Did that title get your attention? Its barely an exaggeration:
We’ve discussed — quite extensively — how stimulus driven this economy has been. Starting with the initial jolt ("The Frankenstein Economy"), the government then moved to throwing everything they had (but The “Kitchen Sink”) at the Economy; all this in the context of a Post-Bubble environment.
The problem with stimulus, regardless of your economic philosophy, is what happens when that stimulus fades away. Things slow down — and worse.
Which brings us to the present "soft patch." Placing that into context is Asha Bangalore of Northern Trust. Banglore makes the intriguing observation about the private job creation between the end of the recession and the beginning of the rate tightening cycle:
"Residential investment outlays have made a sizable contribution to the growth of real GDP in the current business expansion and sales of new and existing homes have soared to set new records. The future of the housing market is tied to employment conditions in the economy. The sluggish performance of payroll employment is the primary reason for the FOMC to take a measured path toward bringing the federal funds rate to a neutral level. At the same time, the performance of the housing market has played a visible role in payroll growth. Employment in housing and related industries (sum of employment in the establishment survey under various categories related to housing industry) accounted for about 43.0% of the increase in private sector payrolls since the economic recovery began in November 2001. The Fed began raising the federal funds rate in June 2004. During the June 2004 and April 2005 period, housing and related industries have accounted for 13.0% of private sector payrolls. The point I am trying to make is that a cooling off the housing market will have an impact via fewer new jobs in addition to other adverse effects. The number of job losses could be significant given the role the housing sector has played in the current recovery."
From 2001 to last month (April 2005) 43.0% of private sector jobs are housing related. That’s astonishing. As if that’s not enough, consider what happened once the Fed began tightening:
Once the Fed began raising rates (June 2004 to present), Real Estate related job creation plummeted 68.2%! During the post-recession – pre-tightening period (11/01-6/04), about half of allt the new priate sector jobs were housing related.
In yesterday’s column ("Don’t Buy the Housing Bubble Propaganda"), I noted how this could all end badly:
"The last, and in my opinion, potentially most damaging factor, is the employment situation. As long as most people are gainfully employed, they will be able to service their mortgage costs. (For those of you who are buying a home you can barely afford, then let me suggest buying mortgage insurance — just in case your main income source falters).
The biggest risk to the housing market is not just rising interest rates — rather, it’s a significant decrease in national employment. Why? It’s not the leverage, but the ability to service the debt that causes problems. A potentially negative scenario is the Fed tightens too far, inducing a recession. Something else goes wrong – theoretically, China stops buying our Treasuries, and that forces the Fed to become a buyer of last resort (think Bernanke’s printing press). Next thing you know, we have hyperinflation, large-scale unemployment, and a housing market off 50%."
I thought this scenario was in the realm of possibility — but not necessarily the most likely outcome. Bangalore’s data suggests it may be more likely than I originally believed.
What does all this mean? Barring a sudden rise in organic job creation over the next 6 to 9 months, this cycle will have run its course — my guess is late 2005/early 2006.
And that’s not good for anyone.
Hat tip to Gary Evans!
Housing Market – Another Information Tidbit
The Northern Trust Company, May 23, 2005