The Liscio Report, via Barron’s Alan Abelson, notes the multiplier effect of each dollar spent on Housing.
"We’ll spare your having to listen again to the
litany of woes that are likely to issue from the great housing boom
turned bust. Suffice it to say that it’s destined to wreak serious
damage on the consumer’s will and wherewithal to spend, which has been
the great enabler of economic growth, not only for this fair land but
just about the whole planet.If the consumer, with his income badly lagging while
he must contend with unprecedented high oil prices and rising inflation
generally, is effectively deprived of the enormous spring of cash and
credit that his house has dependably provided for so many years now —
the golden crutch, as it were — he’ll have little alternative but to
spend less and save more. Nor, in our view, is this saturnine prospect
diminished one whit by July’s brisk retail sales, which owed everything
to freakish hot weather that touched off a run on summer apparel, air
conditioners and kindred beat-the-heat stuff, along with the last gasp
of auto incentives that produced a blip in car sales.The powerful impact the great boom in housing has
had on the economy — and a measure of how much growth overall will
suffer from the end of that boom — is furnished by our friends at the
Liscio Report. Each dollar spent on residential construction, they
observe, generates $1.27 in additional economic activity. That’s topped
only by manufacturing ($1.37) and handily bests the contribution of
health care (54 cents to 81 cents, depending on which part of that
amorphous field you’re talking about), retail (57 cents) and finance
(53 cents).Not only, as the Report comments, has "the kick from
housing…been enormously important in recent years," as those numbers
make emphatically clear, but the actual effect has been far greater
since that $1.27 of additional economic thrust doesn’t include the
hardly inconsequential economic stimulus of remodeling or
mortgage-equity withdrawal.Housing’s fade seems destined to hurt all the more
since nothing else — not capital spending or government largess —
seems primed to take up the slack."
I find it hard to imagine how a soft landing can be engineered from the Housing Slowdown — short of rapid Fed cuts . . .
>
Source:
The Peroxide Plot
ALAN ABELSON
UP AND DOWN WALL STREET
Barron’s MONDAY, AUGUST 14, 2006
http://online.barrons.com/article/SB115533771724333803.html
YO Ben, better start your helicopter!
Let me start by saying that I totally agree with yours and Barrons basic theory on all this stuff – I’m just wondering how the consumer can be tapped out, yet retail sales can come in as high as it did this past week. Any theories on that? Just residual effects?
I think you have to take Mo-to-Mo retail sales with a grain of salt and look more for both the trend and the YOY% changes. YOY% changes have been decreasing since Jan and fell off a cliff and dropped to 1% in June. When you wash out the noise the Retail Sales number doesn’t look very good at all.
So the next question is has anyone done some hard-looking at the likely reduction in consumer spending as the result of the housing implosion ? I”ve only seen rough-cuts of 1-1.5% reductions. Of course if that’s starting with a 3.0-2.5% base and we end up with a net 1.5% GDP growth rate that’s painful ’nuff for me.
“I’m just wondering how the consumer can be tapped out, yet retail sales can come in as high as it did this past week. Any theories on that?”
Life in plastic. It’s just fantastic.
Aug. 7 (Bloomberg) — Consumer borrowing unexpectedly accelerated in June as Americans used credit cards to finance more of their purchases, a Federal Reserve report showed today.
I agree with most everthing and am even surprised by the size of the multiplier effect. I’d like to add a few +/- factors to the equation. The labor force in housing has a huge underground component. When the formal numbers show a drop like last week then be assured casual unemployment is skyrocketing. Second, while the housing (credit) bubble is global in scope the spending is not. New housing spending in particular generates lots of local money. Those places like Phoenix, Sacramento and Miami are going to see their economies disproportionately affected.
As to last month’s consumer spending. As alluded to in the article my anecdotal observation is that it is a last gasp, final blowout event. Black Friday is exactly 10 weeks away. I suspect a tradeable OMFG! moment as a year of flat/declining home prices finally impacts the wealth effect.
I think it’s worth mentioning that retail sales figures are not adjusted for price changes:
“(Estimates adjusted for seasonal variation, holiday, and trading-day differences, but not for price changes)”
So sales can appear to increase when total transaction volume is the same or perhaps even lower and may just give a view of what inflation is doing. This also says nothing about what is happening with margins.
One of the hallmarks of an inflationary environment is also that as prices rise, people begin to anticipate further increases and to buy ahead to the extent that they are not living from paycheck to paycheck. In the case of staples, that might mean that if you expected substantial increases over the next year, you might go ahead and load up if shelf life and storage was not a big deal.
To Craig H : Mastercard’s stock (MA) price definitely appears to echo that factoid about increased credit card usage.
I think most people understand now that Tech and the entire Nasdaq complex is sick -what with the options scandal, poor earnings (and restatments in many cases), looming consumer slowdown and goddawful price action.
But the big question has been what happens to the big exporters in the industrials -materials complex. After all, for all their claims about cooling their economy, China’s economy might be accelerating ! India’s appears to be red hot as well. I think both India and China are going to be very reluctant to see their economies slow. And even if they see their export earnings dry up because the US consumer stops spending, their considerable forex reserves (unlike 1998) gives them the wherewithal to continue their liquidity assisted fixed investment binge. And that would hold up the materials/industrials stocks and may even push them to new highs. I think the stocks of the big exporters are the key tell at the moment.
And watching them suggests we maybe very close to the next leg down, perhaps as early as Monday. VIX and VXN have been acting a bit strange recently, if you ask me. Boeing, Alcoa and Deere broke to new lows in their current downtrends, CAT broke its 200 DMA this week on heavy volume, Crude appears to be cracking. Silver and Gold began retracing exactly at their 0.618 Fibonnaci levels.
Do “They” know something we dont ? There is an outside chance that cyclical exhaustion of the chinese and/or Indian economies is occurring contemporaneously with the US housing bust. If that is the case, its 1929 folks.
I am surprised to see the manufacturing multiplier effect ($1.37) is so big. Can somebody please explain why that is so? Thanks.
I, for one, am already getting a taste of the inflationary environment described by whipsaw due to an Indian ban on export of lentils until next year. Search for “toor dal exports ban” to see what the Indian blogosphere is concerned about these days — more than threefold rise in the price of lentils and plenty of hoarding by many (including my own sister).
Per BEA, real residential fixed investment decreased 0.3% in the first quarter and GDP managed to grow 5.6%. In the second quarter, real residential fixed investment decreased 6.3% and the economy grew 2.5%.
Two consecutive quarters of contraction in housing and yet the economy continued to grow.
DIS said it is seeing no slowdown at its theme parks. In fact, demand is so strong it is raising ticket prices. Hotels/casinos in Vegas are operating near full capacity. RevPAR at non-casinos throughout the country has been steadily increasing. Until this week, the airlines had lifted fares 5 times this year.
The consumer may eventually die, but he’s currently showing lots of life.
S, maybe one last refinancing and fling before handing in the keys to the house to fannie and freddie. And btw, hotels ard motels around DIS have increased rates 50% in the last 2 years.
I wouldn’t look for the economy to stop growing per se but rather turndown until growth is very low – the semi-formal definition of a recession. GDP grew approx. .23% in the last part of 01 while consumption was still growing at nearly 3%. Very unfortunately for us in a way because in previous recesisions/downturns GDP and consumption both went down together. So having positive consumer spending isn’t the major tell – it’s what the trend is. And that’s down.
“I think it’s worth mentioning that retail sales figures are not adjusted for price changes:”
True but since there is no inflation, all must be good. Just got back from Walmart – last week Cabot’s cheese $1.67: this week same cheese $1.94.
Don’t forget Electrosol, new size 36 tablets instead of 40, same price though.
It’s not unusual for the consumer stocks to stay in the game when the economy is starting to slow and the stock market has begun declining.
Take a look at a monthly chart of $CMR, the Morgan Stanley Consumer Index. Plot it on a chart with $SPX as a comparison symbol.
$CMR hit a new high in early 2001, and again in April 2002, while the market was already heading lower.
Now… notice how $CMR and $SPX have diverged since May of this year, with $CMR setting new 52 week highs? Hmmm….
Why is retail spending doing relatively fine? Because the nation is at full employment (unemployment at 4.8%). Yes, housing prices are down 10-15% in some of the hottest areas. But that only affects the late comers who bought at the peak of the market and those who may have used some risky leverage schemes to buy investment properties. The rest of us are working, paying the monthly mortgage, and going shoppin’…
In addition to the nation being at full employment, wage growth has been a bit stronger of late. While energy prices are up, the only impact that seems to have had is on Starbucks and the Cheesecake Factory. Seems like we don’t spend that much on energy as a percentage of our monthly budget. The adjustment seems to be cutting back on cheesecake and frappachinos.
Yes, people use credit cards. Just as they have in the last few decades. Nothing to see here. Same old, same old. It is not the reason that spending continues in the midst of the economic slowdown. Finaly, how bad is the economic slowdown? GDP over 2% still? That’s not exactly a horror show…
Barry,
Do you mean a soft landing can not be engineered in housing, the overall economy or both?
“I find it hard to imagine how a soft landing can be engineered from the Housing Slowdown — short of rapid Fed cuts . . .”
Are you suggesting minus 5% Fed Funds Target. Where are the customer’s yachts…?
Too late….!
Big uptick in plastic this week — no Housing ATM anymore, so they hit the credit cards!
Muckdog
My gas and electric bills have tripled in 7 years. What was affordable then now eats up nearly half my income and I live a very frugal life by anybodies standards. Those of us on the bottom of the heap are hurting bad and I guarantee we gave up cheesecake and fancy coffee years ago.
I am surprised to see the manufacturing multiplier effect ($1.37) is so big. Can somebody please explain why that is so? Thanks.
The multiplier primarily takes into consideration wages. (Complimentary goods are also considered.) Manufacturing still has a higher wage than most economic sectors. Finance you would expect to have a higher multiplier than it does, but it employs many, many low wage employees like bank tellers.
No, Muckdawg, the Nation IS NOT at full employment. Your being fooled by the Bush revision of the unemployment rate, which has “cut off .5-1.0 of enemployed on average since 2001. If we were going by the Kennedy to Clinton model that was used for years, unemployment would be 5.3. The models converged more last month because of the Bush revision FINALLY cutting off those “self-employed” people who actually aren’t employed. Embarrasing, but true.
As for consumer spending, don’t care about it right now. It is a lagger. It is the business side that will contract first and we began seeing that process in the 2nd quarter. Whoever said that the “economy” grew, though business spending cooled, guess what pal, business spending is even gonna cool more much more.
The key is whether the mild recession turns into a ponzi scheme credit collapse triggering a major recession world wide. I see by this thread, the sheep are still grazing.
There is a potential it won’t be as bad as those foaming at the mouth believe but the circumstances haven’t come to pass yet which would support a softer side of life. I hypothesized they would a year ago but that doesn’t appear to be in the cards. It’s still ugly but it’s a different kind of ugly. More kissing your sister ugly as opposed to kissing Boss Hogg ugly.
Should the shit really hit the fan, and it appears it will as of right now, consumer stocks will NOT save you. Money is shifting into the consumer staples right now because buy and hold investment managers have to buy something as part of their charter. You can put your head between your legs and kiss your ass good bye because historically, this upcoming cycle has not faired kindly to defensive sectors.
Muckdog, if they plugged in the real inflation rate into the government numbers, we would be at minus 5% GDP, not plus 2%
per B:
“Should the shit really hit the fan, and it appears it will as of right now, consumer stocks will NOT save you. Money is shifting into the consumer staples right now because buy and hold investment managers have to buy something as part of their charter. You can put your head between your legs and kiss your ass good bye because historically, this upcoming cycle has not faired kindly to defensive sectors.”
I think that you hit the nail on the head, B, these long-only guys have to buy something to stay in business. In WallStreetSpeak, “defensive” translates to “loses less money.”
The more contradictory data that comes in, the more I am convinced that we are already in stagflation, the ultimate contadiction. I don’t know if there was a reasonable way to avoid that or not, but that doesn’t really matter now.
The CW has been that there will be a fairly dramatic selloff in September/October followed by an even more dramatic rally. I’m coming to the view that neither will happen and that we will just see a fairly steady erosion thru the end of the year and into Q1. Stagflation is more about a process rather than discrete events which is why it’s so difficult to get rid of.
The longer term question is whether stagflation is followed by deflation? My guess is that we are heading in that direction but there are a lot of variables, especially at the global level.
Does anyone have any strong feelings about the ‘Birth/Death’ model the BLS uses to adjust job’s data? I’m curious to see when the Street and/or MSM takes the ‘70% of all jobs created this year are ‘birth of business’ jobs not really accounted for’ and runs with it. And of course the GDP deflator is b.s., too, per John Williams at Shadow Stats. It would be nice to see folks explore the real data. I know Barry has done this with the OERent adjustment proposal and has, very appropriately, gone postal over it.
Housing Replaces Baltic Dry Index
What happened to the Baltic Dry Index? This measure, touted as a leading indicator about a year ago has been official replaced by the doomsayers. Take a look at the latest bad news of the future from Alan Abelson via
“In WallStreetSpeak, “defensive” translates to “loses less money.””
Bingo!
It’s also what they mean when they say that consumer staples will “outperform in a down market”. I love it when the fund managers on Bubblevision say it like it’s a good thing.
The other interesting point mentioned but not highlighted is that manufacturing is the leading key driver – yet the trend for US manufacturing being moved overseas or bought out my foreign companies has become ‘old news’ and truly needs the attention as much as the housing industry.
Housing Replaces Baltic Dry Index
What happened to the Baltic Dry Index? This measure, touted as a leading indicator about a year ago has been official replaced by the doomsayers. Take a look at the latest bad news of the future from Alan Abelson via