Interview with Nicholas Perna: Jobs, Housing in Pre-Recovery

My latest weekly interview is with economist Nicholas Perna. Perna is Chief Economist of Perna Associates and a visiting lecturer at Yale University. Previously he was Chief Economist for Fleet Financial Group, Shawmut Bank, and Connecticut National Bank. Before that he was an economist with General Electric, the Federal Reserve Bank of New York, and the President’s Council of Economic Advisers. He appears on CNN, CNBC, NBC Nightly News, and National Public Radio’s All Things Considered. The Wall Street Journal cited him as one of the nation’s top economic forecasters.

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HL: What does May’s job loss number out Friday – 345,000 jobs lost, down 159,000 from April -- and the 9.4 percent unemployment rate say about the jobs future?

N.P.: This is good news. Smaller job losses are always good news. This is half what we were getting at the recession’s worst, so it says that the recession is abating, but still there. It’s consistent with recovery sometime during the third or fourth quarter of this year.

The unemployment rate, which comes from the household survey, had a surprisingly large increase from 8.9 percent in April to 9.4 in May. I think the market was expecting 9.2, but what happened was that there was actually not only a decrease in jobs, but also an increase in job seekers. So, at least part of the rise is less bad. It’s unambiguously bad news when the unemployment rate goes up as a result of job losses, but it’s not as bad when it goes up because more people are looking for work.

HL: Do you think the recession is close to ending?

N.P.: What we’ve got is a decent set of numbers, and if you were out there with the position that the recession was going to last another year or two, it makes it harder to hold to that position.

This is one more indication that we are in a pre-recovery mode. One of the most dramatic indications of impending recovery is the big rally in the stock market that we’ve had since March. Under normal circumstances, the stock market rally precedes the bottoming out of Gross Domestic Product. And there are other more subtle signs, like the narrowing of many interest rate spreads. The case is getting stronger and stronger that the recession will end in the third or fourth quarter of this year.

It’s important to note what I mean by the recession ending is that the GDP stops falling. Jobs are not likely to stop falling until early next year. And the end of the recession will span 12 to 18 months, depending on which indicator you use.

HL: How weak is our economy?

N.P.: It’s showing signs of making a comeback, but to use a medical analogy, it’s pre-recovery. It’s weakening at a much slower rate than earlier this year when it was in free-fall.

HL: What do you see ahead for housing?

N.P.: We’re already beginning to see some markets picking up in terms of sales. I think overall it’s going to be quite some time before foreclosures and delinquencies start coming down. It will probably be late next year, but before that we’ll see some pick-up in sales and maybe even some bottoming out of prices, and even some increases in construction activity.

What the housing market needs is not necessarily stable prices, but prices falling at a much slower rate. This will encourage buyers and builders by telling them that their downside risk is getting much smaller.

HL: Is stock market volatility gradually subsiding, indicating we’re at the start of a bull market, or is a correction ahead?

N.P.: The wrong way to look at this is to ask, “Is this the start of a new bull market?” What we’re getting is a cyclical recovery in stocks, and no one has any idea where we go from here – probably up, but there’s no telling how much and when.

We went through a grossly inflated stock market when the Dow topped 14,000 in October 2007. There was a lot of silliness in that number. It had a lot of excessive leverage, a lot of minimizing of risk, so looking forward, less leverage and more appreciation of risk leads to lower price-earnings ratios. We also have to deal with some big issues, such as the future path of interest rates, in light of massive federal borrowing and our up-to-now huge reliance on imported funds.

One of the forces that could put a lid on stock market recovery is the future path of interest rates. Rising government bond yields don’t bode well for price-earnings ratios. Somehow, from the investor’s point of view, we have to resolve the conflict between rising interest rates and falling PEs. That’s hard to do since there’s so much uncertainty about interest rates. Normally, you’d say there’s such a huge increase in profits that it would override rising rates, but it could be that we’ll have a modest economic recovery with a more rapid rise in interest rates because of the need to borrow.

HL: Some commentators are upset at the weakening dollar. What’s your take?

N.P.: I just got back from Italy, and I’m all in favor of a strong dollar. But there’s an inherent conflict: If you’re a traveler, you want a strong dollar. If you’re a manufacturer, you want a weak dollar, because it makes your exports cheaper. My bet is that the dollar will continue to weaken – albeit unevenly -- because that’s the market’s way of reducing the U.S.’s enormous trade deficit. The thing to worry about is if we get into an uncontrolled decline too fast too soon. That could really spook financial markets. If the dollar falls 5 to 10 percent a year, that’s OK, but not if it does so in a week.

Comments

[conceptwizard:]

How can we get a recovery with housing not bottoming until the end of next year? This is the same scenario with the unemployment numbers both are drivers of spending, which is an undisputed factor of a recovery. 1in 5 homeowners are underwater on their mortgages nationally. Credit has been reduced at the banks overall and credit card solicitations are at an alltime low. (not a bad thing) but this effects spending. The Automakers bankruptcies witl cost millions of more jos along with the 47 states with budget deficits laying off workers and cutting tenders especially California, thus exacerbating the jobless situation, which then snowballs into housing delinquencies. Consumers have lost their retirement spending and retirees are hitting the job markets as they cant afford retirement anymore. Ben Benake states that social spending must be cut to allow us to reduce spending. His concern is the 1.2 trillion of debt for 2009 being able to be financed. This will throw millions on the soup line. (these social programs were started in the GD now were taking them away?)The mortgage rates are increasing and mortgage applications are down 14% from last month, this has a negative effect on housing sales. Retail sales are down and automakers are not even in the game anymore. Commercial real estate is decimating with 11% vacancies and 3000 car dealerships in prime real estate areas closing. Cmmercial Real Estate has 170 billion of refinancing coming due in 2009, when money is a short commodity. The trading volumes are at record lows on the markets indicating a possible retraction. China is strugling as well from recent reports.
The situation is wosening if anything, we are looking like we are at the verge of a "L" from Ben Bernake's statement to congress led us to believe.

Jun 09 08:02 AM

[Mr. Ed, Jr.:]

More nonsense from the "It's getting less bad" crowd. I am surprised he didn't point out that Obama "saved 150,000 jobs". They are really wearing me out.

Jun 09 01:54 PM

[demichae:]

The foreclosure moratorium was put in place to allow the Administration to implement its Making Home Affordable Plan. The idea was that modifications would be offered to those facing foreclosure. However, the banks are operating at a snails pace, as they did not hire additional resources to handle the modifications, and the foreclosures are now happening again. Look for a tsunami of foreclosure hitting the market later this year. It's inevitable that cram down legislation will eventually be based, but Durbin says he won't reintroduce it until next year. If you are timing the bottom, look for sometime next year, but we are nowhere near there yet.

Jun 10 12:55 PM