If you believe the government or the popular press, the economy is out of recession and everything is business as usual again. Last month there was an increase in jobs by 162,000, home sales jumped 8.2%, the Dow is now almost at 11,000 and interest rates are inching upwards in recognition of the economic recovery. It’s all peaches and cream isn’t it!
Unfortunately, I don’t believe the government or the popular press. I like to look at the facts and draw my own conclusions. First of all, the 162,000 new jobs includes 48,000 temporary census jobs. What happens when these jobs go away? And compared to the millions of jobs lost, 162,000 jobs doesn’t feel like anything to celebrate in the first place.
According the Associated Press, in February the pending home sales number jumped 8.2%. This is not year-over-year but rather from January to February. Don’t know if anyone remembers but it was awfully cold in January. Historically home sales slow down during winter, especially when you have pretty bad snowstorms. An 8% increase doesn’t sound like newsworthy at all. Additionally, the government has been offering a ton of incentives to home buyers, which is probably just cannibalization of future home buying. From the California Association of Realtors:
Californians have a brief window of opportunity to receive up to $18,000 in combined federal and state home buyer tax credits. To take advantage of both tax credits, a first-time home buyer must enter into a purchase contract for a principal residence before May 1, 2010, and close escrow between May 1, 2010 and June 30, 2010, inclusive. Buyers who are not first-time home buyers may use the same time frames to receive up to $16,500 in combined tax credits if they are long-time residents of their existing homes as permitted under federal law, and they purchase properties that have never been previously occupied as provided under California law.
And why is the Dow on the verge of breaking 11,000? Is it the fact that the government spent around a trillion dollars propping up the economy or could it be that consumer spending is back? Maybe its consumer spending. After all, the malls seem full around here. But did you hear that 25% of homes in the U.S. are underwater on the mortgage and 14% of all houses are in some state of default? Being in default means that the monthly mortgage payments are not being made. Doing some back-of-the-envelope calculations, Trader Mark was able to put a figure on these numbers. By not paying their mortgage, Americans have an extra $160 billion per year to spend on clothes, cars, vacations and other random stuff. To see the numbers, check out this post on the hidden stimulus package. No wonder the retailers have been doing well!
And are the interest rates trending higher because the market expects a recovery? Or is it because it expects inflation? If you look at the number of people clamoring for TIPS (Treasury Inflation Protected Securities), the number is trending higher as well. Seems like people aren’t big believers of the U.S. Government’s ability to curb long term inflation.
So what is it – peaches and cream or doom and gloom? The truth is somewhere in the middle. With the government willing to spend money (it doesn’t have) to keep stimulating the economy, it looks like the economy is recovering pretty well. But it cannot come without consequence. At some point someone will have to pay the price of all these bailouts and packages. It might be us, our children or foreign bond holders, but that day will come. Just make sure you invest accordingly.