Saturday, January 05, 2008

More bad economic news

Lots of stuff to talk about today, and it's all bad. Business Week and the Wall Street Journal discuss the Labor Department report which says:

The unemployment rate jumped from 4.7% in November to 5% in December, the highest since November, 2005 after the Gulf Coast hurricanes dealt the country a mighty blow. Payrolls—both private employers and government—grew by just 18,000 in December, the worst showing since August, 2003, when the economy suffered job losses as it struggled to recover from the 2001 recession.

WSJ offers a little more analysis:

2007’s job gain was only about 60% of 2006’s job growth. And job creation has been even slower in more recent months. Some, but not all, of this softness has been due to the decline in housing and the turmoil in the financial markets. More important, the pace of job creation over the past year will be revised down when benchmark revisions are made in February… The slack in the labor market is growing rapidly and will force the FOMC to act again at the end of the month.

Now, the stock market doesn't matter to most of us. It's hardly even an economic indicator, given how disconnected most of our fortunes are from the stock market. What matters is the job market. When that starts a downturn, we're in trouble.

In further bad news, this article in the Ft. Worth Star-Telegram demonstrates why for some, the dollar isn't stretching as far as it used to:

Tarrant County residents pay nearly three-quarters more today to heat and light their homes and fill up their gas tanks than they did at the beginning of the decade, a Star-Telegram analysis has found. At the same time household incomes, while increasing, have not come close to keeping up.

[...]The Star-Telegram analyzed data provided by Fort Worth, Atmos Energy, TXU, the Texas Railroad Commission, the Texas Public Utility Commission, the Office of Public Utility Counsel, AAA and the Census Bureau. The findings show a 55 percent increase between 2000 and 2006 in the proportion of monthly income that goes to energy.

In other words, the cost of energy is taking a bigger bite out of paychecks, even given salary increases.

Brandl said the cost of other basic needs such as groceries has also continued to creep up. In mid-December, for instance, the government reported a 0.8 percent increase in consumer prices -- the highest rate of increase since November 2005.

Ow. Ok, as we've blogged about extensively, the rates on people's mortgages are going though the roof, causing innumerable foreclosures and bankruptcies. The dollar keeps decreasing in value and jobs are disappearing. Wages have been flat forever, and credit debt has caught up to earnings. Could it get any worse? Maybe.

But just how different was subprime lending from other lending in the days of easy money that prevailed until this summer? The smug confidence that nothing could go wrong, and that credit quality did not matter, could be seen in the many other markets as well.

That was particularly true in the corporate loan market. Loans were cheap, and anyone worried about losses could buy insurance for almost nothing. It was not an environment that encouraged careful lending.

[...]But the history of junk bonds provides a warning that defaults start to rise a few years after credit gets very easy. By that standard, says Martin Fridson of the research firm FridsonVision, a new wave of defaults is overdue. Already, even without defaults, he says, about a tenth of high-yield bonds are trading at distress levels — levels that provide yields of at least 10 percentage points more than Treasuries.

If a recession does occur, one can easily foresee a wave of defaults in junk bonds and their bank-loan cousins, leveraged loans. With highly leveraged structures supported by some of those loans, the surprises could be greater. It is sobering to realize that the issuing of leveraged loans set a record in 2007, even though the market contracted sharply late in the year.

And that's the news, in short. Here's my predictions: it'll all get worse, although I, like much more learned economists, am having trouble figuring out where it's all headed. I also predict that the dollar will keep falling and the US' economic position will continue to weaken. What this means, I may elaborate on later.


Xanthippas said...

A rescession appears to be in the workings. Unfortunately some of this also reflects fundamental change in our economy (flat wages for example) that economists don't concern themselves all that much with, but we should.

Nat-Wu said...

It's true you rarely see economists treat the average American as being the fundamental benchmark for the state of the economy. If they did, nobody would like the reports they issued.