I have said from the beginning that consumer spending will not pick up to any degree until consumers are no longer seeing the value of their homes plunging; are no longer seeing neighbors lose their homes to foreclosure; begin to see ‘For Sales’ signs thinning out as homes begin selling; and no longer have fear of losing their jobs. Only then might they stop saving and paying down debt out of concern, and begin spending again to a degree that will have the recession bottoming.
That is, the problems began in the real estate industry and spread into the rest of the economy, and the eventual recovery will have to begin in the real estate industry.
But it is not happening.
Instead consumers are seeing their housing worries worsen even as more problems come at them from all directions, including banks refusing to make loans; credit-card issuers raising interest rates on unpaid balances; and gasoline prices surging.
This week’s economic reports, at the midway point of the year in which Wall Street says the economy will be picking up in the second half, will not raise their confidence.
The rain actually began to fall on the ‘Feel-Good’ parade last week, when Warren Buffett, who has been out on the interview circuit for the last year spouting bullish and confident remarks about the economy and stock market, seemed to abruptly reverse course. Perhaps it’s realization that his previous pronouncements have not worked out so well. He suffered unusually large losses last year, and is down significantly again so far this year.
In an interview on Bloomberg TV last week he painted a very gloomy picture, saying “Things will continue to get worse before they get better . . . . . . . It looks like we’re going to need more medicine [more stimulus from the government], not less. . . . . We’re going to have more unemployment. The recovery hasn’t gotten going [from the stimulus efforts so far].”
This week’s economic reports have a growing number of analysts and economists expressing the same opinion, that still more stimulus will be needed.
Among the week’s reports, which for the most part were the first look at how the economy performed in June:
The Conference Board’s Consumer Confidence Index for June declined to 49.3 from 54.8 in May.
It was reported that mortgage applications were down 18.9% last week.
The Institute for Supply Management reported its ISM Mfg Index ticked up to 44.8% in June from 42.8% in May. But it was a faint ray of hope, as it fell short of forecasts that it would rise to 45.6%, and any number below 50 indicates manufacturing is still slowing.
The S&P Case-Shiller Home Price Index reported home prices fell another 0.6% in April, and have declined 33% from their peak in 2006.
The National Association of Realtors reported its Pending Home Sales Index rose a hardly discernible 0.1% in May. And ‘pending’ home sales are quite different from actual home sales, because they are based on sales contracts that have been signed, some of which will be cancelled, and some of which will not close because the buyers will not obtain financing.
The ADP Employment Report showed another 473,000 jobs were lost in June, considerably more than had been forecast.
Auto sales for June were reported and were dismal; Ford sales down 10.9%; General Motors -33.6%; Chrysler -42%; BMW -20.3%; Honda -29.5%; Nissan -23%; Porsche -66%; Toyota -32%; and Volkswagen reported sales down 18%.
The worst punch to the gut of consumer confidence, and the hope that the second half of the year will see recovery, came with the Labor Department’s Employment Report on Thursday, which showed 457,000 jobs were lost in June. That was considerably higher than the 350,000 forecast, and was a considerably faster pace of losses than May’s 322,000 jobs lost.
The news this week certainly blunted the popular talk that the recession is already bottoming, instead stimulating opinions that yet another stimulus package will be needed to halt the economy’s slide.
The question for investors is whether the stock market will finally realize it has gotten significantly ahead of reality by factoring into prices that good times are right around the corner.
In February I predicted one of the biggest bear market rallies ever would begin at any time off the market’s very oversold condition and investors’ extreme bearish sentiment and fear; that temporary improvement in economic reports would be the fuel; but that significant profits would be available from the downside again in the market’s unfavorable summer season. The rally has lasted longer than I expected, but I’ve seen nothing to change my original expectations.
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