The Commerce Department reported that personal consumption dropped 1% in December for the sixth successive month.

The Commerce Department reported that 2008 fourth quarter food spending fell 3.7%.  That’s the steepest decline in 62 years.  People are cutting back, using cheaper items, eating leftovers and not frequenting restaurants.

In spite of the decline in purchasing by the consumer, the Labor Department reported that the consumer price index rose 0.3% in January on a seasonably adjusted basis.

In addition, the Labor Department reported that earnings of U.S. workers adjusted for inflation fell 0.1% in January.

C         Employment.

The Labor Department reports 598,000 jobs were lost in January, 2009. Since the recession started in December 2007, 3.6 million jobs have been lost. Unemployment stands at 7.6%.  Unemployment stands at 13.9% when you add those working part-time and those who have stopped looking.

The Labor Department also reported there are 6.54 million receiving unemployment benefits.There have been three straight weeks of 600,000 or more people making requests.

D.        Manufacturing.

The Federal Reserve reported that overall industrial production fell 1.8%.

The Commerce Department reported that December’s report for durable goods (items lasting 5 – 10 years) dropped 2% and that this was the fifth consecutive month of decline.

E.        Wholesale.

The Labor Department reported that wholesale prices rose 0.8% in January.  That may be misleading because gas prices jumped 15%.  If energy and food prices are removed, the increase in the index is only 0.4%.

F.         Retail Sales.

The Commerce Department reported that U.S. retail sales increased 1% in January over December, which follows six consecutive monthly declines.  We cannot expect major improvement until employment increases.  In addition, that increase is reflective of deep discounting by retailers.

G.        Housing.

The National Association of Realtors reported:

            a.         Sales in January of existing homes fell 5.3% in January to an annual rate of 4.49 million.

            b.         The median home price dropped 14.8% in January to $170,300.00 from one year before.

            c.         They reported there were 3.6 million units for sale, which represents a 9.6 month supply.

The Commerce Department disclosed that housing starts fell 16.8% in January to 466,000 units, the lowest level in 50 years.

According to Standard & Poor’s Case/Shiller Index, which tracks 20 metropolitan areas, home sales fell 18.2% in November 2008 from the prior term.  The index has fallen for 26 months.  Home prices in the areas reviewed have fallen 25% from their peak in 2004.

The Census Bureau reported that vacancy rates of home owner properties increased to 2.9% in the fourth quarter of 2008.  The rate’s 50 year average is 1.5%.

It is reported that Fannie Mae and Freddie Mac held 20% of all loans that were past due as of the third quarter of 2008.

H.        Trade.

The trade gap shrank to $35 billion in December from $40 billion in November.

Not only are we importing less but we are exporting less, also.  The result of exporting less is that the world-wide economy is down and, therefore, orders for our goods are down and this results in layoffs.  Exports have declined 24% at an annual rate.

I.          Global.

Global GDP has declined sharply, for example:

a.         Japan                      -12.0%

b.         Europe                      -5.90%

c.         United Kingdom           -5.90%

d.         South Korea              -20.0%

Overall, the global economy is predicted to grow only 0.5% according to the International Monetary Fund compared to an average 4% - 5%.

Investments in developing countries are projected to drop 80%.

 

II. Local Economy

 A.        Housing and Construction.

The Capital Area Association of Realtors reported that area residential sales fell 13.3%  in 2008 from the previous year.  This is the third year in a row that sales have declined.

The average sales price for a home in the area was $104,000.00.

Only 97 permits were issued by the City of Springfield in 2008 for single-family home construction.  That is the lowest in 27 years.

New commercial construction fared better - $71.9 million in construction permit valuations were issued in 2008 compared to $35.3 million in 2007.  As a result, total building permits valuation was $202.1 million in 2007, down only $2 million from 2007.

B.        Employment.

Local unemployment in December stood at 6.3% as compared to 4.9% one year earlier, according to the Illinois Department of Employment Security.

 

III. Conclusion

 

            Prior recessions in the last fifty years were basically inventory-cycle recessions.  Inventories were built up and caused retrenchment in the production chain.  Workers then were laid off, resulting in the decrease of investment and consumption, including housing.

            In 2001, during the recession, consumption and housing remained strong because of the Fed keeping interest rates so low for so long!  Interest rates have a direct correlation to housing prices.  The lower the interest and the longer period of time it is kept low the higher and higher home prices rise.  The reason is simple.  People have only so much monthly income to spend.  So, when you first purchase a home the rationale is that less interest allows more to be invested in the home, which is equivalent to the principal of the note.  It increases the ability of the buyer to increase size and opulence of the home the buyer purchases.  People and sales persons,  promoters and, yes, many lenders, do not sufficiently factor in divorce, illnesses or economic downturns when they buy or lend on a house.  More intellegent lenders, like Williamsville State Bank & Trust, still do and that is one of the reasons the WSBT is not in difficulty today.

             Buyers purchased on the presumption that values would increase and that they would remortgage based on the assumption that pay downs of principal and inflation would result in an increase in equity.  Basically, home ownership was considered an investment.  By the way, after the depression in 1929, a home was considered a luxury.

            In addition, politicians found that controlled mortgaging was a politically adroit way to increase home ownership to support the “American Dream”.  They created the Community Reinvestment Act which led to lower and lower mortgage underwriting standards.  FHA and FNMA were political creations established to purchase those investments.  It has proved to be a time bomb.  Financing was created under looser and looser government standards.

            In 1994 only 4.5% of the loans were sub-prime.  By 2006, it grew to 20.1%. It is reported that 81% of those substandard loans were also securitized.  Securitization adds to the confusion because the investor doesn’t know what he has bought.  The reason securitization and resulting pools are difficult is because there are bits and pieces of numerous loans and the investor doesn’t know what the real underwriting practices were as applied to the mortgages or components that are in the pool.  For example, one can purchase the first five years of a mortgage or the last 20 years.  A mortgage is chopped up into various pieces.  These various pieces of numerous mortgages form pools which are (in bits and pieces) then sold and securitized.  The original product loses its identity because the investor has a piece of this and piece of that and individual knowledge of the specifics is lost.

            Couple that with the fact that it has never been a smart thing to lend whether in person or in business, to a borrower more than they can pay back.  Doing that spells trouble and that is what was actually encouraged.  First and second mortgages total in many instances over 90% of the then value of the asset.

            In addition, regulators became lax because there was not a national decline in housing in over 20 years, and mortgage underwriting became more lax each year and the market value kept increasing.  The regulators never saw the euphoria.  They went to sleep.

            Basically, the housing market and, in fact, any market, has to have the trust and confidence of the investor.  Whether the average American or the sophisticated guru, the investor does not know what some of the securitized mortgage pools actually contained and the risks involved.  The result was loss of trust and confidence.  Good relationships, from family to businesses, require that.  In investments, it is a must!  As a result, from the individual investor to the banks, there is a need to rebuild the trust and confidence.  A loan is an investment; it is an investment of other peoples’ dollars into a lending instrument.  A purchase of stock is an investment in a company.  All investments require sound principles which breed trust and confidence.  It will take years to rebuild the true and effective relationship that existed before.

            When trust and confidence wanes, and that has happened in the U.S., caution is the word of the day.  Our economy is consumer driven and when there is a loss of trust and confidence the effect is substantial.  People pull back from purchases and investments.  This, in turn, causes inventories to increase, manufacturing slows, investment and innovation slows and employment drops, which adds to the problem.   It is a process that feeds on itself.

            Negativism then takes hold and caution and fear of the unknown become catalysts to that negativism.

            It is only when the person and, therefore, the public feel they can create, manage and control their destiny that positive proactive things occur.

            Reliance on a stimulus package will not produce the result needed.

            How do we correct the situation?  Like in all things, we must return to the basics.

            Self-reliance and individual determination and proactivity is what is needed and what people should seek.  The government cannot solve the problem, the people will.

            The correction will take a long time for we must return to trust and understanding and our obligations to our fellow man and turn away from self-gratification.