Economy sashays sideways

Good morning everyone!

I was traveling over the last several days so apologize for the lack of a post about a couple of important economic data points. Let’s get to them…

Jobless Claims:

Last week 505,000 newly unemployed folks applied for unemployment benefits. That total was flat with the previous weeks total. What’s more, jobless claims lasting longer than a week declined. And most importantly, the four week moving average that smooths this estimated data fell by 6,500 claims to 514,000.

What it means: I have been saying since late summer that jobless claims were likely to improve around Christmas time, especially if retail sales were better than expected. So we have had retail sales just slightly better than expected, with the day after Thanksgiving being the most important retail sales day of the year yet to have happened.

So to me this week’s jobless claims data is yet another indication that the economy is at a critical juncture. It remains almost good. The economy is basically in the last several days before a head cold has finally gone away. It’s at about 85% of full strength. However, this trend beats one of decline. Don’t you think?

Mortgage Payment Meltdown:

The number of U.S. households that are 120 days behind in their mortgage payments is 1.9 million. That represents 3.4% of U.S. households, and is up 0.2% from October’s 3.2%. This group of unfortunate households is clearly at risk for foreclosure and home loss. Ouch! Meanwhile, 6.9 million U.S. households, or 12.4% are 30 days or more overdue on mortgage payments.

What it means: It means that the economy has a dark specter hanging over it. People generally will do just about anything to prevent losing their homes. That 3.4% are about to go into foreclosure is significant. These are folks who are likely unemployed, have reduced incomes, and high amounts of debt. In short, this is a group of people destined to become poor and bankrupt. In terms of economic recovery, the credit ratings of these folks is already collapsed. Attaining credit in the future will be enormously difficult for these folks. Once their finances stabilize they will have to save for purchases, rather than relying on easy credit monies.

So in the next 3-6 years there are a gigantic number of folks who will be basically removed from the consumer engine of the economy. This bodes ill for makers of tech gadgets, home builders, and banks. In other words, the businesses most affected will be manufacturers of discretionary luxury goods (like flat panel TVs and homes on steroids) and those who finance such craziness.

Housing Starts, Stop:

In October housing starts fell 10.6% (!). The big drop is attributed to a number of things: bad weather, confusion as to whether or not a first-time home buyer tax credit would be extended by Congress, and a weak economy. Because Congress extended the tax credit it is expected that the home building industry will recover in the coming months. However…

What it means:

To me the precipitous drop in housing starts is a long-term good thing. Currently there are so many excess houses in the housing market, approximately 8 months worth to be more precise. This figure matches up houses offered for sale with the rate of real state purchases. However, remember our data above. There are going to be many foreclosed homes on the market in the next 12-15 months that will simply add to the supply of homes on the market. Meanwhile, those folks losing their homes are effectively removed from the pool of prospective buyers. Ouch!

What this means is that home builders and those who finance home builders are going to have a very rough patch for probably another 18-24 months. In other words, in about 15 months we will want to start investigating home builder stocks and analyze the survivors for investment. Its very likely that shares of these businesses will be even more depressed than they are now.

But for the economy as a whole the housing starts data is a positive. Why? Because it means that supply and demand are continuing to get more in line with actual economic reality. This also means that home values are also likely to fall as people cut the prices on their house to attract buyers. Lower home equity values mean less lending. Lower home values mean fewer second homes. Lower home values mean less wealth and less consumer confidence (tell me you don’t look calculate your net worth on occasion) and ultimately less consumer spending. Yet, it will be real. I like real. I despise illusory economic growth and the attendant trappings that go with bubble mentalities.

I hope each and every one of you has a spectacular weekend!

Jason