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The True State of the Economy

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Posted on Oct 5, 2013
sashafatcat (CC BY 2.0)

By Mike Whitney, CounterPunch

This piece first appeared at CounterPunch.

Slumping asset prices show a recession is probably on its way. … Stocks tend to fall more frequently and further than property values, so they are better recession-predictors. —IMF research paper by economists John C. Bluedorn, Joerg Decressin and Marco E. Terrones. Bloomberg News

The fact that stock prices have been drifting lower, doesn’t prove that the economy is headed for recession. Nor does political dysfunction (government shutdown), droopy home sales, plunging confidence, chronic high unemployment, rising levels of extreme poverty, unprecedented public dependence of food stamps, weak personal consumption, stagnant wages, falling middle class incomes, or gaping inequality. They may show a country that is on the wrong track and has its priorities mixed-up, but they don’t show that another recession is imminent. Even so, it’s easy to wonder how bad things have to get before the economy more closely reflects the mood of the country which is relentlessly pessimistic. To say that no one believes in Obama’s recovery would be a gross understatement. Obama supporters feel duped, misled, and despondent. Obama is not the agent of change they’d hoped for. He’s expanded the wars, slashed vital safety net programs, exonerated Wall Street criminals, and continued the vicious attack on civil liberties. He’s done everything in his power to boost the profits of the big corporations and banks, but hasn’t lifted a finger to help ordinary working people. And his efforts have paid off, too. Just look at this from Huffington Post:

Corporate profits have increased by 18.6 percent over the past year…. In fact, corporate earnings now represent a larger share of GDP than during any other period in history…

Real wages have declined by nearly seven percent in the past seven years, according to data collected by the compensation research company Payscale. In other words, U.S. workers have less buying power now than they did before the financial crisis…

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Payscale’s findings are just the latest in a slew of research that indicates the sluggish economic recovery has not been beneficial for most of us. Income inequality in the U.S. is at a new high as skyrocketing income gains for the top one percent are met by stagnating wages for practically everyone else. (“Corporate Profits Are Soaring, But You’re Not Feeling It“, Huffington Post)

Okay, so you’ve heard it all before, but here’s something you might not know. At the same time the corporations and banks are reporting record profits, Gallup surveys show that “trust in all three branches of the federal government remains on the lower end of what Gallup has measured historically” while “Americans’ trust in banks fell to an all-time low of 18% — lower than its level at the height of the global financial collapse.” (Gallup)

So, there is a tradeoff for all the loot Obama’s friends have been pilfering from working people, and that tradeoff is trust. Americans no longer have confidence in the government, the market or the justice system. Gradually, that lack of trust will cross-over into the economy as wary consumers set aside more of their earnings to protect themselves from the government-corporate-racketeer oligarchy. A slowdown in personal consumption will impact retail sales, durable goods, hiring and capital investment. It will douse those green shoots with motor oil and push the economy back into negative territory. And while that might not happen in the next month or two, there are sectors of the economy that are showing signs of weakness already. Take housing, for example, which is progressively losing momentum as the year drags on. This is from an article at Global Economic Intersection:

Existing Home Inventories are building, which clearly reflects a fall in demand; and also possibly greater motivation amongst sellers to get out. The inventory trajectory continues to closely shadow the pattern of 2010…. This pattern suggests that the housing market is reaching a critical point at which further intervention from both the Federal Reserve and Federal Government may be needed to give it some more momentum. (“Housing smoke and mirrors,” Global Economic Intersection)

Then there’s this from Wells Fargo concerning the vanishing of investors who’ve been driving the market for the last year:

The housing market is transitioning away from a rebound driven primarily by speculative forces to one where the underlying fundamentals will be much more important,” Wells Fargo said in a report. “Over the past few years investor purchases have been the primary driver of the housing recovery, helping clear inventories of foreclosed and lender-owned properties and pulling home prices dramatically higher. Home prices, which tumbled 33.7 percent from peak to trough using the S&P/Case-Shiller Home Price Index, have since rebounded 16.3 percent and are up 12.4 percent over the past year alone. The swing in prices exaggerates the extent of improvement and likely reflects the whipsaw effect of prices overshooting to the downside during the worst of the housing bust. (“Wells Fargo Predicts Market Rebound”, DS News)

And here’s more from CNBC’s Realty Check:

A potential stall in home price gains and a large drop in the number of distressed properties have some big investors pulling out of the single-family rental market…

“I think the investor market is largely past us,” Doug Lebda, chief executive of Lending Tree told CNBC. “People were buying investment properties three, four, five years ago. What I hear is that’s slowing now.”

Recent reports that Oaktree Capital Group is selling about 500 of its homes added fuel to other reports that Och-Ziff Capital management is selling its homes as well. Both declined to comment on the reports. Carrington Mortgage Services stopped buying distressed homes late last year, claiming the market was “a bit too frothy…” (“Investors in rental homes: ‘It’s a business not a trade’”, CNBC)


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