Half of What’s Wrong With the Recovery in One Chart
Simple national income and product accounting tells us that the current US recover (I can barely manage to type that without scare quotes and I *hate* scare quotes) has been horrible for two reasons: low government purchases of goods and services (G) and low housing investment. Consumption, fixed non residential investment, and inventory investment have recovered normally. Net exports didn’t fall.
The two possible (non exclusive) explanations of the extraordinary decline in real G during the recovery is that Republicans are stupid and that they are evil saboteurs. To be fair, Democrats and (especially) nonpartisan centrists too have flirted with austerity.
Before I go on (and on) the key graph explaining the slow recovery of housing investment shows the low and declining expected rate of house price appreciation. In addition to their well known house price index Case and Shiller survey the expected rate of increase of housing over the next ten years. The average over the random sample of 2000 is shown in the graph I steal below (via DINA ELBOGHDADY)
The dramatic decline in expected medium term house price appreciation is greater than the decline in the mortgage interest rate (about 3% from the business cycle peak to the low point of mortgage interest rates in 2013) so the expected cost of owner occupied housing services is extraordinarily high (meaning it is positive given maintenance and property taxes). The decline is 9% from the peak mania and about 5% from the business cycle peak. This is a sufficient explanation for low housing investment.
There are several other proposed explanations for the years with no recovery of real housing investment and very mild recovery since then. The most natural is that because of speculative overbuilding the US housing stock in 2008 exceeded demand given normal to sane expectations about house price appreciation so housing investment was naturally low until the adult population caught up. Brad DeLong has pointed out that this is nonsense more times than I care to link to (it was nonsense in 2011 and it is much more nonsensical now). Another proposed explanation is people got no jobs and no money — that young adults are living in mom’s basement because they can’t afford to buy or rent. This explanation lasted longer than the over supply of housing compared to trend, but it doesn’t explain why consumption has recovered and housing investment hasn’t US real per capita personal disposable income is higher than it ever was in the past (really). Finally and most nearly plausibly, it is argued that banks are once very badly burned twice shy so lending standards are extraordinarily strict. It is possible to reconcile this with low mortgage rates once loans are mad, but I think it’s hard to distinguish stricter than in the liar loan naughties from stricter than in the normal nineties. The available data are from surveys with respondents whose summary of tightness of standards must be subjective.
I have long guessed that the issue is declining expectations of house price appreciation, but only now found Case and Shiller’s graph (I should have used the google).
just for background a standard boring graph of NIPA components.
Federal spending is $1 trillion a year more than when the economy peaked in 2007.
There was a boom in the housing market from 1995-06. You can’t have a bust without a boom.
First quarterly at annual rate (that is times 4) you are off by about 187 Billion which isn’t pocket change. Second come on, even you shouldn’s sink so low that you present nominal figures without correcting for inflation. I will correct with the GDP deflator (government expenditures doesn’t have a deflator not being a NIPA catagory). I said the recovery (even if my graph set 100 to the peak not the trough). Government expenditures divided by the GDP deflator have increased about 1% since the trough. This is extraordinarily low.
The NIPA catagory is government purchases of goods and services (transfers appear as a cause of consumption). Real Federal Government gross investment plus consumption is down about 7% since the trough. This is very extraordinary. Federal G has sharply declined. The decline is more than $80 billion 2009 dollars.
Do you really think that anyone who reads AngryBear comment threads will fall for presenting a nominal change as a meaningful change ?
Robert,
He really thinks people actually fall for everything he says.
Federal spending growth from 2000 to 2010 was the fastest since the early 80’s, as this log scale FRED graph shows. Also note, since 2010 – not so much. Almost all of that growth took place before or during the official G. R.
http://research.stlouisfed.org/fred2/graph/?g=sxO
Actual growth rate in federal spending is the lowest since 1954, and in the post WW II era has never hovered near 0% for such an extended period.
http://research.stlouisfed.org/fred2/graph/?g=sxP
Here’s the YoY change in $$ amounts.
http://research.stlouisfed.org/fred2/graph/?g=sxR
Almost nothing during the alleged recovery.
JzB
Jazz,
What makes you think you can defeat ideology with mere facts?
I was reading anything I could find about the housing bubble from 2007 and onward.
At the height of the Great Recession, the housing market was a disaster. Home flippers had been caught flat footed. Home buyers and owners had borrowed much of the equity out of their homes and did it with adjustable rate mortgages that would start to adjust after 2 or 3 years. And they would adjust upwards by 3% at a time. A lot of homeowners had become debt slaves.
I remember thinking that those homeowners would be better off if they just defaulted, moved out, and rented housing. And I thought that the economy would also be better off. Debt slaves consume less and the economy suffers for it.
You wrote “This explanation lasted longer than the over supply of housing compared to trend, but it doesn’t explain why consumption has recovered and housing investment hasn’t US real per capita personal disposable income is higher than it ever was in the past (really).”
I would hazard the guess that consumption is up because those former debt slaves now have money available for spending.
The housing market is still a mess, especially in the sand states. Very high percentages of homes are bought with cash. (calculatedriskblog.com) That is not the normal housing market. The normal housing market is a first time buyer accumulating a down payment and buying a starter home. The previous owner of that starter home then upgrades to a newer and/or larger home. That upgrading process occurs multiple times. Cash sales don’t cause that increased liquidity.
The truth is that housing is still overpriced or there would be more buyers. At the peak of the problem bankers actually refused to foreclose. That kept the REO off their books and tended to keep housing prices inflated.
Total Consumer Debt at the end of 1999 was shown as $4.76Trillion. The peak Total Consumer Debt was $12.68Trillion in the 3rd quarter of 2008. And now it is at about $11.52Trillion.
Lenders have returned to earlier safer underwriting standards.That was a necessity if we want to avoid further bailouts of the financial industries.
The solution to the housing problem will involve reducing the price of residential housing, and consumers paying down a large part of this total debt.
And underneath all of this is the fact that American consumers’ incomes had not been keeping up with inflation for at least a decade and closer to two. They had been supplementing their incomes with debt. That ended in 2012. Now they have to live on their incomes and you can not eat a house, or drive it to work, and it won’t automatically wash your clothes.
JimH,
Key comment
“And underneath all of this is the fact that American consumers’ incomes had not been keeping up with inflation for at least a decade and closer to two.”
Credit cards and then the bubble hid this for a decade or so. Thag was preceded by the hours worked increase of US households(two workers) for the decade or so before that. I cannot imagine the next “fix” as opposed to increased income.
I am not a big fan of total consumer debt meaning much, as most of it is mortgage debt and the only thing that matters is the payment.
A guy making a $1000 payment and owing $210,000(4%) is not worse off than a guy making a $1000 payment and owing 151,000(7%)
EMichael –
I do what I can, and just throw the facts out there.
People can accept or ignore them, at their option.
You can lead a horse to water . . .
Cheers!
JzB
Robert –
I don’t agree that consumption has recovered normally.
The trough was quite wide and unusually deep. Recoveries have been getting progressively more anemic since at least 1980. This one is the weakest in the post WW II era.
http://research.stlouisfed.org/fred2/graph/?g=syn
JzB
Calling this recovery “weak” is extremely misleading. It has actually been pretty solid considering the financial problems. In the end, if you adjust for demo, the 80’s recession didn’t end to late 86, this recession looks to be over by late 14/early 15. Both lasted around 7 years. However, the demographic adjustments to both are different. In the 80’s the Boomers were completed in the job market. The total number of jobs, demand and growth expectations and requirements were larger. Now, with the Boomers gone, the number of jobs, demand requirements are falling and less.
With the Boomers waving goodbye, growth is going to be normalized in relation to that. The Y2K/Housing bubble surges were not substainable. Neither is the Boomer 20th century growth surge possible again. There is no big mass poverty right now. The government needs to focus 100% on digital and physical infrastructure and stop debating transfers, which don’t provide long term growth.
In housing terms, that means long term, less sales and construction needed(and more for assisted living lol). But you are talking about a small share of the economy in the first place. If Housing Starts are up to 1.2-3 by the end of the year, that is probably nearing its peak potential sans a boom. It is what it is.
Emichael wrote:
“A guy making a $1000 payment and owing $210,000(4%) is not worse off than a guy making a $1000 payment and owing 151,000(7%)”
I am somewhat sympathetic to that argument.
But refinancing was happening so frequently that practically no one had a 7% mortgage rate. (It was said that if you could fog a mirror, you could get a loan.) I had letters offering me loans of 125% of the appraised value of my home.
And running up credit card debt, then refinancing your home to pay the credit card debt off was an exercise bound to cause a bubble. They were borrowing more and more money based on appraisals which reflected the size of the desired loan more than any inherent value of the property. As appraisals went up then so did the sales price of homes in that community. And so the price of homes was pushed ever higher.
I never believed that the housing (debt) bubble was our worst problem. Instead, it was a symptom of consumer income failing to keep up with inflation and the borrowing used to supplement earned income.
Home mortgage interest rates dropped to below 4%, for a while. That increased sales, for a while, but now home mortgage rates have started back up and sales will fall. (Sales had been pulled forward.)
Sooner or later home prices will have to fall if higher volumes of homes are to be sold. The banks can not extend and pretend forever. Then who is worse off, the guy who is 10% underwater on the $210,000 mortgage or the guy who is 10% underwater on the $151,000 mortgage?
Corporations got into the game over the last year or two. They bought up homes to repair, then rent, and then sale at a profit. But now they seem to be ending that experiment. What is that going to do to the housing market?
After total consumer debt was almost tripled over 8 years then we should be able to agree that consumers are not in any position to borrow significantly more. After all, total debt owed is a factor in determining whether an applicant can afford any new loan.
I don’t see any sustained recovery happening in the housing market, any time soon. Time to pay the piper.
John Cummings –
Calling this recovery “weak” is extremely misleading. It has actually been pretty solid considering the financial problems. In the end, if you adjust for demo, the 80′s recession didn’t end to late 86, this recession looks to be over by late 14/early 15.
We’re in pretty good shape for the shape we’re in.
Yeah – no.
Again, let’s look at real data, which do NOT support your claim – here is YoY % change in real GDP/Cap.
http://research.stlouisfed.org/fred2/graph/?g=syT
The lowest post-recession value of the 80’s was higher than the highest post [official] recession values since ’09.
More broadly, the very best looking values of recent years are on a par with the very worst non-recession values since WW II.
In fact this entire century looks pretty anemic.
How about employment/population ratio for the age 25-54 cohort?
http://research.stlouisfed.org/fred2/series/LREM25TTUSM156S
Close to 0 rebound since hitting bottom.
What metric do you use that makes you think this alleged recovery is OK?
JzB
“Brad DeLong has pointed out that this is nonsense”
The way DeLong defines the trend is a choice. He would like to believe that his tenure with Clinton was the norm, but how can you believe that the stock market boom did not spill over into the real estate market.
I am more inclined to go with Dean Baker. Going back further is also a choice (sorry, could not find a good link), but he also cites vacancy rates to make a real case for doing so.
and this:
http://www.cepr.net/index.php/blogs/beat-the-press/home-prices-are-not-affordable
“so housing investment was naturally low until the adult population caught up” is still a valid argument.
Robert, I didn’t know I was “sinking so low” by pointing out federal spending increased by $1 trillion a year after the economy peaked in 2007, after the severe recession, and after low nominal growth, which you call a “recovery.” It’s not like the 1970s when nominal growth was high.
Here’s a piece of reality for you:
Total Federal Expenditures
2007: $2.73 trillion
2014: $3.77 trillion (requested)
http://en.wikipedia.org/wiki/2014_United_States_federal_budget
Federal spending increased much faster than nominal GDP growth, since 2007.
Also, I may add, Robert, it seems, federal spending as a percent of GDP increased from roughly 18 1/2% of GDP in 2007 to over 22% of GDP in 2013.
http://globaleconomicanalysis.blogspot.com/2013/08/government-spending-as-percentage-of.html
IMHO, Its simply a case of a delivery made to the wrong address. TARP should have gone to Main Street instead of Wall Street.
Lets be clear—-Until Glass Steagall is reinstated this “recovery” will NEVER recover. Its a wrong turn onto “The Road To Nowhere”.
Folks, throwing money at Wall Street was tried during The Last Great Depression(recovery). That went nowhere, just like now, until Glass Steagall was created. EVEN THEN it took years&years AND a world war to bring things around. Lessons learned, lessons forgotten, sigh!
85 billion a month BANKER WELFARE was never enough to fill a rathole ’cause the rats eat it all up! Personally, I can’t wait until The Fed ups those welfare checks to 120 billion a month. It won’t be long, WE need those “Job Creators” who can’t seem create jobs.
Perhaps, my prior comment better belongs here:
I’ve explained before, we need to remove and reduce regulations (e.g., getting rid of $1 trillion of the $2 trillion a year in federal regulations), reduce taxes, fees, fines, fares, tolls, etc. (e.g. by several hundred billion dollars a year), and raise the minimum wage (up to $15 an hour), not only to help lower income Americans, but to raise employment and tax revenue, and reduce spending on the unemployed.
Otherwise, this will continue, i.e. more destruction of potential output with low actual output:
http://stateofworkingamerica.org/charts/output-gap-real-gdp-compared-to-potential-gdp-2000-11/
Over 20 million Americans remain unemployed or underemployed, and we really haven’t dug-out of the 2007-09 recession yet. It’s been a recoverless expansion, since June 2009.
It’s interesting, some people believe Americans will get more for less with more unemployment, more red tape, more taxes and/or fines, etc..
Those people are in for a rude awakening, particularly as the U.S. economy continues to shrink and they become poorer.
You say real personal disposable income is higher. I know that is true in the aggregate but what is the distribution? Say, by quintile?
“Federal spending increased much faster than nominal GDP growth, since 2007. ”
geez
http://economistsview.typepad.com/economistsview/2014/02/links-for-2-28-14.html