The Numbers Racket: Why The Economy Is Worse Than We Know
By Kevin Phillips
13 May 2008
Harper’s Magazine

If Washington’s harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.

The corruption has tainted the very measures that most shape public perception of the economy-the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances-inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. And, of course, our statistics have political consequences too. An administration is helped when it can mouth banalities about price levels being “anchored” as food and energy costs begin to soar.

The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range). We might ponder as well who profits from a low-growth U.S. economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anxious to mislead voters, coddle the financial markets, and tamp down expensive cost-of-living increases for wages and pensions?

Let me stipulate: the deception arose gradually, at no stage stemming from any concerted or cynical scheme. There was no grand conspiracy, just accumulating opportunisms. As we will see, the political blame for the slow, piecemeal distortion is bipartisan-both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt, and a casino-like financial sector. To see how, we must revisit forty years of economic and statistical dissembling.

Two Views of Consumer Inflation

Sources: John Williams, ShadowStats.com
U.S. Bureau of Labor

A SHORT HISTORY OF “POLLYANNA CREEP”

The story starts after the inauguration of John F. Kennedy in 1961, when high jobless numbers marred the image of Camelot-on-the-Potomac and the new administration appointed a committee to weigh changes. The result, implemented a few years later, was that out-of-work Americans who had stopped looking for jobs-even if this was because none could he found-were labeled “discouraged workers” and excluded from the ranks of the unemployed, where many, if not most, of them had been previously classified. Lyndon Johnson, for his part, was widely rumored to have personally scrutinized and sometimes tweaked Gross National Product numbers before their release; and by the 1969 fiscal year, Johnson had orchestrated a “unified budget” that combined Social Security with the rest of the federal outlays. This innovation allowed the surplus receipts in the former to mask the emerging deficit in the latter.

Richard Nixon, besides continuing the unified budget, developed his own taste for statistical improvement. He proposed albeit unsuccessfully-that the Labor Department, which prepared both seasonally adjusted and non-adjusted unemployment numbers, should just publish whichever number was lower. In a more consequential move, he asked his second Federal Reserve chairman, Arthur Burns, to develop what became an ultimately famous division between “core” inflation and headline inflation. It the Consumer Price Index was calculated by tracking a bundle of prices, so-called core inflation would simply exclude, because of “volatility,” categories that happened to he troublesome: at that time, food and energy. Core inflation could he spotlighted when the headline number was embarrassing, as it was in 1973 and 1974. (The economic commentator Barry Ritholtz has joked that core inflation is better called “inflation ex-inflation“-i.e., inflation after the inflation has been excluded.)

I n 1983, under the Reagan Administration, inflation was further finagled when the Bureau of Labor Statistics decided that housing, too, was overstating the Consumer Price Index; the BLS substituted an entirely different “Owner Equivalent Rent” measurement, based on what a homeowner might get for renting his or her house. This methodology, controversial at the time but still in place today, simply sidestepped what was happening in the real world of homeowner costs. Because low inflation encourages low interest rates, which in turn make it much easier to borrow money, the BLS’s decision no doubt encouraged, during the late 1980s, the large and often speculative expansion in private debt-much of which involved real estate, and some of which went spectacularly bad between 1989 and 1992 in the savings-and-loan, real estate, and junk-bond scandals. Also, on the unemployment front, as Austan Goolsbee pointed out in his New York Times op-ed, the Reagan Administration further trimmed the number by reclassifying members of the military as “employed” instead of outside the labor force.

The distortional inclinations of the next president, George H.W. Bush, came into focus in 1990, when Michael Boskin, the chairman of his Council of Economic Advisers, proposed to reorient U.S. economic statistics principally to reduce the measured rate of inflation. His stated grand ambition was to move the calculus away from old industrial-era methodologies toward the emerging services economy and the expanding retail and financial sectors. Skeptics, however, countered that the underlying goal, driven by worry over federal budget deficits, was to reduce the inflation rate in order to reduce federal payments-from interest on the national debt to cost-of-living outlays for government employees, retirees, and Social Security recipients.

It was left to the Clinton Administration to implement these convoluted CPI measurements, which were reiterated in 1996 through a commission headed by Boskin and promoted by Federal Reserve Chairman Alan Greenspan. The Clintonites also extended the Pollyanna Creep of the nation’s employment figures. Although expunged from the ranks of the unemployed, discouraged workers had nevertheless been counted in the larger workforce. But in 1994, the Bureau of Labor Statistics redefined the workforce to include only that small percentage of the discouraged who had been seeking work for less than a year. The longer-term discouraged-some 4 million U.S. adults-fell out of the main monthly tally. Some now call them the “hidden unemployed.” For its last four years, the Clinton Administration also thinned the monthly household economic sampling by one sixth, from 60,000 to 50,000, and a disproportionate number of the dropped households were in the inner cities; the reduced sample (and a new adjustment formula) is believed to have reduced black unemployment estimates and eased worsening poverty figures.

Despite the present Bush Administration’s overall penchant for manipulating data (e.g., Iraq, climate change), it has yet to match its predecessor in economic revisions. In 2002, the administration did, however, for two months fail to publish the Mass Layoff Statistics report, because of its embarrassing nature after the 2001 recession had supposedly ended; it introduced, that same year, an “experimental” new CPI calculation (the C-CPI-U), which shaved another 0.3 percent off the official CPI; and since 2006 it has stopped publishing the M-3 money supply numbers, which captured rising inflationary impetus from bank credit activity. In 2005, Bush proposed, but Congress shunned, a new, narrower historical wage basis for calculating future retiree Social Security benefits.

By late last year, the Gallup Poll reported that public faith in the federal government had sunk below even post-Watergate levels. Whether statistical deceit played any direct role is unclear, but it does seem that citizens have got the right general idea. After forty years of manipulation, more than a few measurements of the U.S. economy have been distorted beyond recognition.

What Does “Unemployment” Mean?

Source: US Bureau of Labor Statistics

AMERICA’S “OPACITY” CRISIS

Transparency is the hallmark of democracy, but we now find ourselves with economic statistics every bit as opaque-and as vulnerable to double-dealing-as a subprime CDO. Of the “big three” statistics, let us start with unemployment. Most of the people tired of looking for work, as mentioned above, are no longer counted in the workforce, though they do still show up in one of the auxiliary unemployment numbers. The BLS has six different regular jobless measurements-U-1, U-2, U-3 (the one routinely cited), U-4, U-5, and U-6. In January 2008, the U-4 to U-6 series produced unemployment numbers ranging from 5.2 percent to 9.0 percent, all above the “official” number. The series nearest to real-world conditions is, not surprisingly, the highest: U-6, which includes part-timers looking for full-time employment as well as other members of the “marginally attached,” a new catchall meaning those not looking for a job but who say they want one. Yet this does not even include the Americans who (as Austan Goolsbee puts it) have been “bought off the unemployment rolls” by government programs such as Social Security disability, whose recipients are classified as outside the labor force.

Second is the Gross Domestic Product, which in itself represents something of a fudge: federal economists used the Gross National Product until 1991, when rising U.S. international debt costs made the narrower GDP assessment more palatable. The GDP has been subject to many further fiddles, the most manipulatable of which are the adjustments made for the presumed starting up and ending of businesses (the “birth/death of businesses” equation) and the amounts that the Bureau of Economic Analysis “imputes” to nationwide personal income data (known as phantom income boosters, or imputations; for example, the imputed income from living in one’s own home, or the benefit one receives from a free checking account, or the value of employer-paid health-and-life-insurance premiums). During 2007, believe it or not, imputed income accounted for some 15 percent of GDP. John Williams, the economic statistician, is briskly contemptuous of GDP numbers over the past quarter century. “Upward growth biases built into GDP modeling since the early 1980s have rendered this important series nearly worthless,” he wrote in 2004. “[T]he recessions of 1990/1991 and 2001 were much longer and deeper than currently reported [and] lesser downturns in 1986 and 1995 were missed completely.”

Nothing, however, can match the tortured evolution of the third key number, the somewhat misnamed Consumer Price Index. Government economists themselves admit that the revisions during the Clinton years worked to reduce the current inflation figures by more than a percentage point, but the overall distortion has been considerably more severe. Just the 1983 manipulation, which substituted “owner equivalent rent” for home-ownership costs, served to understate or reduce inflation during the recent housing boom by 3 to 4 percentage points. Moreover, since the 1990s, the CPI has been subjected to three other adjustments, all downward and all dubious: product substitution (if flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon), geometric weighting (goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption), and, most bizarrely, hedonic adjustment, an unusual computation by which additional quality is attributed to a product or service.

The hedonic adjustment, in particular, is as hard to estimate as it is to take seriously. (That it was launched during the tenure of the Oval Office’s preeminent hedonist, William Jefferson Clinton, only adds to the absurdity.) No small part of the condemnation must lie in the timing. If quality improvements are to be counted, that count should have begun in the 1950s and 1960s, when such products and services as air-conditioning, air travel, and automatic transmissions-and these are just the A’s!-improved consumer satisfaction to a comparable or greater degree than have more recent innovations. That the change was made only in the late Nineties shrieks of politics and opportunism, not integrity of measurement. Most of the time, hedonic adjustment is used to reduce the effective cost of goods, which in turn reduces the stated rate of inflation. Reversing the theory, however, the declining quality of goods or services should adjust effective prices and thereby add to inflation, but that side of the equation generally goes missing. “All in all,” Williams points out, “if you were to peel back changes that were made in the CPI going back to the Carter years, you’d see that the CPI would now be 3.5 percent to 4 percent higher”-meaning that, because of lost CPI increases, Social Security checks would be 70 percent greater than they currently are.

Furthermore, when discussing price pressure, government officials invariably bring up “core” inflation, which excludes precisely the two categories-food and energy-now verging on another 1970s-style price surge. This year we have already seen major U.S. food and grocery companies, among them Kellogg and Kraft, report sharp declines in earnings caused by rising grain and dairy prices. Central banks from Europe to Japan worry that the biggest inflation jumps in ten to fifteen years could get in the way of reducing interest rates to cope with weakening economies. Even the U.S. Labor Department acknowledged that in January, the price of imported goods had increased 13.7 percent compared with a year earlier, the biggest surge since record-keeping began in 1982. From Maine to Australia, from Alaska to the Middle East, a hydra-headed inflation is on the loose, unleashed by the many years of rapid growth in the supply of money from the world’s central banks (not least the U.S. Federal Reserve), as well as by massive public and private debt creation.

THE U.S. ECONOMY EX-DISTORTION

The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today’s U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession. If what we have been sold in recent years has been delusional “Pollyanna Creep,” what we really need today is a picture of our economy ex-distortion. For what it would reveal is a nation in deep difficulty not just domestically but globally.

Undermeasurement of inflation, in particular, hangs over our heads like a guillotine. To acknowledge it would send interest rates climbing, and thereby would endanger the viability of the massive buildup of public and private debt (from less than $11 trillion in 1987 to $49 trillion last year) that props up the American economy. Moreover, the rising cost of pensions, benefits, borrowing, and interest payments-all indexed or related to inflation-could join with the cost of financial bailouts to overwhelm the federal budget. As inflation and interest rates have been kept artificially suppressed, the United States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering.

Arguably, the unraveling has already begun. As Robert Hardaway, a professor at the University of Denver, pointed out last September, the subprime lending crisis “can be directly traced back to the [1983] BLS decision to exclude the price of housing from the CPI. . .With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates.” Were mainstream interest rates to jump into the 7 to 9 percent range-which could happen if inflation were to spur new concern-both Washington and Wall Street would be walking in quicksand. The make-believe economy of the past two decades, with its asset bubbles, massive borrowing, and rampant data distortion, would be in serious jeopardy. The U.S. dollar, off more than 40 percent against the euro since 2002, could slip down an even rockier slope.

The credit markets are fearful, and the financial markets are nervous. If gloom continues, our humbugged nation may truly regret losing sight of history, risk, and common sense.

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Another great article from the New York Times. Keeping it real.

March 16, 2008
Leaving Behind the Trucker Hat
By ALLEN SALKIN

Tivoli, N.Y.

THEIR Carhartts are no longer ironic. Now they have real dirt on them.

Until three years ago, Benjamin Shute was living in Williamsburg, where he kept Brooklyn Lager in his refrigerator and played darts in a league.

Raised on the Upper East Side by a father who is a foundation executive and a mother who writes about criminal justice, Mr. Shute graduated from Amherst and worked for an antihunger charity. But something nagged at him. To learn about food production, he had volunteered at a farm in Massachusetts. He liked the dirt, the work and the coaxing of land long fallow into producing eggplant and garlic.

He tried growing strawberries on his roof in Brooklyn, but it didn’t scratch his growing itch.

And so last week, Mr. Shute could be found here, elbow-deep in wet compost two hours north of New York City, filling greenhouse trays for onion seeds. Along with a partner, Miriam Latzer, he runs Hearty Roots, a 25-acre organic farm.

“I never thought I wanted to farm,” Mr. Shute said. “But it feels like an honest living.”

His partner, Ms. Latzer (the two are not a couple) is 33 and a former urban planner. Her parents, a professor and a librarian, “think its crazy that I’m a farmer,” she said. “They wonder what planet I came from.”

This one. Steeped in years of talk around college campuses and in stylish urban enclaves about the evils of factory farms (see the E. coli spinach outbreaks), the perils of relying on petroleum to deliver food over long distances (see global warming) and the beauty of greenmarkets (see the four-times-weekly locavore cornucopia in Union Square), some young urbanites are starting to put their muscles where their pro-environment, antiglobalization mouths are. They are creating small-scale farms near urban areas hungry for quality produce and willing to pay a premium.

“Young farmers are an emerging social movement,” said Severine von Tscharner Fleming, 26, who is making a documentary called “The Greenhorns” about the trend.

While this is hardly the first time that idealistic young people wanted to get back to the garden, the current crop have advantages over their forebears from the 1960s and 70s, many of whom, inspired by the Whole Earth Catalog or Wendell Berry’s books about agrarian values, headed to the country, only to find it impossible to make a living.

But the growing market for organic and locally grown produce is making it possible for well-run small farms to thrive, said Ken Meter, 58, who studies the economics of food as an analyst at the Crossroads Resource Center, a nonprofit advocacy group for local food initiatives that is based in Minnesota.

“A lot of people in our 20s went to the land and wanted to farm and had a lot of enthusiasm, but not many resources,” he said. “It has only been the last five years where the payment from working your fingers to the bone and supplying urban markets with high-quality produce has been enough where you could imagine making a living.”

Whether young, first-generation farmers constitute a flood or trickle is difficult to say. But many long-time observers of small farms say they have noticed an increase in recent years among college graduates who want to farm, even if they intern at established farms or rent tiny parcels.

“We’ve had a big spike in the last decade and especially in the last few years of people who are new to farming applying to sell at Greenmarket,” said Gabrielle Langholtz, manager of special projects for the Manhattan-based Greenmarket, which runs 46 farmers’ markets around the city. “Maybe they went to liberal arts schools and read Michael Pollan,” she said, referring to the author of “The Omnivore’s Dilemma: A Natural History of Four Meals,” (Penguin Press HC, 2006), “and shopped at farmers markets and said, ‘I’m going to buy a farm upstate and sell to Greenmarket.’ ” The typical size of farms that sell at Greenmarket is 50 to 100 acres, she said.

Nationally, there were 8,493 certified organic farms in 2005, using just over 4 million acres of land, more than double the acreage in 2000, according to the United States Department of Agriculture. (The federal government introduced a uniform standard for organic certification in 2002.) New York had more than twice as many certified organic farms, 735, in 2007 as it did in 2004, according to the state Department of Agriculture and Markets. The agency estimates there are three to five times that many organic farms in New York which, like Hearty Roots, choose not to spend the $500 to $1,000 it costs to become certified.

Put that together with research indicating organic farmers are on average 46 years old, compared with an average of 52 for all farmers, and the numbers seem to reflect what experts say they see in the field: the demand from consumers for food produced on a small scale, bought directly from farmers, has allowed a younger generation to enter farming, even as global markets drive many conventional farmers off the land.

“It has opened up a better opportunity than we’ve had in a while for entry-level farmers,” said Stephen R. Gliessman, a professor of environmental studies at the University of California, Santa Cruz, who studies sustainable agriculture. He said many of his students in recent years have started farms after graduation.

When Mr. Shute led a seminar called, “So you want to be a farmer?” in December in New York, it was standing room only with over 40 people, he said.

Just a few years ago the prevailing style statement in Williamsburg featured metrosexually groomed urbanites wearing trucker hats and pristine Carhartt jackets and quaffing Pabst beer. Now some are choosing the real life behind the pose.

At a recent fund-raising party for Ms. Fleming’s film, in a warehouse next to the Williamsburg Bridge, men in shaggy beards and women in thick sandals sipped Sixpoint Lager from mason jars and snacked on Crane Mountain chèvre.

Guests included Rachel Mark and Betsy Devine, who own Salvatore Brooklyn, a cheese maker in Boerum Hill, and Rick and Michael Mast, tall brothers with Amish-length beards, who are starting a chocolate factory in Williamsburg.

The Billyburg scene has changed, said Annaliese Griffin, who contributes to a blog called Grocery Guy. “Having a cool cheese in your fridge has taken the place of knowing what the cool band is, or even of playing in that band,” she said. “Our rock stars are ricotta makers.”

When John Bliss and Stacy Brenner, both 34, first moved to Maine to farm seven years ago — Mr. Bliss from Tucson, and Ms. Brenner from Philadelphia — they knew little about farming.

“My lesson learned from that first year was that if the soil is good, it won’t let you down,” Mr. Bliss said.

On their Broadturn Farm, in Scarborough, they plan to raise sheep, chickens, pigs and turkeys along with vegetables this year. Like many new organic farms, Broadturn uses the Community Supported Agriculture model to survive. Such businesses sell food subscriptions that entitle consumers to weekly boxes of produce in season. Broadturn’s 20-week subscription costs $500.

Mr. Bliss and Ms. Brenner moved to their current site last year after winning a bid to rent a parcel on the outskirts of Portland controlled by a land trust seeking to preserve open space.

A similar set-up is what allowed Ian Calder-Piedmonte, a philosophy major from Cornell University, to join three years ago with a former classmate who had started Balsam Farms on 60 acres on the South Fork of Long Island. For about $150 an acre, they lease town land across from East Hampton high school, and the Peconic Land Trust leases them acreage in Amagansett, where they operate a farm stand on Town Lane.

“If we can find affordable housing, which is a challenge in East Hampton,” said Mr. Piedmont, 28, who spent two years in Italy after graduation, “we’re going to have two interns this summer.”

Although publications like Small Farmer’s Journal, published since 1976, often present the life of the small farmer in a heartwarmingly “Little House on the Prairie” light, a recent article in Sheep! about the dangers of jackals and one in Backyard Poultry about preventing chickens’ drinking water from freezing, are a reminder of the old-school risks of farming.

“We lost all of our soybeans last year to Japanese beetles,” Ms. Latzer said. She often wakes up at 5 a.m. and collapses into an exhausted sleep by 9 p.m. She earns enough to afford health insurance, but if the landlord doesn’t renew their five-year lease, the enterprise could become untenable.

A number of colleges have added organic farming classes because of demand from students. “A lot of them come out and realize they’re not cut out for it,” said John Biernbaum, a professor of horticulture in Michigan State’s new one-year certificate program. Last year, the first, there were 9 students. This year, 18.

Some feel the strong tug of the land. On March 1, KayCee Wimbish, 32, a former second-grade teacher, moved from her Harlem apartment up to Tivoli to raise sheep and chickens with Owen O’Connor, 22, a Wesleyan dropout who helped come up with the name of their enterprise, Awesome Farm.

Ms. Wimbish grew up in Tulsa, Okla., a child of the suburbs, and it wasn’t until she moved to New York that she discovered farmers’ markets and the politics of food. She worked the last two summers at Hearty Roots and became hooked on the agrarian life. “Moving to New York City,” she said, “was what first got me interested in food and farming.”

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Just a quick post to show the sentiment swing that has caused/enabled the bear-market rally off of the March stock-market lows. The chart above is Intrade.com’s “Recession in 2008″ contract and it is now at new lows, putting the odds at less than 25% vs. 80% at the height of the March panic. I’m guessing that the pendulum will soon start swinging back in the other direction.

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Interesting WSJ article and chart that suggests a turning point may be near. Readers of this blog know that I was on the “housing bubble” story from before it even came on to most people’s radar screens, writing stories and selling my Washington, DC co-op for 6x the purchase price and then renting in the summer of 2004, which is exactly when the rate of price change peaked and reversed, with actual prices peaking the following year. Now that rinse cycle is closer to the end than the beginning. Now on to the article:

Wall Street Journal
May 6, 2008
Is Housing Slump at a Bottom?
By BRETT ARENDS

Is it time, at long last, to head down to Florida to start looking at homes?

Maybe.

And the above chart shows one reason why.

It comes from Wellesley College Prof. Karl E. Case, one of the leading experts on the housing market in the country. And it suggests we may be at, or near, the bottom of the housing crash.

Of course, even if he’s wrong we won’t know for sure for many months.

But new housing starts have at last slumped below the seemingly magical one million mark. That happened in March. Every time that has happened in the last 50 years, it proved to be the bottom of a recession.

“It is really remarkable how much where we are today looks like the bottom we’ve had in the last three cycles,” Mr. Case says. “Every time we’ve gone below a million starts, the market has cleared at that moment.”

There is no guarantee this market will be the same but the similarities with the past are striking. Each boom peaked at around the same level of 2.5 million starts as well.

“It’s bottom-fishing time, I think,” says Mr. Case. “There’s got to be bargains in Florida, Arizona and Nevada.”

Mr. Case isn’t alone in his analysis. A hedge-fund manager made a similar case in Tuesday’s dead-tree edition of the Journal. Bill Wheaton, legendary real estate professor at the Massachusetts Institute of Technology, was quoted here nearly two months ago suggesting some fears about the real estate crash were overdone.

And it was in January that I cited my favorite market source, a private portfolio manager in London, who said the homebuilding stocks on Wall Street were at last a buy.

Those stocks have rallied more than 50% on average from that month’s lows. Share price movements are often thought to anticipate events in the real economy by around six to nine months: If that is the case here, it would suggest actual real-estate prices will bottom sometime over the coming months.

Incidentally, contrarians will also love Tuesday’s gloomy first quarter news from leading homebuilding D.R. Horton and from federally sponsored home loan giant Fannie Mae. Both announced massive losses following write-downs. Fannie is holding a $4 billion cash call and both slashed their dividends. You often see these kinds of capitulations at a market bottom, though of course you can see them on the way down as well.

It’s important to note that real-estate prices in many areas are far from a historic bargain. Prices may still fall further. Yet if you are tempted to keep waiting for homes to get a lot cheaper, there are several reasons to think that might not happen.

First, there are too many other bargain hunters out there.

Second, the falling dollar has made these homes even cheaper to foreign buyers. There are plenty of people in Europe for whom Florida is now a bargain.

Third, interest rates are low right now. I hesitate to give my fellow Americans any extra incentive to borrow yet more money, but you can get a 30-year fixed-rate mortgage under 6%. If the economy recovers that won’t last. If you are shopping for a home, it is probably worth seeing if you can lock in one of these rates cheaply.

Finally, in an age of weak currencies and rising inflation, “real” or “hard” assets are in demand. That should include land, bricks and mortar. Sure, real estate isn’t as cheap as it has been at other times in the past. But are Florida homes any more expensive these days than steel, or copper, or gold? I’m not so sure.

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A nice buying opportunity is presenting itself, with plenty of inventory, low prices, low interest rates, limited competition (for now), etc. As usual, the rich are the ones who get first crack at the action (takes money to make money!).

Sunny Side of the Street
America’s wealthy see buying opportunities in sluggish real-estate market
By AMY HOAK
MarketWatch
April 16, 2008

CHICAGO — Is now a good time to buy real estate? The size of your paycheck likely will play a big part in how you answer that question.

While many average Americans are skittish about the housing market, some of the country’s richest citizens see the current conditions as perfect for buying, according to the Annual Survey of Affluence and Wealth in America, released on Tuesday by the American Express Publishing Corp. and Harrison Group, a market research and consulting firm.

Seventy-seven percent of the wealthiest people surveyed think real estate presents a “real opportunity” right now. In the survey, “wealthy” meant having discretionary household income of more than $500,000 a year.

And these high-income earners are putting their money where their mouths are: 40% said they are in the market to acquire real estate this year.

The survey was originally conducted late last year with 1,800 people representing the wealthiest 10% of American households. But the more recent figures are from a follow-up survey with a smaller sample of the original participants, conducted last week to ensure the study reflects rapidly changing market dynamics.

Other survey participants are “upper middle class,” with incomes between $100,000 and $149,000; “affluent,” with incomes between $150,000 and $249,000; and “super affluent,” with incomes between $250,000 and $499,000.
[wealthy see buying opportunity]
Associated Press

The wealthy aren’t alone in their belief that the real-estate market represents a buying opportunity: 67% of the upper-middle-class participants also agreed with that statement, as did 72% of the affluent and the super-affluent.

“There are bargains out there…severe price pressure across the board,” said Jim Taylor, vice-chairman of Harrison Group. That said, at the very top of the market, there is an abundance of buyers and that is holding prices steady at that level, he added.

Still, the wealthiest were the most committed to buying soon. Only 17% of upper-middle-class participants said they were in the market to buy real estate this year, while 24% of the affluent and 26% of the super-affluent said the same.

Home sweet second — and third — home

Forty-one percent of those in the wealthy category said owning a second home was “almost a requirement” for people of their economic means, according to the survey.

Thirty-three percent of the wealthiest who said they intended to buy this year are now in the market for a second home, and 25% said they are in the market for a finished third home, according to the survey.

“They’re treating it as a portfolio play, rather than a recreation play,” Taylor said. “They’ve moved off the notion that it’s just pleasure real estate,” he said, adding that the wealthy use second homes to help balance their overall investment portfolio.

Recession now, but rebound coming

Seventy-nine percent of the survey’s respondents said the country is in a recession now, but 88% said they are confident that property values will eventually rebound. Still, 18% of respondents said the equity in their home is worth less than what they owe.

Many respondents expressed significant anxiety over the recession, Taylor said. That was especially true of the upper-middle-class and affluent groups, he said.

But not everyone is worried about their own financial stability. Taylor said he expects the number of millionaires to increase by another 6% this year.

Passion for home improvement

A separate survey of senior-level executives found that high earners often are passionate about improving their homes — even more passionate than they are about spending time on the golf course.

Thirty-nine percent of 552 high-level executives said they were passionate about home improvement, compared with 32% who said the same about playing golf, according to a recent survey by Doremus, a business communications agency.

“Home is seen by most as a respite from the world, a place where people feel they can be themselves.” said Hope Picker, director of research for Doremus, in a news release. “And high-powered senior-level executives are no exception.

“Golf is a game, but it’s another form of competition and, in many cases, it’s also a surrogate conference room where business is conducted and deals made. But home, even for many high-level professionals, is a safe haven. In addition, home-improvement projects tend to be both tangible and finite, in contrast to much of their work.”

The company recommended that marketers interested in reaching these high-net-worth individuals should target them through publications, broadcasts and online sites that feature decorating and improvement ideas for the home and garden.

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An interesting article from the NYT.

What I don’t understand is why people aren’t alarmed, shocked, and spurred into action by all this. I mean, for a long time it’s been clear that the American “healthcare” system is broken from the citizen’s perspective and works great from the special interests’ perspective.

The existing system needs to be scrapped and rebuilt from the ground up, but that’s not going to happen until people stand up for each other instead of only caring about themselves.

In America, we’ve got 48 million uninsured people and millions and millions more “insured” people who “have” insurance, but can’t afford to actually get the healthcare they need. Both of those groups of people clearly should be standing up, even marching on Washington.

One reason why that isn’t happening is that they can’t afford to do that because they are basically slaves to the system and can’t afford anything except their slave quarters, slave food, and slave clothes. And even that can be taken away in the blink of eye by the boss, so people keep their mouthes shut, keep slaving away, thankful master doesn’t beat (fire) them today. That’s a pretty strong analogy, and exaggerated for effect, but it’s a sad state of affairs and nobody seems to be doing anything about it.

But what about all the millions of people who are cozy and content? Why do they not care about the others? If they care, why don’t they do something? I don’t understand it. Actually, I think I do understand, but I don’t like it. It’s a negative cycle and it needs to be turned around into a positive cycle.

Ok, enough on this topic that really gets me heated up. Now on to the article. The comments in [brackets] are mine. The bolding is mine.

May 4, 2008
Even the Insured Feel Strain of Health Costs
By REED ABELSON and MILT FREUDENHEIM

The economic slowdown has swelled the ranks of people without health insurance. But now it is also threatening millions of people who have insurance but find that the coverage is too limited or that they cannot afford their own share of medical costs.

Many of the 158 million people covered by employer health insurance [158 million people is only about 50% of America's population] are struggling to meet medical expenses that are much higher than they used to be — often because of some combination of higher premiums, less extensive coverage, and bigger out-of-pocket deductibles and co-payments [pay more, get less].

With medical costs soaring, the coverage many people have may not adequately protect them from the financial shock of an emergency room visit or a major surgery. For some, even routine doctor visits might now take a back seat to basic expenses like food and gasoline.

“It just keeps eating into people’s income,” said James Corbin, a former union official who works for the local utility in Tucson.

Mr. Corbin said that under their employer’s health plan, he and his co-workers are now obliged to pay up to $4,000 of their families’ annual medical bills, on top of about $1,600 a year in premiums. Five years ago, they paid no premiums and were responsible for only about $2,000 of their families’ medical bills.

“That’s a big jump,” Mr. Corbin said. “You’ve just lost a month’s pay.”

Already, many doctors say, the soft economy is making some insured people hesitant to get care they need, reluctant to spend a $50 co-payment for an office visit. Parents “are waiting longer to bring in their children,” said Dr. Richard Lander, a pediatrician in Livingston, N.J. “They say, ‘The kid isn’t that sick; her temperature is only 102.’ ”

The problem of affording health care is most acute for people with no insurance, a group expected to soon exceed 48 million [yes, 48 million], but those with insurance say they too are feeling the pain.

Since 2001, the employee’s average cost of an annual health care premium for family coverage has nearly doubled — to $3,300, up from $1,800 — while incomes have come nowhere close to keeping up. Factor in other out-of-pocket medical costs, and the portion of the average American household’s income that goes toward health care has risen about 12 percent, according to the consulting and accounting firm Deloitte, and is now 20% of the average household’s spending [Just add that 20% to the federal, state, local, sales, real estate, social security, Medicare, etc. and you will see that everybody except the richest America have a very high tax rate and get very little for it.]

In a recent survey by Deloitte’s health research center, only 7 percent of people said they felt financially prepared for their future health care needs.

Shirley Giarde of Walla Walla, Wash., was not prepared when her husband, Raymond, suddenly developed congestive heart failure last year and needed a pacemaker and defibrillator. Because his job did not provide health benefits, she has covered them both through a policy for the self-employed, which she obtained as the proprietor of a bridal and formal-wear store, the Purple Parasol.

But when Raymond had his medical problems, Ms. Giarde discovered that her insurance would cover only $22,000, leaving them with about $100,000 in unpaid hospital bills.

Even though the hospital agreed to reduce that debt to about $50,000, Ms. Giarde is still struggling to pay it — in part because the poor economy has meant slumping sales at the Purple Parasol. Her husband, now disabled and unable to work, will not qualify for Medicare for another year, and she cannot afford the $758 a month it would cost to enroll him in a state-run insurance plan for individuals who cannot find private insurance.

She recently refinanced her car [having to refinance anything to pay for anything, especially healthcare, is a sign of a problem], a 2002 Toyota Highlander, to help pay for her husband’s heart medicines, which cost some $400 a month.

Experts say that too often for the underinsured, coverage can seem like health insurance in name only — adequate only as long as they have no medical problems [Yes, the documents say you have health insurance, but just try to use it and you will see you effectively don't].

“There’s a real shift in the burden of health care to people who happen to be sick,” said Paul B. Ginsburg, the president of the Center for Studying Health System Change, a research group in Washington.

Companies and policy makers have yet to focus on what the faltering economy means for employees’ medical care, said Helen Darling, president of the National Business Group on Health, a Washington association of about 200 large employers.

“It’s a bad-news situation when an individual or household has to pay out-of-pocket three, four or five times as much for their health plan as they would have at the time of the last recession,” she said. “Americans have been giving their pay raise to the health care system.”

Sage Holben, a 62-year-old library technician with diabetes who is active in her local union in St. Paul, says that in 2003 union members agreed to a two-year freeze on wages to protect their health care coverage. But for the union, which will begin talks on the next contract this fall, it may be difficult to continue that trade-off, Ms. Holben said. “It’s at the point where we’re losing, anyway,” she said.

“I live paycheck to paycheck,” said Ms. Holben, who makes close to $40,000 a year at Metropolitan State University.

When she took the job in 1999, she says, the health benefits required no co-payments for doctor visits. Now, her out-of-pocket cost per visit is $25, and she pays $38 a month for her diabetes medicine. She has not been to the eye doctor in two years, even though eye exams are crucial for people with diabetes and she knows she needs new glasses. Nor does she monitor her blood sugar as regularly as she should because of the cost of the supplies.

“It’s not an extravagant expense,” she said. “It just adds up.” And it comes atop the increasing cost of utilities, gasoline and food — and the few hundred dollars of repairs her 1994 Chevrolet Cavalier needs.

Many employers do recognize that their workers are struggling financially even as they are asking them to pick up more of their health-care bills.

“It makes the work we have to do even more challenging,” said Anne Silverman, the vice president in charge of benefits in North America for the publishing company Reed Elsevier. “Employees are being stretched in terms of their disposable income.”

Even so, more companies may see themselves as having little choice but to require employees to pay even more of their health expenses, said Ted Nussbaum, a benefits consultant at the firm Watson Wyatt Worldwide. And when a weak economy undermines job security, he said, workers may simply have to accept reduced benefits.

While Mr. Nussbaum and other consultants say it is unlikely that significant numbers of employers will simply drop coverage for their workers, the weak economy could prompt more of them to push for so-called consumer-driven plans. Such plans tend to offset lower premiums with higher annual deductibles.

And while these plans often allow employees to put pre-tax savings into special health care accounts, they typically end up forcing the worker to assume a bigger share of overall medical costs. About six million people are now enrolled in these medical plans.

Among employers, the hardest pressed may be small businesses. Their insurance premiums tend to be proportionately higher than ones paid by large employers, because small companies have little bargaining clout with insurers.

Health costs are “burying small business,” said Mike Roach, who owns a small clothing store in Portland, Ore. He recently testified on health coverage at a Senate hearing led by Ron Wyden, Democrat of Oregon.

Last year, Mr. Roach paid about $27,000 in health premiums for his eight employees. “It’s a huge chunk of change,” he said, noting that he was forced to raise his employees’ yearly deductible by 50 percent, to $750.

Around the nation, some workers are simply priced out of their employee health plans.

After Brian Falacienski of Milton, Fla., was laid off last year from his job as a surveyor for a construction company, he found another position. But the cost of his new health plan — $800 a month for coverage with a $1,000 annual deductible — was beyond the means of Mr. Falacienski, 38, who is married and has a 2-year-old daughter.

His wife, Marianne, started researching individual insurance policies and was able to find policies for her husband and daughter offering basic, if minimal, coverage, costing $161 a month for father and daughter. But Ms. Falacienski, 32, who has arthritis and the severe digestive disorder Crohn’s disease, is now uninsured. Because of her conditions, she said, four major insurers rejected her.

“I even applied for Medicaid,” she said, “but I wasn’t low-income enough.”

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John Mauldin clarifying some “Recession” confusion (denial) that’s been going around lately.

Also a correction on some housing numbers.

“The 2 consecutive quarters of GDP contraction is not the only metric for identifying recessions. According to the econo-geeks at the National Bureau of Economic Research, a recession is defined as a “significant decline in economic activity spread across the economy, lasting more than a few months.” Here’s their specific language:

“ ‘Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, ‘a significant decline in economic activity.’ Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.’”

“Hence, if we follow what the people who actually determine what is and isn’t a recession say about the matter, and not just limit our analysis to GDP, then it’s pretty clear we are now experiencing an economic contraction.”

Real (inflation-adjusted) retail sales have been flat for the last six months. Incomes are stagnant. Consumer spending is showing every sign of slowing even more. Unemployment is rising (see more below). Consumer sentiment is at 25-year lows. You can count on it that the NBER will show a recession starting the fourth quarter of last year and continuing at the least through the first quarter of this year. This one could last another six months. I still think long and shallow with a very slow recovery.

One last point. The US population grows by about 1% a year. Thus economic growth should increase by at least 1% for the US to stay even on a per capita basis. Thus, at least with regard to GDP per capita, the US is definitely in a recession. And if you use real-world inflation data, we are also in a mild recession.

Housing Numbers Are Better Than I Wrote
Sometimes I just flat out get things wrong. And last week I blew it. William Helman, among others, pointed out to me that the 974,000 new-home construction number I used includes multi-family dwellings as well. I knew that, and just forgot. So, let me let William give you the real story:

“I am a loyal reader and I enjoy your weekly letters. Now and then there is an interpretation of the data that I fail to agree with. The letter of April 26, 2008 is a case in point.

“In the section headed ‘If You Are in a Hole, Stop Digging’ you state that the building industry is building over 400,000 more homes than they are selling. You infer this by subtraction new home sales (single-family) for March of 526,000 from housing starts for the month of 947,000.

“First, you should note that single-family housing starts for March were 680,000 (annual rate) and 267,000 (annual rate) were multi-family, or apartments/condos, thus totaling 947,000. The comparison with home sales, which are single-family home sales, should be with single family home starts.

“Second, single-family home sales exclude the construction of single-family homes by owners – persons who buy a lot and contract to have a house built on the lot to live in and not to sell.”

When you subtract out apparent construction of homes by owners and not builders, William presents data that suggests builders are building less than they are selling, which would make sense.

“… However, when we consider the apparent inventory of existing homes for sale along with newly constructed homes, there is a very large excess supply. That suggests that the excess supply of single-family homes on the market, relative to past norms, is between one and 1.5 million units. This is equal to about one year of ‘trend’ single-family home production. At the current rate of new single-family home construction (a 680,000 annual rate, or about 400,000 to 500,000 below ‘trend demand’), it would take at least two years and possibly three years or more to work off the excess.

“Of course there is a lot of uncertainty in trying to estimate future home construction in this way. The demand and the supply are not necessarily, and probably not, at the same places. Thus some of the inventory may remain in excess for a much extended period, while in other places the excess may become exhausted quickly, thus spurring increased new construction more quickly.

“On balance it seems clear that housing starts are likely to remain subdued and well below trend for an extended period. But this is because of the large inventory of new and existing homes for sale. It is not, as you indicated, because builders are currently building more homes than they are selling. Builders are building less than they are selling. Still, this is not to say that sales will not decline further, causing an even further decline of starts before leveling or beginning a gradual recovery.”

I stand corrected.

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• Today: Latest foreclosure stats: Homes facing foreclosure more than doubled in 1Q from 2007.
• Last week: Latest new home sales, starts, and inventory stats: New home sales plunge to lowest level in 16 1/2 years.

The key numbers and what they mean:

• Foreclosures: 157,000 properties were repossessed during the quarter. That’s about 52,000 per month or an annual rate of about 600,000.
• New homes starts: 950,000 (annual rate).
• Add those two numbers together and you get a 1.55 million homes per year coming onto the market (not including non-foreclosure existing home sales).
• The current annual new home sales rate is 526,000 per year.
• Putting it together: supply = 1.55 million and demand = 0.526 million.

So supply is about 3x demand. Even Alan Greenspan should know what that means: Something must adjust. That something mostly being price adjusting down. Also starts still need to come down. But foreclosures have probably not yet peaked and will continue to offset declining starts. Lower prices will stimulate demand (eventually). But if people sense prices will be lower tomorrow, they will wait and/or put in low bids to compensate for the risk (that whole “catching a falling knife” thing). Bottom line: Eye of the storm.

Well, that’s the update. Don’t shoot the messenger!

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