Hate to Say I Told You So

Turn my back on the rot that’s been planning the plot, because I’m gonna No need for me to wait, because I wanna No need, two, three and too late, because I’m gonna Hate to say I told you so…. I do believe I told you so…. — The Hives, “Hate to Say I Told You So” It’s somewhat ironic that the alterna-hit by The Hives hit U.S. airwaves in mid 2002, just as the stateside housing bubble was starting to gain a head of steam and the economy was setting itself up to grow at an untenable pace. I know the Swedish garage rockers weren’t riffing on the policies of then-chairman of the Federal Reserve Alan Greenspan — or then-Treasury secretary Paul O’Neill, for that matter. But they might as well have been. (O’Neill resigned in December 2002, himself becoming a harsh critic of the Bush administration’s economic policies, while Greenspan has become a lightning rod for criticism in the wake of the U.S. housing collapse.) But that same chorus is still being echoed today — hate to say I told you so! — after “advance estimate” fourth quarter GDP numbers were released by the Bureau of Economic Analysis last week. The headline estimate showed surprisingly strong growth at 5.7 percent, enough to make most lay people wonder where the recession went. But numbers can be really, really misleading; and like many economists watching key economic indicators, I am now concerned by what we saw embedded in the GDP figures. I want to zero in on the key factors to pay attention to, and what we’re likely to see ahead. Because as the economy goes, so too do mortgages. Inventory liquidation slows. This can be a hard one for non-economists to fathom, but businesses slowing the rate at which they liquidate inventories shows up as a boost to GDP — and in this case, 3.39 percent of the 5.7 percent headline figure is the result of inventories. This is both transitory, and the typical effect seen when an economy is attempting to emerge from a recession. Personal consumption expenditures struggles. This is the typical “consumer spending” part of GDP most of us are familiar with, and it fell from 2.8 percent (annualized) in Q3 to an estimated 2.0 percent in Q4 2009. To which I say: look out below. Consumers are in no condition to pick up PCE any time soon, as they are still repairing their blown-out household balance sheets — and I’m not sure that “extending and pretending” when it comes to a borrower default on an unaffordable mortgage is doing anyone any favors here. And that’s to say nothing of the fact that the U.S. consumer is now a saver, with some predicting the U.S. personal saving rate could reach 8 percent this year. Residential investment cools off. RI fell from 18.9 percent in Q3 2009 to a poor 5.7 percent in the fourth quarter — and it could get even worse, for reasons I’ve discussed before. (I’m probably in a small camp that sees housing resuming its drag on the U.S. economy later in 2010, while most I know/read tend to see housing in some form of a recovery.) Both RI and PCE are generally seen by economists as leading indicators for overall GDP — and with a tepid showing from both, I think we have some strong reasons to be concerned. Doubly so considering that the jobless rate is expected to stay at roughly 10 percent for some time to come. (Disconcerting, too, as noted by a colleague at BlackRock, is that net exports were positive contributors to GDP in the fourth quarter, when they should typically be detracting from national income at this point.) As for what the tail end of 2010 might look like? Well, the Case-Shiller HPI is already leveling off on any home price gains seen over the last few months, for one thing — while headlines tout 10 months of nominal price gains, it’s the second derivative that has me concerned, as it’s showing signs of flipping to negative. New home sales tanked in December 2009, also, to a level not seen since December of 1966 (that’s before I was born, folks!). Existing home sales didn’t do a whole lot better, falling 16.7 percent between November and December. And, of course, delinquencies are continuing to rise, with Fannie Mae [stock FNM][/stock] reporting a serious delinquency rate of 5.29 percent for November 2009 this past week. And all this coming before the government scales back its direct involvement mortgage markets, too? To quote The Hives: Hate to say I told you so …. but I do believe I told you so. For those of you interested in the song, if you missed it way back in 2002, it’s probably time to find your inner Mick Jagger and rock out: Paul Jackson is the publisher of and HousingWire Magazine.

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