Conflicting signals

As the raft of the third- and fourth-quarter economic statistics floats ashore over the next month, there are bound to be some conflicting numbers concerning the overall health of the US economy. The business press has tended of late to zero in the housing market, where house prices have been falling in several major markets. As reported in the Wall Street Journal today,

“With U.S. house prices growing less than 1% during the third quarter, it provides more evidence that the long forecasted national deceleration in house prices is occurring," said [Office of Federal Housing Enterprise Oversight] Director James B. Lockhart in a press statement. But, “given the five-year appreciation prior to this quarter of 56.76%, the slowdown is not unexpected,” he added.

Five states—New York, Rhode Island, Michigan, New Hampshire, and Massachusetts—saw price declines from the second to the third quarter of the year, Ofheo said. The third quarter’s growth in prices also was down sharply from the rate of quarterly increase a year ago. In the third quarter of 2005, prices rose by 3.30% over the second quarter, compared to 0.86% growth in the third quarter of 2006.

Overall, OFHEO’s report cited a national average that is still appreciating, albeit at a decidedly slower rate of growth.

Another recently released set of statistics, that of the National Association of Realtors, notes that sales of existing homes notched a 0.5% increase in October, the first such increase in several months, leading the folks at Strategic Forecasting to write that “housing prices are more stable than the pundits think,” citing the built-in stability of the housing market due to demographics, immigration, and Americans’ flexible attitude toward relocating.

Of course, the housing market is often Exhibit A when folks make a case for impending catastrophe in the US economy, but at best, the housing market provides a mixed bag of indicators. Growth nationally has been modest, and only the bubble markets—typically in the northeastern and southwestern US—will likely see depreciation in the value of new and existing homes. In those cases, the prices were largely irrational to begin with.

Still, the slowdown should be noted, for there is, historically, some predictive power in the movement of house prices and sales. The current fad is to see the housing market as a barometer of sorts for nationwide confidence in the US economy. Such a view might be an overstatement, but if true, it would stand to reason that this year’s retail sector might see lower sales figures during the all-important holiday season. If confidence is low—as the housing market would indicate—then, naturally, folks will spend less money this Christmas.

Initial sales figures from the nation’s leading retailers, however, are similarly mixed. Walmart is reporting relatively flat November sales figures; other retailers, however, have seen a jump in same-store sales. In short, we will have to wait and see if Americans have collectively decided to restore some sanity to their personal balance sheets.

Earlier this year, I wrote a brief essay on the historically predictive power of the bond market, particularly during periods of a so-called inversion of the yield curve. While at that time, the yield curves of short-term and long-term borrowing were running roughly neck and neck, we have seen a true inversion during summer and fall, leading some to posit that a recession is only a matter of time. It would not be surprising, then, to hear retailers cry about finding coal in their stockings come Christmastime.

While signals regarding the health of the US economy remain somewhat mixed, I think we should plan for a recession to hit during the first quarter of 2007, a state of affairs that should become apparent—if it isn’t at that time—once the statistics begin arriving in April. How mild or severe? What do I look like, an economist?

In all seriousness, I don’t think there will be an actual contraction of the US economy during any quarter of 2007, but the slower growth will be felt, hitting some companies and families harder than others.

For all its faults, the Bush administration has done a decent job taking the economy off the table as a political issue. Of course, there are persistent problems that have not been resolved, such as the runaway budget deficits, the out-of-whack current-account and trade deficits, the growing disparity between rich and poor, and the deceptively poor US job market, but the Republicans’ recent electoral massacre had little to do with poor economic performance. Depending on the severity and length of the impending recession, the next election cycle may see the economy moved to the front burner. Political candidates, despite noise in the electorate over Iraq, would be wise to take heed.