{"id":443727,"date":"2010-03-18T10:42:00","date_gmt":"2010-03-18T14:42:00","guid":{"rendered":"http:\/\/www.businessinsider.com\/rosenberg-the-economy-is-stabilizing-not-recovering-and-that-wont-prevent-us-from-a-deflationary-meltdown-2010-3"},"modified":"2010-03-18T10:42:00","modified_gmt":"2010-03-18T14:42:00","slug":"rosenberg-the-economy-is-stabilizing-not-recovering-and-that-wont-prevent-us-from-a-deflationary-meltdown","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/443727","title":{"rendered":"Rosenberg: The Economy Is “Stabilizing” Not Recovering, And That Won’t Prevent Us From A Deflationary Meltdown"},"content":{"rendered":"

Does it matter if the economy is merely stabilizing and not actually recovering?<\/p>\n

David Rosenberg of Gluskin-Sheff<\/a> says yes, big time.<\/p>\n

It would seem that investors are taking comfort in the view that the U.S. labour
market and home prices are stabilizing.  The problem with the former is that if it
only stabilizes and does not improve, then a persistent 10% unemployment rate
will, over time, lead to a deflationary environment, which is never good for
equities unless driven by the kind of tech-led productivity gains we saw in the
1990s.  This deflation is caused by excess capacity and insufficient aggregate
demand — it’s not the same.  Jobless claims have to fall below 400k, not merely
stabilize around 460-470k, before employment growth can resume.   <\/p>\n

A big impediment for the employment outlook is the fact that the State and local
government sector employs 20 million people or 15% of the workforce (versus
less than three million in the federal government) and is in major downsizing
mode.  Today’s Investor’s Business Daily (page A2) mentions that more than
25% of Detroit’s public schools are closing their doors in June to stem budgetary
red ink of $219mln.  Also see page A8 of the WSJ for how the lower levels of
government are doing all they can to bolster their depleted revenue base (States
Pressure E-Tailers to Collect Sales Tax).   <\/p>\n

As for home prices, we have a total of over 20 months’ supply of total housing
inventory overhanging the residential real estate market when all the shadow
inventory is accounted for; therefore, it is hard to believe that we have hit
bottom in the home price deflation cycle.  And, the demand for homes, as we
can see in the continued negative year-over-year readings in mortgage
applications for new purchases and the receding new traffic index in the NAHB
survey, is dormant at best.   <\/p>\n

Meanwhile, a wave of new supply is coming from strategic defaults, which now
account for 35% of all defaults according to research published by the University
of Chicago.  To be sure, the Case-Shiller index has emerged as the nonfarm
equivalent to home price measures, and it has yet to roll over.  But it has slowed,
and being a three-month average, it may take time to show deflation again.  The
LoanPerformance home price index is down for four months running.  Freddie
Mac’s conventional home price index fell 0.7% in Q4.  RadarLogic’s 25-city
house price index is down for two months in a row and in four of the past five.  <\/p>\n

It would seem that investors are taking comfort in the view that the U.S. labour
market and home prices are stabilizing.  The problem with the former is that if it
only stabilizes and does not improve, then a persistent 10% unemployment rate
will, over time, lead to a deflationary environment, which is never good for
equities unless driven by the kind of tech-led productivity gains we saw in the
1990s.  This deflation is caused by excess capacity and insufficient aggregate
demand — it’s not the same.  Jobless claims have to fall below 400k, not merely
stabilize around 460-470k, before employment growth can resume.  
A big impediment for the employment outlook is the fact that the State and local
government sector employs 20 million people or 15% of the workforce (versus
less than three million in the federal government) and is in major downsizing
mode.  Today’s Investor’s Business Daily (page A2) mentions that more than
25% of Detroit’s public schools are closing their doors in June to stem budgetary
red ink of $219mln.  Also see page A8 of the WSJ for how the lower levels of
government are doing all they can to bolster their depleted revenue base (States
Pressure E-Tailers to Collect Sales Tax).   <\/p>\n

As for home prices, we have a total of over 20 months’ supply of total housing
inventory overhanging the residential real estate market when all the shadow
inventory is accounted for; therefore, it is hard to believe that we have hit
bottom in the home price deflation cycle.  And, the demand for homes, as we
can see in the continued negative year-over-year readings in mortgage
applications for new purchases and the receding new traffic index in the NAHB
survey, is dormant at best.   <\/p>\n

Meanwhile, a wave of new supply is coming from strategic defaults, which now
account for 35% of all defaults according to research published by the University
of Chicago.  To be sure, the Case-Shiller index has emerged as the nonfarm
equivalent to home price measures, and it has yet to roll over.  But it has slowed,
and being a three-month average, it may take time to show deflation again.  The
LoanPerformance home price index is down for four months running.  Freddie
Mac’s conventional home price index fell 0.7% in Q4.  RadarLogic’s 25-city
house price index is down for two months in a row and in four of the past five. 
 
And, the FHFA index, which used to be the market-mover in years past, posted a
1.6% home price slide in December, which was the steepest decline since
November 2008 — at the peak of the mania of the mid-1990s, this index began
to show cracks about four months before the Case-Shiller did.  Stay tuned.  
It’s not often that we find ourselves in agreement with Larry Kudlow, but his
comment on CNBC yesterday that he “needed a microscope to detect any signs
of meaningful economic recovery” certainly did resonate.  From our lens, it’s
more like a telescope, but why quibble?  <\/p>\n

Now: See our case that the economy really is recovering strongly ><\/a><\/strong><\/p>\n

Join the conversation about this story »<\/a><\/p>\n

See Also:<\/b><\/p>\n