Economic Notes: All the King’s Horses
8/24/2009
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
All the king’s horses, and all the king’s men, couldn’t put Humpty Dumpty together again. But what about the king’s Treasury and Federal Reserve? When the U.S. economy tumbled, Treasury promised to spend and the Fed pledged to lend until their Mr. Dumpty was on the mend.
They have spent and lent. And, consequently, their Mr. Dumpty, while not yet mended, is less broken.
Auto sales
surged as the “cash for clunkers” incentives brought buyers to car dealers’ lots. But what will happen to sales now that the rebates are at an end? In the short run, sales will decline due to seasonality (end of summer). In addition, to the extent that the rebates merely accelerated the timing of purchases, sales in subsequent months will be lower. Those factors will be short-lived, however, and should dissipate by mid-autumn.
After that, autos, like most retail sales, will reflect the consumer’s mood, which after improving from recessionary lows has grown more pessimistic according to the mid-August Reuters/University of Michigan survey. This explains why, despite the gains in autos, total retail sales remained flat in July.
Industrial production
rose in July for only the second time since the end of 2007, due in part to renewed car production. But manufacturers outside of the auto sector are also receiving increased orders which, given their much-reduced inventories, means stepped-up capacity utilization.
As noted earlier (see: "Crawling Downhill"), the manufacturing sector’s loss of employment – which had been disproportionate until recently – has already slowed. The more recent production data suggest that the factory sector may soon begin hiring. And added jobs are the sine qua non of a cheerier consumer.
The sales of existing homes jumped in July, reaching the highest level since August 2007. Homebuilding was virtually unchanged, however, as builders remain cautious.
As with autos, the stimulus package (viz., the first-time buyer tax credit) was partially responsible for the resale bounce. There is more at work here, however. Although prices are no longer falling precipitously – and have bottomed in some regions – they are down sharply.
With interest rates low (due to the Fed’s policies) and prices subdued (due to foreclosures), the volume of resales will continue to increase. Nevertheless, inventory will increase as previously discouraged sellers return their units to the market – a key reason why builders remain cautious.
Perhaps when he is healed, Mr. Dumpty might buy a new home – assuming paying for all the king’s spending and lending doesn't leave him broke.
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