The Virtual US Recovery is in Trouble
Most newspapers are filled with reports of a growing US economic recovery after nearly three years of recession and stagnation. President Bush speaks of steady growth beginning. The Federal Reserve head, Alan Greenspan, says much the same. Wall Street stocks are rising on hopes of future boom. The sober reality, however, is that the economy of the United States is on artificial life support. The Bush Administration is doing everything possible to feed the illusion of recovery, what we might well call a virtual recovery, until the November elections. He is doing this at a huge cost to not just the US, but also to the entire world economy.
In normal postwar US recessions, companies reduced debts, laid off workers and prepared to go forward with a better debt-to-revenue basis. Private households have normally reduced their debts and cut back in spending in a normal recession. This is no normal recession. The situation is alarming, and not at all the usual recovery. For the first time since the Great Depression in the 1930's American families are dramatically increasing their private debts during and after the so-called end of recession, officially announced back in November 2001. Instead of the usual period of savings and caution, families have borrowed to record levels. The central bank of Greenspan has encouraged the biggest consumer debt orgy in world history, since the collapse of the dot.com bubble in March 2001.
Personal debt levels rise, jobs vanish
Since the end of 2000 private consumer debt has exploded from 70% of Gross Domestic Product (GDP) today to 82% today. As of April 2003, total private consumer debt, mortgage and other debt (auto, credit card etc.) stood at $ 9.3 trillion. This is a huge rise. Most of the debt has been concentrated in the debt for home mortgages and related loans. Here total household debt has risen to just over $ 7 trillion. That is $ 25,000 debt for every man woman and child. Average credit card debt alone is $ 12,000 and rates paid to banks for that debt are well above 14% a year.
Families can add debt, if their income to pay that debt rises. The opposite is the case, however in the US today. Last year personal income rose by 2 % officially. Individual debt rose by near 10 %. Personal debt for autos, credit cards and such rose to $ 2 trillion for the first time. Including home mortgage debt, total private household debt rose $ 925 billion in 2003 and wages and salaries rose by a mere $ 190 billion. Americans are sinking into debt to keep the economy going. One poll shows 28 % of Americans consider their debt as the biggest problem. Only record low interest rates have made this dangerous situation possible this long. It cannot last. Bush hopes it lasts at least to November's elections.
To prevent a collapse of the US economy after the collapse of the IT economy, Greenspan cut interest rates more than 13 times to a 43 year low today of 1%. This encouraged families to buy new homes or larger homes. That in turn pushed prices of all homes higher. In the past year average home prices have increased 14% for existing homes, and 18% for new homes nationally.
While personal debt is rising, personal income to pay off the debt has not risen. Since the stock market crash and recession in late 2001, the US GDP has risen 7.2% in total, while personal wage and salary income is up only 2% before inflation, and 0.6% after, almost nothing. Yet personal debt has exploded. Such a situation can last only so long before people are unable to pay debts on a car, credit card or even a home.
Greenspan again gave a speech on January 28 promising not to raise interest rates any time soon. Yet he insists the economy is in a healthy recovery. If the recovery is healthy, why is the interest rate level not going back to normal? The answer is, it is not a healthy recovery. Some economists are calling it the second great depression, whose serious effect is hidden only by record low interest rates and huge deficit spending by the Bush Administration. That, combined with the continued Japanese and Chinese willingness to buy hundreds of billions of dollars of US government debt to finance the Bush deficit when Americans cannot.
Jobs across America are vanishing at a record rate. Officially some 2.7 million jobs have gone since 2001. Unofficially the number is likely near 7 million according to a former Federal Reserve economist. Entire industries are being lost to cheap imports from places like China or Mexico or Indonesia. Chinese textiles and furniture imports have become so large in the past two years that entire sectors of the US are becoming industrial ghost towns. And not only blue-collar jobs are being destroyed. In the past 18 months or so major US banks and large companies have outsourced entire parts of their computer and related services to centers in India or elsewhere at a fraction the cost. This includes for the first time very high paid white-collar jobs as software programmers or engineers or accountants.
But, you say, unemployment is falling? That depends how you count. Under US Labor Department methods, you are not counted as unemployed unless you are actively looking for a job. If you have given up finding one, you simply disappear as a statistic. Hundreds of thousands of jobs have vanished in this way, yet official unemployment is listed as 5.6 % of the active workforce.
The government has different measures of employment. If we add underemployed who would take a full-time job if offered, and add those who simply have given up finding any job, total US unemployment would be 10.9 %, not the headline 5.6 %. And that is only using official US government data, Table A-12, 'Alternative Measures of Labor Underutilization.' But that number is never reported to the press. Private economists suggest the real number is even significantly higher. And even using other official measures of new job creation, the job gain is lower than in any post-recession since the War.
For those Americans lucky enough to have found a new job in the past three years, most have not been lucky to find a better job. A recent study by the Economic Policy Institute finds that industries that are adding jobs are paying on average 21 % less than the industries cutting jobs. In Michigan, the US auto industry is losing well-paid production and engineering jobs while new jobs in health care and similar fields there pay 26% less. More Americans are forced to take part-time jobs, often without getting health insurance or other benefits. Some 4.8 million people are working part-time because no full job is available.
The most dramatic change is the permanent vanishing of US manufacturing jobs since 2000. US Manufacturing has lost jobs for a record 42 months in a row. Today, in what is hailed to be recovery, US industry is working at only 76 % of capacity, near depression levels. Goods are being made in Asia instead. Asian central banks, especially in Japan and China, in turn, support the US market, their largest, by buying US Government bonds and such with their huge trade dollar surplus. The effect of this is to create new jobs. Jobs not in America where they are vanishing, but in Asia. The issue has become an explosive political hot potato.
Housing bubble about to pop?
With real unemployment rising to near 11 %, wages stagnant or even falling, it is not surprising that some families are having trouble surviving. Personal bankruptcy filings are at a record high. And now there are signs for the first time that, despite lowest interest rates in 43 years, families are starting to have trouble paying their home mortgages. Today the ratio of household debts to personal asset worth is at an all-time high of 22.6 %. Many families are forced to work two or even three jobs to pay bills, especially cost of the mortgage on their home.
Home prices have climbed dramatically in the past 3 years as low interest rates have encouraged banks to lend to even high risk families. Government or semi-government agencies with names like Fannie Mae or Freddie Mac take the risk off the hands of the local lending bank onto the US taxpayer. For more than one hundred years, US banks lent money for buying a home based on very conservative rules that required a significant initial cash payment, usually 25-30 % of the value of the mortgage loan, and proof that the family had collateral or assets worth more than the home in event of payment trouble. Today, using new financial derivatives and government guarantees, banks lend without even thorough checks of credit. In some cases loans are for 125 % the value of a home. And the US Congress is planning to introduce a law, 'The Zero Down Payment Act of 2004' that would allow certain buyers to buy without a penny of cash first. They are playing with fire.
With interest rates on 30-year home loans at a 43-year low of 5.7%, and banks throwing cheap credit at homebuyers, with no end in sight from Alan Greenspan's generous credit policy, no wonder home sales broke all records in 2003. The problem is that with unemployment rising and wages stagnant, signs of an end to the home buying bubble are evident.
In Colorado Springs, one of the strongest areas in that state, mortgage foreclosures, a process where the bank or government takes possession of a house for non-payment, are at a 12-year high, up 21 % in a year. The region has lost some 9,000 high-paid technical IT jobs since 2001. In Portland Oregon, the rate of foreclosures is the highest in the country, and in that single area each month 50,000 people are late paying their mortgage debt. The reason is usually job loss. Nationally, foreclosure rates are the highest since the deep recession of the early 1970's.
Even in areas where rising home prices have been greatest, many families are having difficulty. This is because cities impose property tax based on market values of the home. In Seattle, home of Microsoft and one of the strongest home markets in the nation, older retired families are being forced to sell their homes that they have long owned because local property taxes have risen too high to pay on their fixed pensions.
Families with too much debt have only three choices: increase income, borrow more, or default and declare personal bankruptcy. Bankruptcy filings are at alltime high levels. Yet interest rates remain at historic lows. Once rates again begin to rise, and they must at some point soon, if only to stop the dollar fall, economists fear a flood of new bankruptcies and home mortgage defaults as families are unable to pay rising interest costs. That in turn, would trigger a new wave of unemployment, company closings, wage cuts and stock market failures. The problem this time is that the US has already done everything it could in normal recessions and more.
The Greenspan Fed has cut and cut like never. Jobs have vanished at record rates and families have borrowed at record rates. There will be perhaps one last spending binge as American families get a last tax rebate from last year's tax cut stimulus this April.
This is an explosive mix. The period after November is pre-programmed to be one of the most dramatic in US economic history. The Federal Reserve will then try to print dollars like crazy to control the collapse. The impact of the new US economic decline will be worldwide. It will hit just as the first alarming signs of oil peak production impact the world.