Thursday, February 25, 2010

U.S. Economy Continues to Deteriorate Despite 'Recovery'

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

A number of economic reports in the last few days indicate that the U.S. economy has not only not failed to recover from the recession, but continues to fall deeper into a hole. Banking, consumer confidence, employment numbers, durable goods and the housing industry - each representing a different aspect of the economy - are all sending out troubling signs. Despite the onslaught of negative data, mainstream economists continue to echo the official U.S. government view that "the recovery is still on track".

Updated statistics from the FDIC indicate that there were 702 banks on the troubled list as the end of 2009. This is an increase of 27% from the third quarter. FDIC numbers also show that U.S. banks cut lending by 7.5% in the fourth quarter of last year. Since lending is the lifeblood of the economy this doesn't bode well for the future. The FDIC also had to put aside an additional $17.8 billion for future bank failures. Its deposit insurance fund is now at a negative $20.9 billion. Despite statements that it has enough cash to keep operating (Bear Stearns and Lehman Brothers made similar claims), it is only a matter of time before the FDIC is bailed out. This will take place before the end of the year and will be done by tapping a line of credit from the Treasury department. Expect this event to be downplayed by mainstream media reports with claims that it is not really a bailout.

While the U.S. banking system continues to dissolve, consumers are losing confidence in the economy. The Conference Board numbers for February fell a whopping 10.5 points to 46 (around 100 is a good number). The present situation subindex fell to 19.4, the lowest level since February 1983 when the U.S. was trying to recover from a severe double dip recession. Before the Credit Crisis, consumer spending represented 72% of the U.S. economy. Without their participation, a sustainable recovery is not possible. Other reports indicate there is no way in the near future that consumers can resume their vital economic role. Consumers not only don't have credit, credit card debt was dropping at close to a 20% annual rate at the end of last year, but they are worried about the job market as well.

The weekly jobless claims indicate why the job picture is still troubling. Initial claims were up 22,000 last week to 496,000 (a number around 400,000 indicates recession and 300,000 indicates a healthy economy).  These numbers are highly volatile because they come from state unemployment offices that are notorious for backlogs in processing the claims. This problem occurred during the holiday season and the claim numbers were consequently lower. The mainstream media then fell all over itself to report the tremendous improvement in the employment picture, instead of the real story of bureaucratic incompetence that was preventing accurate numbers from being produced.  Market watchers usually only pay attention to the four-week moving average to get around this problem. This number has risen by 30,000 to 473,750 in the last four-weeks.

The just released Durable Goods report got major headlines about how bullish the number was. This is only the case as long as you don't look at the details of the report. Responsible for the good headline number was a 126% increase in civilian aircraft orders (these orders can be cancelled by the way). Outside of transportation, orders fell 0.6%. Core capital equipment and machinery orders dropped 2.9% and 9.7% respectively. These two numbers are the important ones that determine the direction of the economy. For all of 2009, durable goods fell a record 20%.

Finally, housing doesn't look like it is in recovery mode either. Housing was the epicenter of the Credit Crisis and it will be years before all the damage wrought by the bubble will be worked out. According to the Mortgage Bankers Association, mortgage applications for home purchases have just fallen to a 13-year low. New home sales in the U.S. fell to the lowest level on record in January (records go back almost 50 years). Government nationalized Freddie Mac reported it lost another $7.8 billion in the fourth quarter. That brings its total loss to $25.7 billion for all of 2009. Freddie Mac purchased or guaranteed one in four U.S. home loans in 2009. The Obama administration has promised a blank check to Freddie along with its companion housing entity Fannie Mae, also nationalized and bleeding money, to cover losses up until 2012.

This is little evidence that the U.S. economy has recovered from the recession or is going to recover from the recession any time soon. The support for the recovery viewpoint comes from government statistics that have been highly manipulated. All governments of course want to present a rosy picture of their handling of the economy for political reasons and it is much easier to make the numbers better than it is to actually make the economy better. Eventually the public catches on to this game however. The recent consumer confidence numbers indicate that the American public is no longer buying the public relations story, but is starting to pay more attention to the realities they have to face on a day to day basis.

Disclosure: No positions

NEXT: The Impossible Contradictions of U.S. Consumer Spending

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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