With the Labor Department last week releasing the worst jobs numbers in five years, some economists are asking whether the U.S. economy in a recession. Larry Kudlow, senior contributor and host of “The Larry Kudlow Show” on CNBC, told Steve Malzberg the last five jobs reports from the Labor Department show the U.S. economy entered a “mild recession.”
The jobs reports are not the only sign whatever mild recovery the U.S. economy was experiencing is over. Consumer spending in May unexpectedly declined, the final reading of consumer sentiment showed a decline, service sector growth barely expanded and regional manufacturing in the Northeast, mid-Atlantic and Midwest are stuck in contraction. Regional manufacturing data has shown the sector as a whole either in contraction or hovering just above it for months.
And that follows an entire year of equally poor data and monthly losses in manufacturing employment.
By definition, a recession is a period of temporary economic decline when trade and industrial activity are reduced, which is generally marked by a fall in gross domestic (GDP) in two successive quarters. The Commerce Department reported the second reading on first-quarter GDP was revised higher to show the U.S. economy grew at an annualized pace of 0.8%, up from the 0.5% initially reported earlier this month.
There was no revision to the consumer spending component, which represents more than two-thirds of all U.S. economic activity. While the GDP numbers don’t match the textbook definition, it is also true that the government has adjusted its methodology for calculating the closely-watched gauge numerous times since the Great Recession. Those changes have been implemented twice after quarterly GDP was reported to have contracted and have had a positive or inflating impact on the final reading.
The one area of the U.S. economy showing promise is the housing sector, but analysts caution the situation isn’t what it seems.
The Commerce Department reported housing starts in the U.S. came in at an annual rate of 1.172 million in April, topping the estimate for 1.127 million. The agency also released a report showing sales of new single-family homes jumped 16.6% last month to an annualized rate of 619,000 units.
The National Association of Realtors (NAR) said the Pending Home Sales Index showed contracts to buy previously-owned homes rose 5.1% last month, higher than the median forecast. The NAR, which is essentially a representation of the housing lobby in D.C., said existing sales of single-family homes in the U.S. rose 1.7% in April to an annualized rate of 5.45 million units.
But the gains aren’t at all a natural result of market forces.
“Of the estimated 1.5 million first-time buyers in our data over the past year, more than a million bought homes with a downpayment of 5% of less,” said Stephen Oliner, co-director of AEI’s International Center on Housing Risk. “The sheer scale of this number shows that many, many households are buying their first homes with little money down.”
The National Mortgage Risk Index (NMRI), which is conducted monthly to measure how government-guaranteed loans with a first payment date in a given month would perform if subjected to the same stress as in the financial crisis that began in 2007, has increased year-over-year in every month since January 2014.
In other words, Mr. Oliner and his colleagues argue, the government hasn’t yet learned the lesson of the subprime mortgage crisis.
The NMRI last month found purchase loan volume surged 16% in April from a year earlier, fueled by an 18% jump for first-time buyers. The NMRI for Agency purchase loans came in at 12.59% in April, up 0.56% on a year-over-year basis and 1.27% from April 2014. An NMRI value of 10% for a given set of loans indicates that 10% of those loans would be expected to default in a severe stress event, based on the actual performance of loans with the same risk characteristics after the financial crisis.
“April 2016 was another exceptionally strong month for home buyers, as volume hit a series high for the month of April,” said Edward Pinto, co-director at International Center on Housing Risk and former executive vice president and chief credit officer for Fannie Mae. “With leverage continuing to increase and given that April represents the lower volume portion of the home buying season, we expect the remainder of the 2016 spring buying season to be exceptionally strong.”
An increasing number of analysts are starting to agree with those like Mr. Kudlow, who argue the government’s numbers can’t be fully trusted and aren’t telling the entire story. Even during months of stronger than anticipated job creation, those jobs have been low-paying and largely part-time positions, which is keeping wages stagnant and at lower-than-historical levels.
Analysts will be watching the numbers out of the second quarter very closely.
The Atlanta Federal Reserve currently forecasts second-quarter GDP rising at a 2.9 percent rate, though the continuing high level of inventories (among other factors) likely means they are overestimating growth. The economy grew at a 1.4% rate in the fourth quarter.