Can Housing Be Fixed Without Jobs?

An end to the first time home-buyer tax credit could result in a decline in the housing market, experts warn. However, can we expect a sustainable recovery in housing by using temporary measures rather than creating more jobs? See the following post from Expected Returns.

From Bloomberg, U.S. Economy: New home sales drop as end of tax credit looms:

Sales of new U.S. homes unexpectedly fell in September as the end of a tax credit for first-time homebuyers approached, highlighting the importance of government aid to the emerging economic recovery.

Purchases dropped 3.6 percent to a 402,000 annual pace that was lower than the most pessimistic economist’s, according to Commerce Department figures issued today in Washington. Other data showed orders fo climbed 1 percent in September, the fourth gain in the last six months.

The drop in sales “does raise some questions about where the housing market is going to be in six months, arguably without any more support,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. “Whatever you think about the economy, it’s not going to be a straight line” toward recovery.

Are people still calling a bottom to this market? This is a sneak peek of what is going to happen once the government removes props from housing. Housing sales are still down year over year, and we're supposed to be in recovery mode. The ultimate driver of housing will be jobs, which we're still shedding, and lower housing prices, which the government won't allow to happen.

Tax Credits + MBS Purchases

“Much of the strength in the economy is due to temporary factors such as fiscal stimulus initiatives like the home- buyers credit,” said Dana Saporta, an economist at Stone & McCarthy Research in Skillman, New Jersey.

Fed policy makers meeting next week are likely to repeat their commitment to keeping interest rates low for an “extended period.” The Fed last month decided to slow purchases of $1.25 trillion in mortgage-backed securities while extending the end-date of the program by three months, to March 31.

Fed policy makers are obviously pushing on a string here when it comes to housing. Low interest rates are immaterial when banks refuse to refinance and people are unemployed. It won't be pretty for housing when there are no more buyers of mortgage-related debt, and foreclosures and distressed sales really start to hit the market.

This post has been republished from Moses Kim's blog, Expected Returns.

Job Growth Held Back By Weak Consumer Spending

While the U.S. job market continues to be challenging, declining initial jobless claim filings offer hope that the worst of the recession is over. Investors should continue to be cautious with regards to the long-term outlook since sustained job growth will rely heavily on increases in consumer spending levels. See the following post from Capital Spectator for more.

The trend remains our friend in the land of initial jobless claims. The absolute level is still reflecting pain in the labor market, but there's no denying that the general ebb and flow of new filings for unemployment benefits is favorable.

As our chart below shows, new filings dropped again last week, falling to a seasonally adjusted 514,000, below the previous week's 524,000, the Labor Department reports. That puts the latest number at the lowest level since the week ended January 3, 2009.



Confirming the trend is the decline in continuing claims, which dropped below the six-million mark in the week through October 3 for the first time since March.

All of which is encouraging and lends more support to our earlier calls that the recession is technically over. But that invites our standard caveat: sustained growth in the labor market is still far from imminent. Even the optimists don't expect much good news on this front until next year. “We will probably have more sustained growth in the labor market starting in early 2010," Maxwell Clarke, chief U.S. economist at IDEAglobal in New York, tells Bloomberg News. "From there we will find a peak in the unemployment rate and ultimately create jobs.”

Part of the problem is that consumption may revive in fits and starts. For an economy that relies heavily on consumer spending, that challenge threatens to remain a thorn in the recovery's side for the foreseeable future. Indeed, yesterday's update on retail sales offers little reason to think otherwise. The Commerce Department reports that retail sales last month slid 1.5% on a seasonally adjusted basis. Of course, if we exclude auto purchases, which were artificially boosted in recent months by the government's cash-for-clunkers program, retail sales inched higher in September by 0.5%. That encourages some observers, including Bruce Shalett of Wynston Hill Capital in New York, who tells Reuters: "While the consumer may be more prudent in the way they spend money, the data would indicate they are certainly spending money. The consumer is participating in the recovery."

The stock market seems to be buying into that outlook, or so the rally of late suggests: The media's obsession with reporting that the Dow Jones Industrials closing above 10,000 for the first time in more than a year being the obvious example.

But until the labor market starts showing stronger signs of revival, we remain wary of declaring that consumption is set to return to the golden days of yore.



Inflation, meanwhile, still doesn't seem to be a problem, which bodes well for keeping interest rates just above zero. The liquidity-injection train rolls on! But let's also recognize that the deflationary scare is now history, or so it appears. The last time CPI dipped on a monthly basis was March. Last month's inflation report is hardly worrisome—CPI rose just 0.2% in September. But the future will struggle with the question of how long the Fed can/should continue to pump money into the economy as if the world was coming to an end? Finding the sweet spot between juicing the labor market, consumer spending and at the same time keeping a lid on future inflationary pressures promises is the new new thing in central banking.

What does all this imply for investing? For our money, we're increasingly cautious...again. Asset allocation decisions are tougher these days compared with early in 2009, when the price of risk looked unusually attractive. That doesn't mean it's time to run for cover. But for the moment, we're of a mind to consider our Global Market Index's passive weights as a guide for structuring portfolios. Until more convincing signals (or valuations) arrive, we're inclined to settle for a neutral asset allocation. Or, to borrow Warren Buffett's metaphor, we're not tempted to swing at every pitch these days.

This post has been republished from James Picerno's blog, Capital Spectator.

Jobs Tax Credit Making A Comeback

Unemployment reared its ugly head last month as job losses accelerated, renewing support for a job stimulus. As the fourth quarter begins, we could see many companies looking to reduce costs in order to reach fourth quarter targets. However, the idea of a tax credit for employers is gaining support and might actually work, as the following post from Economist's View explains.

Would a tax credit for businesses that create new jobs be enough to turn the employment picture around?:

Support Builds for Tax Credit to Encourage Hiring, by Catherine Rampell, Ny Times: The idea of a tax credit for companies that create new jobs, something the federal government has not tried since the 1970s, is gaining support among economists and ... has some bipartisan appeal...

One version of the approach, to be unveiled next week by the Economic Policy Institute,... would give employers a two-year tax credit if they increased the size of their work force or added significant hours of work (for example, making a part-time worker full time). ...

“It’s beautiful if it can be timed at a dire moment like this, when unemployment is way too high and appears to be going somewhat higher,” said Mr. Phelps, an economics professor at Columbia, lamenting that the president dropped it from the $787 billion stimulus plan approved in February. “But it’s a pity that this wasn’t done a year ago.” ...

The federal government last tried this measure in 1977-78. During that period, employment — which had been soft from the 1973-75 recession — climbed at a record pace. The creation of one out of three jobs that was awarded the credit then was attributed directly to the policy. But the permanence of those jobs was less clear, and some dispute how many of those positions would have been created eventually anyway. ...

Timothy J. Bartik, a senior economist at the Upjohn Institute for Employment Research who is working on the draft with John H. Bishop of Cornell, estimates that it would cost about $20,000 for each job created. ... The authors estimate their proposal could create more than two million jobs in the first year. ...

An American Economic Review study has suggested that the 1970s policy was responsible for adding about 700,000 of the 2.1 million jobs that were awarded the credit. This may sound modest, but if accurate, economists say it would make this proposal a successful and relatively cheap way of creating jobs.

Advocates argue that such incentives would be more effective this time around not only because of design, but also because of timing. In 1977, hiring was already on the upswing, whereas economists expect today’s job market to decline a bit more and then stagnate for months.

“Now is a better time than ’77 was because we’re closer to the bottom of a recession,” said Daniel S. Hamermesh, an economics professor at the University of Texas, Austin, who helped create the 1970s plan. “This could help an uptick proceed more rapidly.”

But critics of the idea argue that businesses hire based on actual demand for their products, and a minor subsidy for adding an employee will not make up for the collapse in demand across the broader economy. ...

Barack Obama ... proposed a job creation tax credit during his presidential campaign, and then in discussions for the stimulus package. The proposal was eventually killed because of concerns that employers would exploit the tax credit. For example, companies might close and reopen, claiming credit for all their “new” employees.

Even advocates acknowledge that, as with any tax incentive, employers and their accountants will take advantage of loopholes. But they argue that with strong rules ... the proposal could minimize such abuse. ...

It's worth a try, but just because both sides might agree doesn't mean it will be enough on its own to solve the employment problem. To have a chance of doing that, I think a policy like this needs to be combined with demand-side policies that create the need for more workers, the tax credit alone won't be enough. So yes, let's try this, but let's use it in addition to rather than a substitute for additional stimulus measures (which are being called other things for political reasons) that directly increase the demand for workers.

This post has been republished from Mark Thoma's blog, Economist's View.

Why Employment Should Not Be The Number One Concern

Economist Andy Harless discusses why job loss is not the biggest problem facing the economy right now but a necessary part of the natural cycle of economic growth. He also explains how unemployment will help prevent inflation that many analysts are worried about. For more on this see the following post from Economist's View.

Why has the rate of both job creation and job destruction been falling in recent years?

Job Losses Are Not the Problem, by Andy Harless: It is sometimes argued that recessions benefit the economy by allowing the destruction of old, inefficient economic structures so that newer, better ones can be created to replace them. On the surface, this story might seem to apply to the recent recession: ostensibly, a lot of useless jobs in finance, real estate, and construction were destroyed, as well as perhaps old manufacturing jobs that hadn’t caught up with the latest technology, and jobs in retail trade that needed to be replaced by the Internet, and so on. But there’s one problem with that point of view: overall (at least during the first four quarters of the recession, up through the end of 2008, for which we have the relevant data), there weren’t an unusually large number of total jobs being destroyed.

But...but...but...haven’t we been hearing about large numbers of job losses month after month since the recession began? Sort of. We’ve been hearing about large numbers of net job losses. That is, the number of jobs that have been lost has been a lot more than the number that have been created. And a lot of job losers have ended up collecting unemployment insurance for a long time, sending the figures for continuing claims up to records, instead of getting new jobs. But the gross number of jobs being destroyed has not been unusually large. In fact, relative to the overall level of employment, job destruction was happening at a faster rate during the boom of the late 1990s than it was during the last quarter of 2008.

How can that be? For one thing, when you take out the business cycle, there seems to have been a general downward trend in the rate of job destruction over the past 10 years. More important, the rate of job creation also had a downward trend, and it dropped to new lows during the recession of 2008. If you lost a job in 1999, you weren’t actually all that atypical, but it wasn’t a big problem, because typically, you could find a new job fairly easily. If you lost a job in 2008, you were (typically) out of luck.

Source: Business Employment Dynamics data from the Bureau of Labor Statistics

The fact is, job creation and job destruction take place during booms at rates that are not dramatically different from the rates during recessions. It’s just the difference between the two that changes. In a typical boom quarter, about 7 million jobs are destroyed, and about 8 million are created. In a typical recession quarter, about 8 million are destroyed and about 7 million are created. There just isn’t much support for the idea that recessions give us a special ability to reallocate resources more intensely than we do during a boom or a period of normal growth. “Creative destruction” is a dynamic process that continues all the time, not one that occurs in separate phases of creation and destruction.

And the most salient feature of the current episode is that there has been unusually little creation. From the 1990’s to the 2000’s, the quarterly job creation rate fell from about 8% to about 7%. Since 2006, it has fallen to about 6%.

Some might argue that this type of slowdown in job creation is inevitable during times of structural change and that it is useless to try to oppose it with monetary and fiscal policy. It takes a long time (Arnold Kling, for example, would argue) for the economy to come up with ideas for new, productive uses of resources when the old uses are no longer productive. Monetary and fiscal policies can’t do much to speed up this process. They can’t make entrepreneurs more creative.

I’m skeptical of that view: entrepreneurs were plenty creative during the 90’s, once the booming stock market gave them a reason to apply their creativity. Monetary policy really did help speed up the process of finding new uses for resources: low interest rates led to high equity prices, which made it easy to raise capital and thereby made it advantageous to find new ways of using capital. Some would say the process went too fast in the end, with a large fraction of the uses proving ultimately unproductive, but statistics show aggregate productivity rising rapidly and continuing to rise during the subsequent years, even (atypically) during the recession that immediately followed the boom. There may have been a lot of froth, but there was plenty of good beer underneath, and monetary policy is what opened the tap.

In any case, even if I were to concede that monetary and fiscal policies don’t help speed up the adjustment process, they do help us get the most out of the economy in the mean time. With nearly 10 percent of the labor force unemployed, there are a lot of resources being wasted – people spending their time looking for jobs that many of them just aren’t going to find until we get a lot more economic activity. There are plenty of useful things that those people could be doing in the mean time.

Perhaps more important, monetary and fiscal policies help us reduce the risk that a weak economy – too weak for too long – will fall into a deflationary spiral. As long as job creation remains weak, employers have little incentive to raise wages, and competition will tend to push down prices. Even an “artificial” stimulus, one that doesn’t accelerate the structural adjustment process, will create a demand for labor and force employers to compete somewhat for workers. That competition, in turn, will prevent them from competing too aggressively in product markets and keep prices reasonably stable.

There is, of course (in theory, at least), the risk that policies will go too far and not just prevent deflation but produce excessive inflation. As I have argued before, we are nowhere near that point right now. I made the case against inflation using mostly the unemployment rate, but the case becomes even stronger when you consider the job creation statistics. This unemployment is specifically being induced by a slowdown in job creation. Job creation is specifically what leads to inflation: it’s when companies want to hire aggressively that they start raising wages excessively and competition becomes unable to keep prices in check. If unemployment – which arguably has a more tenuous relationship to inflation – is far, far away from the danger point, job creation – which has a direct relationship to inflation – is even further away.

Quick reaction (I had hoped to say more about the decline in the rates of job creation and destruction, but that will have to wait, so your thoughts on this are welcome):

I think both monetary and fiscal policy can help with restructuring, as noted above monetary policy can increase the return on projects and thus creates an incentive to find "new, productive uses of resources." Fiscal policy can, both literally and figuratively, pave the way for those projects to come to fruition.

But, though fiscal policy in particular could have been devoted more toward helping labor and other resources make the transitions to new industries, and perhaps more could have been done to help with the creation of new opportunities, the main point I want to make is that we should distinguish between cyclical and structural unemployment. Much of the unemployment we are seeing is due to the business cycle, it has little to do with the need to restructure the economy, and both monetary and fiscal policy can be of great help with this problem. I don't know for sure how much of the change we are seeing is structural and how much is cyclical, but I am willing to assert that most of the change in unemployment is a cyclical rather than a structural phenomena. Thus, "even if I were to concede that monetary and fiscal policies don’t help speed up the adjustment process," though I see no reason to concede this, it only speaks to the ability of these policies to help with structural adjustment, monetary and fiscal policy are still very much needed to deal with the unemployment related to the business cycle.

This post has been republished from Mark Thoma's blog, Economist's View.