The Economy's Last Hurrah Before That Big Sucking Sound

By: Richard Benson | Thu, Dec 6, 2007
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As 2007 wounds down, it's time to reflect on how bogus government statistics along with Wall Street media hype have impacted the psychology and perception in the financial markets. Sheer disappointment is one way to describe what the financial markets will experience as the existing belief in a Goldilocks economy is challenged by sobering facts and a hard landing, yet to come.

Christmas is meant to be a festive and happy time of year spent with family and friends, but there is a dark side to this year's holiday. The picture of the father, mother, son, or daughter pulling out the only credit card left that's not maxed out in order to buy that special gift for a loved one, is not the face you'll see portrayed in the media. The TV and newspapers show only affluent-looking preppy-faced Americans wearing pricey Italian shoes and sunglasses, shopping the malls and luxury stores for 50-inch flat screen TV's, cashmere sweaters, Tiffany diamond rings and fancy chocolates. The media will avoid at all costs the large percentage of Americans on the brink of bankruptcy and foreclosure, living paycheck to paycheck, because there's nothing Christmassy about that picture.

I have to wonder, though, if Americans are really shopping (i.e., spending money), or just looking for bargains at the major department stores that began running fire sales as early as October. Foreigners will undoubtedly be the luckiest group this season as they take full advantage of the declining dollar. Contrary to what you may have read in the American financial press about the declining dollar being good for America, you'll read a different viewpoint in the foreign press, as many people overseas think America is getting what it deserves: a real comeuppance, as the dollar and our empire literally go down the tubes.

The US Economy is in terrible shape! Our government has been psychologically manipulating the American people every time they publish blatantly false data on employment and income that makes our economy look stronger than it really is. If the average American realized how bad things were, they might try to save more. But spending would collapse if they did, so the goal of the Bush Administration seems to be to hide any signs of a recession as long as possible.

If you don't see it, it must not be there

For those familiar with the government releases, the Bureau of Labor Statistics ("BLS") just posted a benchmark data revision that showed the total number of workers employed on the payroll survey was 300,000 less than originally estimated for March 2007 (900,000 versus the 1,200,000 that was reported). By the time the dust settles, and later benchmark revisions come in for the whole year, it is likely that all of the jobs added by the BLS Birth/Death Model in 2007 will be fictitious. This could mean there hasn't been any job growth at all! Without the fiction of job growth, you can imagine how much worse it will be for consumer income, spending, and sentiment not to mention business investment plans.

The reason employment is weak is because at least 40 percent of all job growth was tied directly or indirectly to housing. With housing in free fall, the solid job growth reported by the BLS Payroll Survey simply does not make sense.

The Department of Commerce keeps statistical estimates such as Personal Income, which is based on the estimated number of workers in the BLS Payroll Survey. So now, based on the revisions to the BLS Payroll Survey for March (and other data), revised Personal Income (wages, salaries, interest income, etc.) grew at an annual rate of only 1.6 percent in the second quarter of 2007, not the 4.5 percent originally reported. That's three percent less in Personal Income. These imaginary workers with no Personal Income will not be shopping this December or anytime soon, so we can expect to see lower retail sales and corporate profits. Income never made, can't be spent.

As these pretend workers turn out to be a myth, they will eventually show up in the government statistics. When that happens, corporate sales will suffer and the financial markets will take notice. This is also a reminder that for statistics, the government's game is to report the false glowing numbers to the financial markets in the full light of day, and then report the corrections and horrible truth in the dead of night, and hope no one notices.

The big reason the economy is going over the cliff is not the direct result of the sub-prime mortgage debacle and the hundreds of billions in investor dollars that have been lost, although this is a major contributing factor. The reason, we focus on, is that the economy is already in recession as a direct result of homeowners having had that ATM ripped out of their house. Stories like the homeowner who purchased a home for $100,000 years ago but got carried away in the frenzy of the last decade by doing 4 cash out REFI's, running their mortgage balance up to $625,000 while living large, are last year's stories. That $800 billion a year in Mortgage Equity Withdrawal ("MEW") has come to a sudden end and with the average homeowner no longer living large off the house, the economy is left with that "big sucking sound".

With home prices falling, there frequently is no equity to take out! Potential borrowers don't have verifiable income to actually pay back a loan unless home prices are rising rapidly, so they can no longer buy or refinance. Meanwhile, with lenders asking for down payments, housing prices will just keep heading down for another year.

The US economy is continuing to weaken in many areas: The US Treasury has received lower income tax receipts forcing state and local governments to cut back because they're coming up short; capital gains on home sales are falling as home prices fall; property tax receipts are also declining as assessed values go down; weak retail sales mean lower sales tax receipts; corporate profits are down, along with corporate taxes paid; and, many self-employed workers may be employed, but they're not making anything or only half of what they used to.

Moreover, America is not the only country with an economic problem. The housing bubble is turning out to be worldwide, with a major impact on England and much of Europe. The biggest economic losers include the emerging markets, especially China. Don't believe for one second those Wall Street touts selling the notion that the emerging markets have "decoupled" from the US economy and their growth will lead the world forward without the American consumer. That's hogwash. Where do you think their trade surpluses and big sales gains (driving investment in plants and equipment) came from anyway? From the American consumer and MEW! Take $800 billion of easy spending away from the American consumer and you're going to see a lot of blow back in lost sales by the emerging market countries, including China.

As the recession takes hold, I see this holiday shopping hype as the Economy's Last Hurrah, but it's not just the American economy that's going to hear that "big sucking sound" in the New Year!



Author: Richard Benson

Richard Benson
Benson's Economic & Market Trends
Specialty Finance Group, LLC

Prior to founding the Specialty Finance Group in 1989, Mr. Benson acted as a trading desk economist for Chase Manhattan Bank in the early 1980's and started in the securitization business in 1983 at Bear Stearns, and helped build the early securitization businesses at Citibank and E.F. Hutton.

Mr. Benson graduated from the University of Wisconsin in 1970 in the Honors Program in Math, and did his doctoral work in Economics at Harvard University. Mr. Benson is a member of the Harvard Club of New York and Palm Beach.

The Specialty Finance Group, LLC is a Florida Limited Liability Company and is registered with the NASD/SIPC as a Broker/Dealer.

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