Out of Control Policy Blog

More Numbers Support Fauxcovery Thesis

More numbers came out last week that support the thesis that the GDP growth at the end of 2009 is really a fauxcovery that won't be sustainable or a solid foundation to build on.

Sales of existing homes fell 7.2% in January, according to the National Association of Realtors. Single-family home sales dropped 6.9%, while condo sales dropped 8.1%. From MarketWatch:

Sales of existing homes have fallen two consecutive months after rising steadily through the fall on the back of a federal subsidy for first-time home buyers. The 16.2% decline in December was the largest on record; January's decline is the second largest since 1999, when the NAR began tracking consolidated sales of single-family homes and condos.

Economists surveyed by MarketWatch expected sales to be relatively flat after December's record decline... "It's not good news," said Lawrence Yun, chief economist for the real estate industry lobbying group. "There is rising concern about the strength of the housing recovery."

Earlier last month, it was reported that new home sales had dropped 11.2% in January, wiping out all housing start gains from 2009.

Meanwhile, the fourth quarter GDP growth was revised upward to 5.9%, from 5.7% as was first estimated. (There will be one more revision to the GDP numbers in a few weeks.) On its face, the current Q4 estimate suggests that the economy really is getting stronger. However, within the revised number are troubling revelations:

Nearly two thirds of the growth in GDP in the fourth quarter was accounted for by changes in inventories, not by final sales. Businesses had been reducing their overstocks at the fastest pace in generations earlier in the year, and then sharply slowed the pace of reductions in the fourth quarter. The slowdown accounted for most of the fourth-quarter growth.

As I've discussed on OOC before, the inventory cycle can not be the sole foundation for a recovery.

Critics of this thesis will point out that consumer spending did edge up 0.5% in January. But I would attribute this to misplaced confidence in the market. The housing situation nationwide has not improved and looks like it will continue to drag on through 2010. That will make it hard to banks to quickly work out the toxic debt still sitting on their books, which will in turn keep lending limited. And that is likely to prolong a Fed increase in the federal funds interest rate, which could stoke inflationary fires.

If my concerns wind up justified in 2010 (though seriously, take the word of every economic analyst with a grain of salt, has no one learned that lesson from the crash?), then perhaps consumer spending really should pick up in the next few months. If the Fed does lose its handle on inflation then we might as well use the purchasing power of our dollars while we've still got it.

Anthony Randazzo is Director of Economic Research


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