Kevin Phillip’s article in May’s issue of Harper’s (Numbers Racket: Why the economy is worse than we know) gives an excellent analysis of the underlying and less obvious factors that have led to our current economic situation:
“…the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.
The corruption has tainted the very measures that most shape public perception of the economy—the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances—inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits.”
Click here to read the article. While you can look to any media source for a complex discussion of how the mortgage originator was the cause of the meltdown, the Phillip’s article takes an interesting look at the critical statistics, like Consumer Price Index (CPI), unemployment and Gross Domestic Product (GDP), underlying our entire economy and how they have been systematically “adjusted” over the last 25 years. Seen in the harsh relief of the current crisis, the Harper’s article addresses a number of interesting economic conundrums and laws of unintended consequences that are involved in economic policy.
June’s recent new jobs report showed the greatest month over month increase in unemployment rates since 1986 to 5.5%. The report indicates the economy has lost 49,000 jobs, which will continue to squeeze income at a time when healthcare, food and energy prices are soaring. Compounded with inflation concerns, this is a strong indication that the economy is either in or headed for a recession. (A recession is defined as two quarters of negative economic growth.) Nothing could be worse news for the mortgage industry.
Most Americans can gauge the tone of the economy by the unemployment rate. It is one of the first statistics a politician will pull out to support or refute the policies of their opposition. A good bellwether number is about 6%. Really, 7 or 8 gives a sense of unease…but 6 or less, that’s a tolerable variance. In the lay world, the unemployment figures represent all the people looking for a job… that is the unemployment number. Unfortunately, that isn’t even close to how the official figures are determined.
At issue is spin. Labor Secretary Elaine Chow sloughed off notions on CNN Newsroom that this indicates a recession, citing other statistics “are not so dire.” Perhaps she didn’t realize that she used the word “dire” or that the Dow experienced the biggest selloff in 2008 this month, losing just over 400 points. She pointed to the $57B in stimulus checks that the Administration believes will begin “stimulating” this summer. In addition, she remarked that the greatest cause of the increase was an “unusually high number of new entrants into the labor force.” Although considering the BLS’ broad use of metrics to apply seasonally adjustments, it seems unlikely that the adjustment didn’t consider that people graduate in May.
Consider this example by Jack Guttentag in his Yahoo Finance column “The Mortgage Professor”:
“In 1983 the Bureau of Labor Statistics was faced with an awkward dilemma. If it continued to include the cost of housing in the Consumer Price Index, the CPI would reflect an inflation rate of 15 percent, thereby making the country’s economy look like a banana republic. Worse, since investors and bond traders have historically demanded a 2 percent real return after inflation, that would mean that bond and money market yields could climb as high as 17 percent.
The BLS solution was as simple as it was shocking: Exclude the cost of housing as a component in the CPI, and substitute a so-called “Owner Equivalent Rent” component based on what a homeowner might rent his house for.The result of this statistical sleight of hand was immediate and gratifying, for the reported inflation index quickly dropped to 2 percent. (This was in part because speculators needed to offset their holding costs by renting out their homes while their prices skyrocketed, thereby flooding the market with rentals, which pushed down the cost of renting a house or apartment.)
While the BLS was correct in assuming that this statistical ruse would fool the average citizen into believing that inflation was only 2 percent (and therefore be willing to accept a meager 4 percent return on his bank savings), what is remarkable is that the ruse also fooled the bond traders, and apparently continues to do so, leading analyst Peter Schiff to describe these supposed savvy bond traders as the “hormonal teenagers of the capital markets.”
The current subprime credit crisis can be directly traced back to the BLS decision to exclude the price of housing from the CPI. It is now clear that the “benign” inflation figures reported over the past 10 years in no way reflected the skyrocketing rise in home prices, with states like California experiencing annual home price increases of as much as 30 percent annually. With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectation of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the “teaser” rates that quickly escalated to unaffordable levels. As long as home prices continued to skyrocket, buyers could refinance based on the increased value of their equity as collateral, but once home prices stabilized and even declined, many families were forced into foreclosure.”
Read the full “The Mortgage Professor” article here.
The issue is spin. So what’s the truth? More to come.
