As the chart above plainly illustrates, there is a strong, negative correlation between mortgage applications and rates. The move upward in mortgage rates from their May lows reduces the buying power of a home buyer 15%. This dynamic is pushing down housing sales though real estate industry shills claim that housing sales will remain buoyant. Usually, raising prices for a product reduces demand, but the housing recovery narrative dies hard.
The charts above show both the services and manufacturing sectors simultaneously slowing down. Fortunately, they barely hold onto expansionary territory. Unfortunately, the economic data continues to disappoint, and the recovery remains lackluster four years after the supposed end of the recession. For the future, expect more of the same. A little luck could help pick up the pace, but a shock will throw the country back into recession.
Exports are falling as China and Europe continue to disappoint while imports spiked. Yet, these negative trends are spun into good news. The rise in imports is not a sign that the economy is heating up. It indicates that Americans spent a larger share of their incomes on energy. Persistent high trades deficits will continue to sap economic growth. This was the reason that 1Q2013 growth was revised downward almost a quarter from 2.5% to 1.9%. How soon the mainstream media forgets the articles it published only weeks ago.
Middle Eastern crises are excellent for oil prices, but they are bad for the economy. Higher energy prices mean that consumers get less bang for their buck in virtually every sector. This price spike will sap economic growth in the second quarter as explained in the comments regarding the trade deficit above.
The economy actually needs to create 500, 000 per month for the next three years or so to raise employment to the level last seen before the onset on the Great Recession. You would never know this from reading accounts of payroll increases in the mainstream media. 188,000 jobs created is less than half what we need, but it is also a relatively strong number as the chart shows. The best thing you can say about the employment picture is at least it isn’t getting worse.
Let’s not panic, because there will be plenty of time for that later. While the markets are roiled at the prospect of Portugal reneging on its bailout, a lot must happen before that becomes a reality.
First, the current government must fall, and there are still coalition negotiations to be had. Second, a anti-bailout government must be elected, and then that government must follow through. Keep in mind that the current ruling coalition in Greece made a lot of noise in the election before meekly succumbing to the troika’s demands once firmly in power. Third, the troika must actually pull the plug on Portugal, and it is doubtful that this risky decision will be taken before German elections.
Of course, it was doubtful that France, Russia and the U.K. would rush to the defense of tiny Serbia after Austria handed the country an ultimatum fully backed by the Kaiser’s blank check. Be wary of Europe in the summertime.
Here’s another example of anchoring bias. Eurozone economic data is so awful that when less awful data is released it is perceived as “good.” While retail sales rose 1% from April to May, they actually decreased slightly from May of 2012. Moreover, we have been down this road before. As the red circles in the charts highlight, European retail sales have occasionally risen or stopped falling so dramatically several times since the beginning of the Eurozone recession. Despite the positive spin bestowed on this news by the usual suspects, the chart of truth shows that sales have not risen in consecutive months since the summer of 2011. And the recession wears on.