Potholes in the Economy

July/26/2009 16:05PM
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A great couple of weeks on Wall Street make all of us feel better. A delay in the aggressive insurance reform movement make some of us feel better. All in all, it was a good week.

But, lost in the glow of this good news, unemployment jumped by 600,000. Some of that was cited as part of the auto plant closings. But, the number of those unemployed for six months or more hit 29%, the highest number since this data has been published, topping the 1982 record of 26%. That will bring the July unemployment number up to 9.6 or 9.7 from June’s 9.5.

Is unemployment a leading or trailing indicator of the direction of the economy? We are always told the unemployment numbers trail the recovery. Last week that was certainly true for the stock market.

But, consumer spending is 70% of the economy, and with these unemployment numbers, that just isn’t happening. The savings rate in this country has jumped from 0 to 6.9% as even those still working are hunkering down to have a nest egg if they get laid off.

The raise in the minimum wage last week to $7.25 will add to the rolls of the unemployed. Some people will get cut from jobs in small businesses as owners absorb the overall cost increase of the minimum wage effect. Combined with less sales, these owners are strapped. In other times they could take the minimum wage hit, but now it’s going to mean lay offs. This couldn’t come at a worse time.

Hidden in the fine print of most news last week, foreclosures are growing again despite all the programs to reduce them. The resident idiot in the Senate, Dick Durbin, was quoted ” The foreclosures are growing far faster than our voluntary programs, we’re falling farther behind.” Senator Durbin was the main guy on the cram down program, which did not pass. The Hope for Homeowners program, enacted last fall, is being reworked since it resulted in only one mortgage modification. You read it right, one. How far out of touch are the lawmakers wiht the real world to pass an act that results in one deal?

The Home Affordable Modification Program, launched this spring with $50 billion has offered 325,000 modifications. Of that, 160,000 are in a trial stage. Better than one, but not much help either. To qualify for this plan one must have a job, a mortgage that is above water, a bank that will lend, and jump through even more hoops. No wonder it hasn’t been much help.

Meanwhile, one that is working. Hope Now, a non-government consortium of mortgage companies, trade associations, and community organizations has modified about 4 million mortgages. What do they know that the government doesn’t? Everything.

Geithner, who forced the banks to meet the stress test and raise capital, is writing them telling them they have to work harder to keep Durbin from being more embarrassed. Or, to give the tool he needs to go back and try the failed cram down deal again.

So, more people losing their jobs, more people losing their homes, and the market is up. What if this recession is different? What if unemployment is the leading indicator of the economy? What if unemployment continues to go up until consumer spending picks up and savings goes down?

From my perspective the yellow brick road of the past two weeks on Wall Street has some pot holes big enough to swallow a bus.

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