Discussion over the impending “fiscal cliff” and continued fiscal instability from the Eurozone, combined with a still sluggish recovery are leaving many Americans feeling pessimistic about our economic future. However, that fact remains that we are recovering, and there are some less-reported economic barometers that show we are moving in a positive direction. A great place to start is FRED, the economic research of the Federal Reserve Bank of St. Louis.
Household debt is way down over the last five years
For the quarter-century leading up to the Great Recession, American consumers accumulated ever-larger piles of debt, both in absolute terms and relative to the size of the economy. Home mortgages were the largest portion of that, but it also included credit cards, auto loans, and student loan debt. The good news is that in the past three years, Americans have made remarkable progress cleaning up their balance sheets and paying down those debts. After peaking at nearly 98 percent of economic output at the start of 2009, household debt was down to 83 percent of GDP in the spring of 2012. That represents debt reduction of $636 billion, or more than $2,000 for every man, woman and child. It should be noted that some of the decline came from debt being written down (such as in mortgage foreclosures), not from being paid off. But the simple fact is that excessive household debt played a major role getting us into this mess; we are well on our way toward fixing it.
A huge obstacle in recovering from this recession is decreased consumer spending. That trend may have reversed in the latter part of this year, particularly after a 12+% increase this last weekend over previous years in spending during Black Friday. For the first time since the Great Recession hit, American households are taking on more debt than they are shedding, a shift that might represent a more resilient recovery.
For two of the last three quarters, American households’ total outstanding borrowing on things like credit cards, mortgages and auto loans has increased after falling for 14 consecutive quarters. Many analysts even see an end to the long, hard process of deleveraging. That process has been a central reason for the sluggishness of the recovery.
Closely watched economic figures underscore households’ sense of strength. Despite tepid growth and still-high unemployment, consumer confidence has been up dramatically, and last month was at a five year high. It since has slacked off a little this week with concerns over the fiscal cliff, but it is still higher than it’s been in the last three years. Economic growth numbers for the third quarter showed household spending picking up pace as well.
The drop in overall debt is in no small part because of foreclosures. Delinquencies and write-offs by lenders are slowing but have not stopped. But the struggle to pay down old debts might not prove such a drag on economic growth in the future.
Now, with the economy more stable and interest rates at generational lows, Americans finally feel more comfortable taking out a loan on a new car or putting money down on a mortgaged home. With their finances more in balance, workers have started spending less of their paychecks paying off old loans and more on leisure or household goods.
Given the importance of consumer spending to the American economy, those changes translate into a more resilient recovery. Consumer spending still drives 65 to 70 percent of the US GDP growth. The end of deleveraging and the recovery of the housing sector will be strong engines for the United States economy.
Experts estimate that the overall level of debt, compared with income or economic output, would continue to fall for the next one to three years — with the earliest prediction for the end of deleveraging coming in mid-2013 and the latest at the end of 2015.
In addition to household debt being down, the cost of servicing that debt is way down. Not only do American families owe less money than they did a few years ago, the price of maintaining that debt is much lower than it once was. In late 2007, debt service payments added up to a whopping 14 percent of disposable personal income. Now it is down to 10.7 percent, about the same as in the early 1990s. That reflects both Americans reducing their debt burdens (see above), and ultra-low interest rate policies from the Federal Reserve that have reduced rates paid on debts. Translation: It costs Americans $403 billion less, or about $1,300 per person, to make their debt payments than it would if debt service costs were still at their 2007 ratio. Ultimately, the consumer is in a better place to purchase, ultimately driving our economy.
Electricity and natural gas prices have fallen
Americans who cook or heat their homes with natural gas are seeing big savings, thanks to falling prices for fuel. The retail price for consumers’ gas service piped into their homes is down 8.4 percent in the year ended in October. The lower wholesale price of natural gas is also pulling down electricity prices; they are off 1.2 percent over the past year.
A shale-driven glut of natural gas has cut electricity prices for the US power industry dramatically and reduced investment in costlier sources of energy.
These are both utility costs that people can’t control much in the short-run, so low prices here translates directly into more disposable income for Americans to use for everything else they want or need to buy. And in percentage terms, it is most helpful for the middle income and poor, who spend a greater proportion of their income on basic energy needs.
This may appear to be blasphemous in a state whose economic growth is so tied to energy and the natural gas boom. However, due to the quality of the natural gas produced in Texas, we have not been as hard hit as other areas of the country. There are different levels of natural gas generated off of natural gas produced from shale. The Eagle Ford shale south of San Antonio benefits from a higher amount of liquid yields across much of the play, which bring higher prices even while natural gas prices are low. Higher oil prices have helped spur development as oil, condensate, and NGLs (ethane, propane, and butane) all command better prices than natural gas pumped from other shale plays in North America that don’t have as much oil mix or liquid natural gas.
Additionally, although energy is a big portion of the Texas region GDP currently (around 10%), the amount of economic impact it has compared to the ‘Texas oil recession’ of the late 80’s has lessened when 20+% of the states GDP was directly tied to energy. Also unlike the late 80’s, there is a lack of real estate development ‘boom’ presently, potentially softening the economic risks we saw in the ‘oil region’ in the late 80’s.
Businesses quit laying off people
If you are in a Texas metro, you know that businesses are hiring. The national job market has been underwhelming in an economic recovery that officially began more than three years ago, and unemployment remains high at 7.9 percent. But there is some hidden good news in the jobs numbers. While businesses aren’t adding new workers at a pace that would put a dent in the millions of unemployed back on the job very rapidly, they also aren’t slashing jobs at a very rapid clip. Private employers laid off or discharged 1.62 million people in September, according to the Labor Department’s Job Openings and Labor Turnover data. That may sound like a lot, but it’s near the lowest level in the decade the data goes back. During the depths of the recession, employers were slashing more than 2 million jobs a month. And even during 2006, which was in theory a good year on paper for the economy, employers slashed an average of 1.66 million workers a month, more than they are now. It is a sign that even though employers aren’t adding jobs in large numbers, they also are reasonably happy with the workers they have and are not dismissing workers in unusually large numbers. It’s a good time if you already have a job.
In addition, government layoffs have slowed down, helping the economies of Austin and San Antonio who felt the effects of Federal and state budget cuts over the last few years.
Nationally housing is dramatically more affordable
People often speak as if higher home prices are an unambiguously good thing, but that can be misleading. Sure, a retiree looking to sell off a large house and live in a small condo benefits from high home prices. But as we all know, the majority of the ‘boom’ states saw homeowners taking equity out of their homes to fund a lifestyle, so when the market corrected, their was minimal equity left due to the homeowners spending. But most everyone else is better off when buying a home is more affordable rather than less. Six years ago, an average of 40% of each month’s wages were used to pay for housing. Today that amount is closer to 26% of the average private sector employee’s pay. For young people just starting out, young families, or those looking to buy a bigger place, that is hard to beat.
As the media has stated, a housing comeback is now underway; that much is clear. Adding to a steady drumbeat of positive data for the sector, the latest monthly data has showed steady gains in housing starts in the last three months.
The question now is how strong it will be and where it will take place. And to answer those questions it helps to look into the fundamentals of the major US housing markets. These numbers suggest the future for housing is looking bright in the Texas metro areas. But that’s getting ahead of things. A good way to look at which housing markets are potentially overvalued and which are undervalued—and where the market seems to be begging for new home construction and where there is still a surplus of unneeded houses—is to look at the relationship between rents and home prices. Over long periods of time, the price to rent a given house should rise at about the same rate as the price to buy one.
But over shorter periods of time, the two can diverge. And when they do, it is usually a sign that something is up in that market. For example, from 2000 to 2005, prices in the Miami metro area rose by 136 percentage points more than did rents, a sure sign that it was one of the nation’s most bubbly housing markets. Those numbers come from comparing changes in the S&P Case-Shiller home price index for different major metro areas compared with the Labor Department’s consumer price index measure of “Owner’s Equivalent Rent,” for those same areas. Owner’s equivalent rent is a measure of what it would cost to rent the housing stock that people in that city own.
Sure enough, in Miami, in the four years starting in 2005, rents kept rising, up 23 percent, while home prices fell 38 percent. Essentially, the imbalance reversed itself.
Few places have experienced booms and busts quite that dramatic, and we definitely did not see this type of appreciation in rents or home prices in Texas. Nevertheless, the same analytical tools can help explain what cities are poised for a rise in prices and construction in the future. When rents are rising faster than home prices, it is a sign that purchasing a home is becoming relatively more affordable, and so it will behoove people to seriously think about buying. That in turn should create upward pressure on prices in the future and coax builders into the market. These things can move in slow waves, so it’s not necessarily proof that the markets flashing green lights for improvement will get better next year. But over time, this is a solid indicator of where new construction ought to occur.
Here in Texas we never saw the rapid appreciation the rest of the country was experiencing. In the boom years of 2001 through 2006, Texas was 50th in appreciation according to OFHEO, which tracks each state’s residential appreciation. The best news out of this analysis, though, may be this: All of the Texas metros have housing markets that have been in pretty good balance over the last year, with prices rising at about the same rate as rents. And that may be the best sign for the housing market of all. After all these years of bubbles and busts, ups and downs, there finally is a measure of stability. And that is a shift that bodes well for the economy.
So where is the economy headed in 2013? We are optimistic. After the past five years it is easy to continue to be negative, everyone expects it. Third quarter GDP growth was announced this week at 2.7%. We’re not back to the ‘boom’ years, but we are improving. Housing is improving, employment is improving, GDP has some legs underneath it, and all in all the economy shows to be improved in 2013-14 with sustainable demand fueling its growth.