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Rumors of recovery are premature


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I hate to be the bearer of bad news, but recent reports of the economy stabilizing are premature. The latest spin on economic indicators has focused on housing and consumer spending. Warning! If you want good news, you should stop reading now.

Pending sales of existing homes rose 3.6 percent in June, exceeding expectations and leading some to conclude the housing market is recovering. It must be noted that these are pending sales, meaning the potential buyers haven’t actually received their loans and signed closing documents. With underwriting guidelines more strict and appraisals more scrutinized than ever, not all of these pending sales will actually come to fruition.

Another housing indicator, new home sales, gained 11 percent in June. Though this is better news than expected, median and average sale prices are still significantly down from a year ago. Additionally, buyers are responding to incentives such as low interest rates and builder upgrades. We will run out of these buyers shortly.

A nine-month supply of existing and new homes still has to be absorbed, but even this is misleading. This figure is based on the expectation that demand will remain at its current level. With falling incomes, near-record unemployment nationally and the first-time homebuyer tax credit set to expire, we know that demand cannot continue at this summer’s rate. “Ah,” you say, “but didn’t you read that consumer spending is exceeding expectations? The recession will end in the third quarter!” However, the increase was driven by higher gasoline prices, somewhat attributable to seasonal fluctuations and certainly not an indicator of economic recovery. This consumer spending also is not sustainable, as June witnessed the largest decline in personal incomes in 4 1/2 years.

The problem with predictions of the recession ending in the third quarter is that gross domestic product (GDP) gains, marking the end of a recession, will not reflect what is really happening in the economy.

Job losses are mounting, incomes are falling and consumers are not spending on much outside of necessities. Household wealth is spiraling downward and with it, consumers’ ability to spend.

Iowa’s unemployment rate in June was 6.2 percent, the highest it has been in 23 years. When new data begins to suggest that employment is stabilizing, consider it with caution. Once people have been unemployed for 26 weeks or more, they are no longer tracked by the Labor Department. This means that a large number of people laid off in the spring will no longer be counted in the official jobless figures. The data also doesn’t account for those who have given up their job searches. Our actual rate of national unemployment is most likely higher than the reported June rate of 9.5 percent, and even that number represents a 16-year high.

The bottom line is that GDP figures may inch upward a bit, and there will be occasional meager signs of improvement in the data. But until households are made whole in terms of employment, wealth and income, there will be no recovery.

A recovery without jobs is no recovery at all.

Meghan O’Brien is a retail economist with the Regional Capacity Analysis Program at Iowa State University and also serves as an Extension program specialist.

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