| Peter Morici is an economist and professor at the Robert H. Smith School of Business at the University of Maryland. He is a recognized expert on international economics, industrial policy and macroeconomics. Prior to joining the university, he served as director of the Office of Economics at the US International Trade Commission. |
The $150 billion dollar US stimulus package announced by the Bush Administration and Democratic leaders, coupled with interest rate cuts implemented by the Federal Reserve, should help avert an economic debacle but the danger of recession continues.
The subprime crisis has created a shortage of business loans and mortgages, and imposed massive losses on U.S. banks. These are sending housing prices down, drain consumer and business spending, and impose the risk of recession.
Major U.S. banks have written down $100 billion in securities backed by defaulting adjustable rate mortgages and other questionable, creative mortgage products. Other losses are expected from auto loans, credit cards and home equity lines of credit—essentially second mortgages. Total U.S. bank losses should equal or exceed $150 billion and just about cancel out the benefits of stimulus package announced by the Administration and Congressional leaders.
Mortgages have been scarce. The bond market has only been willing accept securities backed by Fannie Mae and other federally chartered banks. Generally, these banks lend only to prime borrowers and in amounts less than $417,000. Jumbo loans and loans for purchasers who are less than prime have not been available, and this has been a terrible drag on the housing market.
As part of the stimulus package, this cap will be raised to as much as $625,000—depending on the average price in a metropolitan area. This will help restore the market for jumbo loans but will not completely restore the mortgage market. Loans for more expensive homes and loans for prospective homeowners who are not “prime,” but who are still reasonable credit risks, will remain difficult to obtain.
Interest rate cuts announced earlier this week will also help by making resets on adjustable rate mortgages less painful and by lowering consumer borrowing rates for prime borrowers. However, many homeowners in trouble will remain distressed.
The absence of a bond market to securitize the largest jumbo mortgages and all but the best mortgages under $625,000 remains a serious problem for the housing market. The Treasury and Federal Reserve should take further steps to encourage banks to reform lending and underwriting practices to restore the confidence of investors in mortgage-backed securities, and in turn, to fully restore the markets for sound, mortgage-backed bonds. Only those steps will return the mortgage and housing industries to normal operations, and ensure full economic recovery.
The stimulus package and recent moves by the Federal Reserve reduce but do not eliminate the risk of recession. Full economic recovery requires fundamental, prompt banking reform.
Here are my forecasts for upcoming economic data.
Week of January 28
New Home Sales - Dec 648K 647
Durable Goods Orders – Dec 0.5% -0.1
Consumer Confidence – Jan 85.8 88.6
ADP Employment – Jan 40k 40
GDP – Q4 (a) 1.1% 4.9
GDP Deflator 2.5 1.0
PCE Deflator 4.0 1.8
Core Deflator 2.3 2.0
FMOC 3.0% 3.5
Employment Cost Index - Q4 0.8% 0.8
Personal Income – Dec 0.4% 0.4
Personal Spending 0.2 1.1
PCE Index 0.3 0.6
Core PCE Index 0.2 0.2
Real Personal Spending -0.1 0.5
Chicago PMI – Jan 52 56.6
Help Wanted Index - Dec 20 21
Initial Jobless Claims 315k 301
Nonfarm Payrolls - Jan 40k 18
Manufacturing Payrolls -20k -31
Unemployment Rate 5.0% 5.0
Average Work Week 33.7hrs 33.8
Hourly Earnings 0.3% 0.4
Construction Spending – Dec -0.5% 0.1
ISM Index – Jan 49.0 47.7
ISM Prices 67.0 48.0
Mich Cons Sentiment - Jan (r) 78.5 80.5
Auto Sales - Jan 16.0m 16.27*
Car Sales 7.65 7.82*
Truck Sales 8.25 8.44*
*SAAR as published by Motor Intelligence
Week of February 4
Factory Orders - Dec 0.4% 1.5
Factor Shipments 0.5 1.5
Durable Goods Orders 0.5 -0.1
Nondurable Goods Orders 0.2 3.0
ISM Services – Jan 52.9 53.9
ISM Prices 71.7 72.7
Productivity – Q4 (p) 2.0% 6.3
Unit Labor Cost 2.0 -2.0
Pending Home Sales – Dec 87.6 87.6
Consumer Credit – Dec $8.0b 15.4
Wholesale Inventories – Dec 0.4% 0.6
Professor,Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone