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Why the Economy Isn’t Improving Anytime Soon

Posted by Larry Doyle on June 26, 2009 8:30 AM |

What kid doesn’t get frustrated with his father who dictates a line of reasoning with the tried and true, “because I said so.”

In similar fashion, the public at large should be equally frustrated with economists, market analysts, and the media who continually promote ‘unemployment’ as a lagging indicator. The simple fact is in the Brave New World of the Uncle Sam economy, I believe we should question the definitions and impacts of all our economic inputs. Today, let’s dive into the all important unemployment statistics.

Recall that under the most adverse scenario of the Bank Stress Tests, the unemployment rate was assumed to top out at 10.3%. Well, do not be surprised if we reach that rate by Labor Day with a strong chance we see 11% by year end. Last week, Obama himself acceded to likely double digit unemployment. Warren Buffett predicted as much in an interview aired yesterday.

The financial industry and government officials play down these statistics by stating that unemployment lags the economy. I beg to differ!! The Wall Street Journal provides strong evidence why unemployment is the preeminent leading economic indicator in writing, Unemployment Vexes Foreclosure Plan:

Rising unemployment is complicating the Obama administration’s effort to reduce foreclosures and stabilize the housing market.

The first wave of mortgage delinquencies was sparked by borrowers who took out subprime mortgages and other risky loans that became unaffordable, causing them to fall behind on their monthly payments. But the current wave is increasingly driven by unemployment or underemployment, economists and housing counselors say.

The Obama foreclosure-prevention plan was “built around the subprime crisis model, not the unemployment crisis model,” said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.

The Obama program provides financial incentives to mortgage-servicing companies and investors to reduce mortgage-related payments to 31% of monthly income.

But many borrowers don’t have sufficient income to qualify for a loan modification under the plan. Mr. van Zalingen said roughly 45% of the more than 900 borrowers who sought help at two recent counseling events would fall into that category even if their interest rate were dropped to 2% and their loan term were extended to 40 years.

I wrote “The Most Critical Economic Statistic” a month ago to highlight the importance of mortgage delinquencies. There is a very strong correlation between unemployment, delinquencies, foreclosures, and subsequent defaults on credit cards and other personal debts.

The Obama administration and all of Washington are increasingly concerned–with good reason–about the impact of increasing unemployment and underemployment, which currently sits at 16.4% and may very well get to 20%!!

What might Washington do? When in doubt, throw more money at it. The WSJ highlights how and where that money may be delivered:

The administration is considering making changes to the loan-modification program to address the current employment landscape.

“We recognize that unemployment is a significant complicating factor,” said Deputy Assistant Treasury Secretary Seth Wheeler. “We are studying what more we can do.”

The Obama program currently calls on mortgage-servicing companies to consider options other than loan modifications for borrowers who can’t qualify for them for a range of reasons, including loss of income.

One possibility is a forbearance plan that allows borrowers to hold off from making mortgage payments for several months while they look for work. But there are no specific guidelines for determining who should get forbearance and for how long.

The administration is weighing whether it should provide more specific guidelines for how mortgage companies should work with borrowers who have lost their jobs but are believed to be good candidates for re-employment. It is also considering providing additional incentives to encourage servicers to offer forbearance plans.

Several Federal Reserve economists, meanwhile, have suggested the government pay a share of the mortgage payment, for a limited time, for borrowers who see a significant disruption in their income.

Other options include providing short-term loans to borrowers who have lost jobs, or giving special treatment to borrowers likely to become re-employed soon. Administration officials haven’t taken a position on these options, and said each brings its own challenges.

Do not forget that the American consumer represents approximately 70% of total GDP and that the United States represents approximately 30% of global GDP.

Not exactly a lot of green shoots in this report. Meanwhile, about those delinquencies:

there are signs the overall mortgage-delinquency problem is getting worse. The percentage of mortgage loans that were at least 30 days past due but not yet in foreclosure climbed to a record 8.49% in May, up from 8.08% in April and 5.66% a year earlier, according to LPS Applied Analytics.

Unemployment a lagging indicator? . . . Please!!


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