Sense on Cents

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: (more…)