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Mortgage and Trade Data Increase Recession Risk

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    July 13, 2012

    The recent spate of negative economic news continued on Wednesday with the release of mortgage purchase applications which showed a continued decline even as mortgage interest rates hit historic lows and the wholesale trade data which showed accelerating weakness in consumption trends.  This, of course, is really not new information for our regular readers as we have been discussing the weakening economic trends for several months now, and most recently, herehere and here.

    housing-m2v-070512The mortgage purchase applications release was further evidence that the recent bump in the housing data, particularly purchases and existing home prices, is likely a temporary phenomenon.  With a continued decrease in the velocity of money, as discussedin detail here, as a result of excess reserves continuing to pile up at the banks, credit remaining extremely restrictive, wages stagnant and low savings rates which impair individuals abilities to accumulate the needed down payment, expectations of a housing recovery are likely premature.

    What is important about the purchase applications release is that the decline comes when rates have declined to the lowest level on record during the HEIGHT of the summer home buying season.  As discussed previously the bulk of the increase in the home sales has come at the lowest end of the price scale as investors scoop up distressed properties to turn them into rentals.  This is NOT the type of activity that leads to a lasting housing recovery and is very limited in its potential duration.

    home-vacant-heldoffmarket-052512With banks still holding back supply, more than 30% of homeowners underwater in their mortgage, and unemployment remaining stubbornly high which will lead to further defaults in the future – once the speculation wave has passed the void of activity will again resurface.  The chart of vacant homes held off market sitting at record levels tells you all you need to know.

    For all of those individuals jumping on the “housing recovery”bandwagon – what is important to remember here is that we are coming off extremely low levels of activity so ANY activity shows up as large increases on a year over year basis.  (1 to 2 is a 100% increase whereas 10 to 11 is only a 10% increase)  Furthermore, housing is only driven at the margin by those wanting, or being forced, to sell and those individuals that are actively seeking, and able, to buy.  That is a very thin group of people driving the market currently so any negative changes will cause the current ephemeral bounce in activity to dissipate.

    inventory-sales-ratio-071112The wholesale trade data was even more concerning than the housing data.  First, there was a 0.3% increase in inventories which was in line with expectations – but the concern has been the fact increases in inventory have remained a large part of the current growth in the economy.  Secondly, the previous month of inventories were also revised lower and the year over year trend has been decreasing as demand has slackened.   Wholesale“sales” declined by 0.8% and was the largest drop in sales since March 2009.  (Side note:  Lumber sales dropped the most on a month over month basis implying further weakness to the housing recovery story)

    The declines in the annualized rates of change in both inventories and sales are not a sign of a strong economy.  While not at recessionary levels as of yet the current rate of decline are certainly worth noting.  More importantly when this data is put into context with the recent weakness in the manufacturing reports, from declines in production and new orders, the trend of weakness should not be readily dismissed.

    What is important to remember is that while the media, and most analysts, continue to focus on one data point to the next – it is the macro trends of the economic data that provides an analysis from which an investment framework can be built.  As of late – those trends are clearly negative, and despite continued hopes to the contrary, economic weakness is pervasive and will eventually impact the markets.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of Streettalk Live

    lance robertsAfter having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.