After yesterday’s sharp downward revision to Q1 GDP put the US economy firmly in contraction, many analysts insisted that the results were anomalous. CNN called the -1.0% result “not a big deal,” and insisted that the spring would have a “bounce back” in economic activity. Reuters chalked it up to bad weather in winter. Others pointed to gains in the housing market and falling unemployment to argue that the rebound had already begun.
Not so fast, CBS analyst Constantine von Hoffman warns. Contractions are rare enough events outside of actual recessions that they’re hardly “not a big deal,” and the economic indicators on which the sunny optimism relies actually are not as positive as their top-line numbers suggest. For instance, the housing market is only gaining for a narrow slice of inventory, while the rest of the market is stagnating — or worse:
While the overall price of homes has increased, the numbers of homes being sold has decreased. The price rise stems from a schism in the real estate market: Sales of the priciest 1 percent of homes continue to increase, even as they fall for the other 99 percent.
A report released Tuesday by real estate research firm Redfin found that sales of the most expensive homes were up 21.1 percent through April of this year, while they’ve fallen 7.6 percent for the rest of the market. That follows a gain of 35.7 percent in 2013 for the top 1 percent and just 10.1 percent for less expensive homes. In 2012, sales increased by 17.5 percent and 2.9 percent, respectively.
The report noted: “While home sales have shown meager to modest gains in the non-luxury portion of the market in Oakland (up 2.2 percent over last year), Miami (up 1 percent), Raleigh-Durham (up 1.2 percent) and Atlanta (up 4.8 percent), other markets including Phoenix (down 15.7 percent) and Minneapolis (down 12.5 percent) display a strange (and perhaps troubling) dichotomy: For the top 1 percent, the housing market is still booming. But for the rest of the market, the recovery is running out of gas. As home prices have risen, wage and job growth have failed to keep up.”
On employment, the jobs being created are significantly short of what is needed to get people back in the labor force, and lower paying than the jobs that are being lost:
“It’s what we typically think of as middle-skilled workers — for example, construction workers, machine operators and administrative support personnel — that are hardest hit during recessions,” William C. Dudley, president of the New York Federal Reserve said in a speech last week. “Further, a feature of the Great Recession and indeed the prior two recessions is that the middle-skill jobs that were lost don’t all come back during the recoveries that follow. Instead, job opportunities have tended to shift toward higher- and lower-skilled workers.”
Middle-skilled workers frequently have to take lower-paying, lower-skilled jobs when their jobs disappear. According to the Bureau of Labor Statistics, the economy added 288,000 jobs in April. Of these, 24,000 came from temporary business help services, 35,000 were retail jobs, 40,000 were education and health services and 15,000 were in what is called “other services.” The report noted that within this sector, “employment in personal and laundry services continued to trend up; this industry has added 32,000 jobs over the past 12 months.”
The one good sign from yesterday’s BEA report was that consumer spending continues to grow over the 3% mark. That’s not a good sign in and of itself — consumers can have irrational spending habits just the same way investors can have “irrational exuberance.” Its value comes as an indirect measure of the economy more than just the contribution it makes to the GDP. It gives a solid indication that consumers are experiencing the actual on-the-ground economy in a positive way.
Even that positive gloss was countered by the significant drop-off in business investment in Q1. That indicates that investors and owners are battening down hatches for the near future rather than getting ready to revel in a sharp rebound. We’ll see which group has a better handle on the economic future, but von Hoffman’s skepticism looks like better advice than shrugging off a -1.0% GDP result as “not a big deal.”
Update: Megan McArdle doesn’t buy the “not a big deal” theory either:
Key areas of decline were exports, inventories and nonresidential fixed investment. In other words, whatever happened was happening on the business side.
This doesn’t necessarily signal a slide into another recession, so don’t rush out to change your money into gold certificates and canned goods. The lousy weather could easily have depressed all three categories, after all. The markets aren’t freaking out; they were expecting this downward revision.
That said, as I wrote last month, this is a sign of an economy that is still very weak. It has been six years since the financial crisis. Federal government spending is still around 21 percent of GDP, up from 19 percent in 2007, and the Federal Reserve still has a very expansive monetary policy. Under those circumstances, a quarter of negative growth is pretty unsettling.