"Why No One Knows Where The Economy Really Stands"

by Ed Wallace

"The fact is that today we don't know where we are for jobs, don't know our real position for discretionary spending, and don't know how many homes will ultimately be foreclosed and where this will leave the average home price. Nor do we know whether the market is artificially inflated into another bubble position or whether what appears to be investor confidence is real. This easily explains all the potentially positive economic reporting on one day, which is then reversed the next. And all the while, real consumer confidence numbers continue to languish at near-Depression levels; in a nutshell, the public isn't buying it.

In the corporate world the first and most critical item for anyone taking over a troubled institution is determining where that company stands financially. Identifying and assessing cash on hand against negative cash flow, sorting out divisions that are hemorrhaging badly from those making a profit, and items such as outdated inventories that need to be written off against the costs of the products that are still selling—all of that is crucial information, needed immediately if not sooner. What the educated executive is looking for is where the company really stands on that given day. Only then can a baseline for performance be drawn and a way established to return the company to long-term profits.

In fact, it is widely known that the bigger a corporation's financial crisis, the greater the need to determine all of the facts quickly and in many cases ruthlessly. Obfuscation in a time of dire financial straits is always a critical mistake; it serves only to prolong the crisis, assuming it doesn't spell the end of the company. America, the corporation, should follow this same rigid emergency business procedure. If we want to save the economy, we must start by knowing exactly where it stands now.

Real, misguided, or hype? The lack of real numbers and transparency became more than apparent last week, when the consumer spending numbers for September were released showing a 0.5% drop. Wall Street's reaction was predictably negative, while numerous pundits added their multiple opinions about whether this meant the recession had truly ended. But the newly released numbers simply added confusion to the irony of it all: The day before September's retail results came out, the most recent GDP numbers had shown a strong rebound—a 3.5% annualized growth rate.

In the housing market, new studies showed home prices stabilizing and even increasing slightly, but sales of new homes still fell by 3.6%. (Existing homes were up nearly 10% from the previous month.) As for employment, many have written that there is finally a slowing of the new weekly jobless claims, followed by the net loss of jobs in any given month. But even here, one of the most shocking stories about the nation's overall employment picture came out a month ago and was widely ignored by most news media. This brings into question how the Bureau of Labor Statistics determines the employment numbers.

The lack of a full and honest accounting of the economy often leaves the media, and therefore the public, in the dark as to where the nation currently stands in this downturn. And that makes it nearly impossible to gauge if and when a solid, broad-based recovery will start. After all, it is the unknown that breeds fear.

The first place to start is with the accounting for consumer spending data. There is no reason whatsoever that America should be hamstrung by the outdated and often incomplete consumer spending data collected by the Census Bureau and released 30 days after the fact—not when we can get more accurate data almost instantly. States have computers now, and their quick publication of sales tax revenues reflect Americans' spending on discretionary purchases far more accurately than the numbers we're getting.

As an example, on Oct. 5 the Arizona Department of Revenue reported that its taxable retail sales had contracted 12.5% in July from the same period a year ago, and a few days later Nevada reported a 24.1% fall in sales tax revenue for the same month. In between the release of those two reports, Texas reported a 12.5% drop in sales tax revenue, and Georgia posted a 16% drop in retail sales taxes—for September. The point should not be lost: If America needs to know the true status of discretionary retail sales in America (whether the consumer economy is expanding or contracting), then we could force states to report their monthly sales tax revenues promptly and post all of the data publicly. As it is now, one has to read a lot of state newspapers to find the data. In Arizona's case, such immediacy would have been both helpful and slightly reassuring: In spite of the state's horrendous midsummer sales drop-off, tax revenues for building, lawn, and gardening sales rose 10.9%. However, tax revenues from car sales were down 42.5% from the same month in 2007.

With the technology at hand, we can easily see real movements across the retail sector state-by-state with absolute and detailed accounting each month. Yet we don't do that, leaving us to get our information from pundits speculating on the strength of the real consumer economy.

In the first week of October the BLS admitted it had overstated new job creation in the private sector by an astonishing 855,000 jobs, primarily from back in 2006 when the economy was still showing to be in expansion. Starting with next February's report, this "benchmark revision" will be deleting 800,000 jobs that never existed—which means that we have been operating under a delusional set of numbers over the past four years. BLS overstated the strength of the economy during good times, and now that fiction will come crashing down on our heads in the first quarter of next year.

This key early warning indicator of the strength of the American economy was damaged back in 2006. The resulting false job count gave the impression that the economy was expanding far faster than it really was, which made us think the good times would keep on rolling. Today we know better; if we had known the employment facts in 2006, more prudent economic moves could have softened the blow of the financial meltdown.

Shadow Market Clouds Housing: In the housing market it is being reported that inventories of unsold homes have fallen, while prices and sales are firming up in many regions. But here, too, certain critical facts may well be obscured. We don't know how many unsold homes exist unseen in the "shadow market" or how many properties are already in foreclosure but not listed for sale. They're hidden by the primary lenders so their numbers won't depress home prices further. But there's another major benefit: Banks don't have to immediately declare their losses on those nonperforming loans.

The "Miami Herald" published on Sept. 24 its study showing that for every home for sale right now in South Florida, the shadow housing market is potentially holding back five properties. Obviously this distorts the real picture of America's housing market. Worse, however, it keeps home prices from finding true equilibrium in this period of deflation, which would make housing more affordable for the millions whose incomes have been deflated.

Moreover, because of the change in the mark-to-market rules, banks that keep inflated properties on their books, which are not sent quickly to market for resale, defer having to write off their losses. Meanwhile, not taking losses quickly alows many banking institutions to appear more profitable than they really are. And that can lead to, you guessed it, those outrageous, often record bonuses for their executives.

No one knows the real number of homes being held in the shadow market today. A few analysts suggest it might be as high as 800,000 properties or more. Whatever it is, this shadow market distorts the truth of where housing and banks' solvency really stands today.

Stock Market as an Economic Indicator? Maybe it is time for the Conference Board to revise its Leading Economic Index indicators, or at least leave off the performance of stock prices based on 500 common shares. It is true that historically the statistic has been a legitimate predictor of the forward progress of the economy. But the market's performance this time around has been enhanced and inflated because so much of the liquidity put into the banking system to stop its collapse has found its way into equities and commodities. As central banks have done the same worldwide, this figure, pumped into anything but new loans, could well be in the trillions.

The Wall Street Journal has called this latest asset bubble phenomenon "the Bernanke Market." But if investor money flows are to remain a Leading Economic Indicator, it might be best to publish the flows of capital out of equities into money-market certificates in downturns and how much of that money returns to equities over time. That would far more accurately represent real market confidence than what's happening now—borrowing Fed money for near 0% and using it for quick paper profits in equities. Again, this economic data used to be important because historically it reflected the trend of the market. But using what the stock market is doing now as factual data is potentially treating another asset bubble as financial reality.

You Can't Handle the Truth: The fact is that today we don't know where we are for jobs, don't know our real position for discretionary spending, and don't know how many homes will ultimately be foreclosed and where this will leave the average home price. Nor do we know whether the market is artificially inflated into another bubble position or whether what appears to be investor confidence is real. This easily explains all the potentially positive economic reporting on one day, which is then reversed the next. And all the while, real consumer confidence numbers continue to languish at near-Depression levels; in a nutshell, the public isn't buying it.

On the upside, it is quite easy to develop accurate data that provide the real wide-screen picture of our economy as it stands right now. Once we get that, then smart actions on real issues can commence. Like a personal recovery program, the first step is recognizing and admitting that one has a problem; with that sobering truth in hand, there's an even chance of overcoming one's problems. We don't do this well in America anymore."

"Note to Congress: No banker should be allowed a bonus whose institution is holding back bad home or commercial loans, having marked the properties up in value to show them worth far more than the near-term market price. It distorts the bank's profit picture and puts us right back where we were from 2002 to 2007: Paying excessive executive bonuses on profits that were nothing but imaginary."

Ed Wallace is a recipient of the the Gerald R. Loeb Award for business journalism, given by the G. and R. Loeb Foundation, and is a member of the American Historical Society. His column leads the Fort Worth Star-Telegram's "Sunday Drive" section. He reviews new cars every Friday morning at 7:15 on Fox Four's Good Day, contributes articles to "BusinessWeek Online," and hosts the top-rated talk show Wheels Saturdays from 8 a.m. to 1 p.m. on 570 KLIF.

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