Economic Pessimism In America

As I've noted before and as many people have observed, this economic recovery is far, far from normal.  Many aspects of the economy have not returned to pre-Great Recession levels and one has to wonder why this is the case, despite the fact that the Fed and other central banks around the world have used their complete arsenal of economic tools to battle the downturn.

A recent study by the Pew Research Center may explain why this is the case.  In this study, Pew looks at the attitudes about the public in 39 nations to see how they feel about the state of the economy in their home nation.  In a later posting, I will look at the response of all nations but for the purposes of today's posting, I will focus on the responses of Americans.

1.) Condition of the American Economy:  In 2013, only 33 percent of Americans feel that their economy is in good shape, down from 50 percent in 2007.  This is slightly above the median of 24 percent among all advanced economies but keep in mind that advanced economies include many European nations where things are slightly better than grim.

2.) Economic Outlook:  Only 44 percent of Americans feel that the economy will improve over the next 12 months with 33 percent feeling that it will worsen.  This is well above the 25 percent median among all developed economies and the highest among all advanced economies as shown here:

3.) Putting Food on the Table:  Surprisingly, even though the U.S. has the highest GDP output on a per capita basis among all nations in the study, 24 percent of Americans had difficulty putting food on their tables in the last 12 months.  This is comparable to the levels seen in Greece and Indonesia, nations with a far lower per capita output as shown on this graphic:

4.) Satisfaction With Country's Direction:  Only 31 percent of Americans are satisfied with the direction that their country is taking, the sixth lowest level among the advanced economies and among the lowest of all economies as shown here:

Perhaps this explains why the recovery, particularly in the United States, has been so "spotty".  The fact that only 33 percent of Americans expect that the economy will improve over the next year suggests that consumers and voters are far from happy about their current situation and future prospects.

The Shortest Housing Boom

Just about everyone has heard of the Case-Shiller Home Price Indices, a leading series of monthly calculations of the changes in the value of homes in the United States.  This key index was created by Robert Shiller, an economist at Yale and Karl Case an economist at Wellesley College. 

Recently, the Case Shiller index has shown that house prices in both the 10- city and the 20-city composite indices have just seen their biggest annual increase since the housing market collapsed in 2006 as shown on this graph:

These recent price increases have some of the bobbing heads on the 24 hour business/news providers practically apoplectic.  Some metro areas are now showing what could be termed rather frothy rises; Phoenix saw a year-over-year positive return of 22.5 percent, San Francisco saw an increase of 22.2 percent, Las Vegas saw an increase of 20.6 percent, Atlanta saw an increase of 19.1 percent and Detroit saw an increase of 18.5 percent.  Las Vegas saw a month-to-month increase of 1.4 percent, a rather significant jump.  Keep in mind that these cities were terribly hard-hit during the decline, however, there is really no particular economic reason why their prices have rebounded as they have.  This certainly has the appearance of a mini-bubble, doesn't it?

A recent interview of Robert Shiller on Yahoo Finance gives us a bit of insight on the main reason that the housing market in the United States appears to be on the rise again.  Dr. Shiller notes the impact of the Federal Reserve on what could be yet another market bubble.  The fact that the Fed is buying $40 billion worth of mortgage securities each and every month has impacted the mortgage market like this:

According to Freddie Mac's weekly data release, 30 year fixed mortgage rates are very, very close to 40 year lows, hitting a low of 3.35 percent in October 2012.  To put this into perspective, these rates were between 6.5 and 6.75 percent just prior to the housing market implosion in 2006 and hit a peak of 14.67 percent in mid-1984.  Over the period between 2000 and 2012, the average fixed 30 year rate was 5.82 percent, nearly 2.5 percentage points above today's rates.  Obviously, once the Fed removes itself from the market and puts an end to QE3, all bets are off.  Mortgage rates are likely to rise and homebuyers and owners will find themselves once again living in the real world.

What is particularly scary is Dr. Shiller's prediction that housing prices could well be the same in ten years as they are today.  Today's housing price boom which has been driven largely by purchasers buying properties to rent, could well be the shortest on record, particularly as more households are forming in rental homes rather than in purchased properties.  As well, with the echo boomers finding job prospects lacking, the ability of the next generation to afford all of those 3 bedroom, two and a half bathroom suburban homes has been severely compromised.

Looking at historical house price data collected by Dr. Shiller back to 1890 and corrected for inflation, it looks like we are just returning to the mean housing price after the deflation of a massive bubble:

In closing, a fascinating schematic showing the buildup of an asset bubble by Dr. Jean-Paul Rodrigue at Hofstra University gives us a really good look at the mindset of the house-buying public during the development of the housing market bubble and shows us that, as I noted above, we are likely just returning to the mean:

Doesn't that one graphic say it all?  Unfortunately, lessons from the past are sometimes very slow to be learned and in the case of the American housing market, the data suggests that we may now be overshooting the target.

Cuts to Infrastructure Spending - A Poor Choice

Updated May 2015

While common sense, something that seems to be lacking in Washington, would tell us that governments must make some changes to get the revenue side of the ledger to balance the spending side, there is spending that should remain "sacred".  Unfortunately, such has not been the case and there is hardly a more dramatic case of underspending than the public spending on infrastructure.  This has become increasingly apparent over the past few years as systemic failures have either led to civilian casualties.

From our friends at FRED, here is a graph showing total public spending on infrastructure since the mid-1990s:

Total public spending on construction peaked at $325.481 billion in the first quarter of 2009, just as the Great Recession was officially coming to a close.  Since then, spending on infrastructure has dropped to its current level of  $264.17 billion in the first quarter of 2015, a drop of 18.8 percent.  Government spending on construction is now at levels last seen in late 2006.

Here is an even more-telling graph from FRED:

This graph shows government spending on construction as a percentage of GDP and shows us that, over the 22 year period from 1993 to the present, construction spending as a percentage of GDP is now at a 22 year low, coming in at just 1.51 percent of GDP.  During the Great Recession, public spending on construction as a percentage of GDP hit a 20 year peak of 2.3 percent in the first quarter of 2009 and has since fallen by 0.79 percentage points or 34.3 percent.  Over the 20 year sample, construction spending averaged 1.83 percent of GDP so you can see that current spending levels are well below average.

Let's close by taking a quick look at a single key aspect of America's infrastructure; its bridges.  With the average American bridge having a lifespan of 50 years and an average age of 42 years, the current Administration is just kicking the can further down the road as shown on this bar graph:

Right now, 68,842 bridges or 11.5 percent of the nation's total are considered "structurally deficient".

In the last half of the first decade of the new millennium, here is a look at the underfunding problem for bridges alone:

Yes, we all agree that we need to cut spending, however, public safety over the medium- and long-term is paramount and it's looking like government is not up to doing what is really necessary.  While it looks like the sequester has answered some of Washington's fiscal problems for it, I would suggest that perhaps spending cuts on public infrastructure is not the best way to go. 

Non-Vacationland USA

When I first started working after finishing my degree, I was hired by a company headquartered in Tulsa, Oklahoma.  It was a great company to work for save one thing; the company's vacation policy.  Unlike my peers who were hired by Canadian companies and started off with 3 weeks of vacation after the first year, I found myself short-changed by comparison since the Canadian subsidiary that I worked for was subject to the HR policies south of the 49th parallel.  Eventually, the company did top up my vacation allowance to the Canadian standard, however, it was an interest lesson in the differences between the two nations when it came to paid vacation allowance.

A study by the Center for Economic and Policy Research entitled "No-Vacation Nation Revisited" reviews the requirements for paid vacations in 21 developed economies around the world including Canada, the United States, Australia, New Zealand, Japan and 16 nations in Europe.  Here is a bar graph summarizing their findings, showing the number of legally mandated annual holiday and vacation days:

Notice something odd?  That's right, the United States lags its peers in both the allotment of paid holidays and paid vacation to the point where:

1.) 23 percent of American workers have no paid vacation at all.

2.) 23 percent of American workers have no paid holidays at all

3.) on average, American workers in the private sector receive only 10 days of paid vacation and 6 paid holidays per year.

While the 10 days of paid vacation may not seem unreasonable, it is very low compared to the other nations in the study, particularly those in Europe.  Germany, which has a reputation for being a very efficient economy, mandates that employees are given a minimum of 24 days of paid vacation and 10 days of paid holidays, the second highest in the study.  The United Kingdom mandates a minimum of 28 days of paid vacation.  Australian law mandates a minimum of 20 days of paid vacation and 6 days of paid holidays and New Zealand mandates a minimum of 20 days of paid vacation and 10 days of paid holidays.  Canada's offering is second worst in the study; Canadian law mandates a minimum of only 10 paid vacation days and 9 paid holidays, a rather pitiful number compared to its peers.  Interestingly, the European Union sets a vacation floor of 20 days for all of its Member States and, as you may have noticed, most nations in the EU provide more than 20 days of combined paid holidays and paid vacation.

Here is a chart showing the details of the data in the bar graph:

It's interesting to see that Germany offers an additional one to six extra days of vacation depending on age and that Switzerland offers an additional five days of paid leave for workers under the age of 30 who do volunteer work with young people.  Imagine that!  In addition, Austrian law grants workers with over 25 years of seniority an additional six days of paid leave for an impressive total of 36 days.  Unlike Canada and the United States where actually taking your allotted vacation days in many industries is considered a career-limiting move, in the United Kingdom and Switzerland, laws forbid employers from offering employees additional pay if their forfeit their vacation days and, in addition, requires that the leave is to be taken by the end of the year in which it is granted.

Now, let's go back to the vacation- and holiday-challenged workers in the United States.  The availability of paid holidays and vacation days varies with several factors including whether workers are full- or part-time, the level of their wages and the size of the working establishment:

1.) 91 percent of full-time workers receive paid vacation compared to only 35 percent of part-time workers.

2.) 90 percent of workers in the top 25 percent of earners receive paid vacation compared to only 49 percent of workers in the bottom 25 percent.

3.) 86 percent of workers in medium to large establishments (more than 100 workers) receive paid vacation compared to only 69 percent in smaller establishments.

Lest we get too excited about the fact that these workers get paid vacations at all, the allotments are rather meagre:

1.) full-time workers get an average of 12 paid vacation days compared to 3 days for part-time workers.

2.) the top 25 percent of earners get an average of 14 paid vacation days compared to only 4 days for earners in the bottom 25 percent.

3.) workers in medium to large establishments receive an average of 12 paid vacation days compared to only 8 days for workers in smaller establishments.

While, as a whole, workers in the United States are terribly short-changed on both legally mandated and actual holiday and vacation day allotments, it is rather sad to see that many workers at the lower end of the employment spectrum have no rights to taken more than a few days off in a year.  It is increasingly obvious that the corner office dwellers are using the hard efforts of their workers to benefit themselves without regard for their well-being.  Even Forbes, the bastion of American capitalism knows the importance of taking time off to one's well-being.

Stephen Harper and Rob Ford - Canada's Conservative Bedfellows

Poor Stephen Harper.  His conservative-leaning pals are having a pretty rough go of it lately.  First, it was the Duffster and "The Boxer" and now it's Rob Ford.

Thanks to a posting by Montreal Simon, I happened on this pretty interesting little video on YouTube:

Apparently, the two gentlemen in the video were at the same fund-raising event on August 2, 2011 where 700 attendees gathered in Ford's Etobicoke backyard.  According to the Star, the guest of honour, Jim Flaherty, is a long-standing friend of the Ford family dating back to the 1990s when he served with Rob Ford's father, Doug Sr, in the Mike Harris government.  In fact, Jim Flaherty endorsed Rob Ford's candidacy for mayor back in 2010.

Just in case you didn't catch it all and want to ruminate over the Prime Minister's words, here they are:

Doug Ford:  "We have a very, very, very, very special guest.  He's my new fishing partner.  He took me up north a couple of weeks ago and we went fishing and I love to fish.  Stephen Harper, the Prime Minister of Canada (cheers)".

Stephen Harper:  "Thank you for that warm welcome.  I want to thank Rob as well for that introduction (laughter).  I, um, I've heard about these events here.  This is a wonderful place to have a barbecue like this.  But I want to thank Dianne (Ford's mother), not just for hosting us, but for really giving us this great conservative political dynasty that we have here with the Fords (applause).  It's fantastic and as, uh, you know, Rob, uh, many of you may remember that Rob endorsed us in the election that helped alot.  Rob is, un, doing something that is very important that needs to be done here.  He is cleaning up the NDP mess in Toronto (laughter and applause)...that's great.  I have to get this plug in, I'm not paid for this one, but we started cleaning up the ND, uh, we started cleaning up the mess, the left wing mess federally in this area.  Rob's doing it municipally and now we've gotta complete the hat trick and do it provincially as well."

I wonder if Stephen still feels the same about Rob now that there is the potential for yet another rather significant mayoral scandal?  Will this be yet another case of "bus tossing"?  Apparently, as in the cases of Mike, Patrick and even Pamela, one has to be very, very careful about who one gets into bed with politically.  You've gotta feel sorry for Stephen, apparently friendship isn't all that it's turned out to be!  I guess our mothers were right all along, you have to choose your friends very, very, very carefully.

As an aside, I'm also wondering if Rob gets to call our Prime Minister "Steve" when they are out fishin'?