December, 2012, Economic and Financial Review, Part 1: Pessimism, High Unemployment, Driving Off the Fiscal Cliff

We have spent the past few days reviewing the latest political class insanity. Sadly, it now takes four full days of insanity posts to get it all in. As has been our habit, we follow our monthly political class insanity review with a review of the latest economic and financial information relative to America.

Unfortunately, recent months’ reviews of the economy’s health have not been much better or uplifting than the idiocy of the political class insanity:

1) In the week ending November 24, 2012, the seasonally adjusted estimate for initial unemployment claims was 393,000 Americans. While this is a decrease of 23,000 from the previous week's revised figure of 416,000, the 4-week moving average was 405,250, an increase of 7,500 from the previous week's revised average of 397,750.

In other words, even though we are three years from the end of the Great Recession, Washington’s economic policies, programs, and bumblings are still causing almost 5 million Americans to file for first time unemployment benefits on an annual basis.

2) In a recent Rasmussen poll that was conducted in the third week of November, those surveyed indicated that 50% of American adults think the U.S. economy will be weaker in a year’s time. In October, only 23 percent felt the same way. Thus, in just one month’s time, this measure of pessimism doubled in America.

Lack of confidence and increasing pessimism usually manifests itself in lower consumer spending, resulting in lower corporate profits resulting in less business expansion, resulting in lower economic growth, resulting in more pessimism. Unfortunately, there is no indication that anyone in Washington has any idea how to break this negative economic death spiral.

3) Washington Post writer Ruth Marcus recently commented on the political machinations going on in Washington regarding the so-called “fiscal cliff” that may result in both massive tax increases and unsubstantial reductions in Federal spending on January 1, 2013. Rather than go into details about these political shenanigans, listen to the succinct summary from Ms. Marcus:

1. The country is going to go over the fiscal cliff.
2. Politicians’ discussions on avoiding this disaster have been “pathetic.”

Enough said, pathetic is the right word again when describing the American political class.

4) Although the housing market has been improving a little over the past year or so, an accomplishment that was not too hard given how bad housing has been for the past four years, a recent Reuters article from November 28, 2012 summarized the most recent housing data and it is not good:

• New U.S. single-family home sales dropped slightly in October and the September's rate of home sales was revised sharply lower.
• The recent Commerce Department estimated home sales dropped 0.3 last month.
• The latest data leave the pace of new home sales just below the pace estimated in May, indicating there has been little upward trending in the market for new homes for the past seven months.
• A separate government report showed applications for U.S. home mortgages also fell last week.
• The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, dropped 0.9% in the week ending Nov. 23The MBA's seasonally adjusted index of refinancing applications declined 1.5%.
• About the only good news was that average home selling price is up almost 6% vs. last year, which again, is not too hard of a goal to attain since the housing market, and associated housing prices, has been in the ditch for so long.

While the housing market may not be trending downward as dramatically as it had been over the past few years, there is little indication that housing is about explode in growth.

5) Last Thursday, the government’s Bureau of Economic Analysis released its latest estimate on annualized GDP growth from the third quarter. This estimate showed an annual GDP growth rate of 2.7% in the third quarter of 2012. This is double the estimated GDP growth rate from the second quarter of 1.3%.

Certainly good news but still well below a GDP growth rate that should be expected relative to other periods following severe economic downturns and still below the long term U.S. economic average annual growth rate of 3.0%. High levels of consumer pessimism and continued high levels of unemployment benefit filers and unemployment will likely make it difficult to maintain even this somewhat meager economic strength.

6) Additionally, Fitch, a major bond rating agency, recently pronounced in a Reuters article that it foresees the unemployment rate in the U.S. going over 10% if the political class does not resolve the fiscal cliff crisis. Good luck with that happening, given the political class mismanagement of the economy so far. A 10% unemployment rate will prevent the economic growth from getting much higher than it was estimated last quarter.

Continued high unemployment, economic pessimism abounding across the American public, inept politicians driving the country over the fiscal cliff, a housing industry that is still far from being healthy, still sluggish economic growth, and more bad news from a major ratings industry.

Worst of all, we are not done with this month’s bad financial and economic news. That conclusion will not happen until after tomorrow’s post.

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