You don’t need to be an economist to understand why the nation’s joblessness is the biggest hurdle to reviving growth.

The official U.S. unemployment rate is at 9.5 percent and climbing, and it stands at a startling 16.5 percent when you add in discouraged Americans who have stopped looking for work and those who want to work full time but can only find part-time jobs. No wonder consumer spending has flatlined. That only perpetuates the crises in the housing and banking sectors.

“Everything that got us into this recession is made worse by weak job conditions and any hopes we have of climbing out of this recession will be hindered by the same,” said Niko Karvounis, a policy analyst at the New America Foundation, a nonpartisan think tank based in Washington.

The deep recessions that started in 1973 and 1981 were followed by a burst of hiring about six months after the peak in job losses. That wasn’t the case in 1991 and 2001, when shallower recessions were followed by nearly two years of woes for workers.

The term “jobless recovery” grew from those latter experiences. Even though the economy was looking stronger, plenty of Americans didn’t feel much relief because they still didn’t have jobs.

Part of that shift in post-recession employment had to do with structural changes in the economy. The manufacturing sector lost prominence to the service sector over the years. The diminished role of unions also was a factor.

“Manufacturers tend to have a deeper job cuts in a downturn and they have a sharper upturn,” said David Wyss, chief economist at Standard & Poor’s in New York. “The service sector does layoffs later but hires later, too.”

Many economists are forecasting a “jobless recovery” for the United States as it emerges from the recession that began in December 2007. That includes the Federal Reserve, which on Wednesday bolstered its outlook for economic growth. The central bank now predicts the economy will shrink between 1 percent and 1.5 percent this year, less than it had previously forecast. It also is predicting the economy will expand as much as 3.3 percent next year, a relatively weak showing coming out of a recession. One reason why: The Fed expects the unemployment rate to move above 10 percent this year and remain stuck in the high 9 percent range in 2010.

But can the economy really grow stronger in the face of such joblessness?

Researchers at the Federal Reserve Bank of San Francisco have found that the current recession is much like its predecessors in the overall pace of job losses. But what is different is a historically low level of hiring this time around, which means many of the newly unemployed can’t find new jobs.

At the same time, there are high levels of involuntary part-time workers. The fraction of the labor force that is working part time for economic reasons has nearly doubled to 5.8 percent in June of this year from when this recession began in December 2007. More than half of such workers faced reductions of five hours or more per week, according to the Fed report.

To see that at work, look at the many private and public entities using job furloughs, or short-time hiatuses, to reduce costs. Just this week, US Airways asked 400 flight attendants to take furloughs in an effort to avoid layoffs in that group. Workers at Gannett Co., CSX Corp. and many others have also faced furloughs.

All this presents a problem for the U.S. government, which has been trying to bolster the economy through monetary and fiscal stimulus. The Fed has cut interest rates to near zero, while President Barack Obama’s $787 billion stimulus package reduced taxes and increased government spending after an earlier Bush administration plan to distribute $168 billion in cash through tax rebates had little lasting impact.

None of that has been “labor intensive enough,” argued economist Nouriel Roubini in a note to his clients at his economics analysis firm RGE Monitor. Roubini, who is also an economics professor at New York University, was ahead of the pack in 2006 when he forecast that the worst recession in four decades was on its way.

Deutsche Bank chief U.S. economist Joseph LaVorgna points out that the ratio of household debt to income now stands at 128 percent, much higher than in the final quarters of the last two recessions. That will inhibit consumers’ ability to take on debt again, which helped drive those previous recoveries.

It also amounts to another hurdle to a housing rebound. That will intensify the pressure on already battered bank balance sheets as mortgage and credit-card default rates rise — and make them think twice about boosting lending to both consumers and businesses.

Even though Congress and the Obama administration haven’t shown any inclination to push for another stimulus package, they may have to act again with a plan directly aimed at creating jobs if the unemployment rate stays stubbornly high.

They may want to look at the success in China, where second-quarter growth accelerated 7.9 percent from a year earlier on a stimulus-fed investment boom. That plan included big spending on construction of highways and other public works.

In the U.S., money could be pumped into industries to make them more productive or there could be a further ramping up of spending on infrastructure projects. It also could mean more targeted tax cuts, including some aimed at businesses.

None of that will be cheap. But something has to be done to bring jobs back, for the entire economy’s sake.

http://blog.taragana.com/n/all-business-troubled-labor-market-threatens-a-significant-turnaround-in-us-economy-112799/

reviewed by Moishe Alexander, CFC  canadian funding corp CEO

A rise in mortgage rates and high unemployment are just two of the factors that are likely to hold back prices and sales.

Property experts say that although first-time buyers and Bank of Canada rate cuts have helped restore stability to a market that slumped from late 2008 to early this year caution is still needed.

‘We should be less fearful than we were six months ago, but I don’t think we should be exuberant yet. The resale markets in Canada are very strong. May figures were pretty good, and June numbers will be even better,’ said Will Dunning, an economic consultant who specializes in the housing market.

‘But by July and into the fall there will be an offset of considerably slower activity. I don’t think it’s likely to go off a cliff. It’ll depend on what happens in employment and the broader economy, and how that affects confidence,’ he added.

Indeed the latest data from the Canadian Real Estate Association suggest that Canada’s residential property market, which has withstood the financial crisis much better than its hard-hit US neighbour, has been showing signs of improvement for several months.

May resale home prices rose 0.4% to $319,757, topping the previous record set a year earlier and the first year-over-year increase since May last year. Also sales activity climbed for the fourth month in a row.

The association, which represents more than 97,000 real estate brokers and agents, now expects sales activity to continue improving.

Philip Soper, chief executive officer of Brookfield Real Estate Services, an arm of Canadian property giant Brookfield Properties, expects a period of stabilisation over the next year.

Unemployment is one of the biggest dangers for the recovery. The jobless rate increased to an 11 year high in May.

http://www.propertywire.com/news/north-america/canadian-property-market-200907073299.html

reviewed by Moishe Alexander, Canadian funding corp CEO

A rise in mortgage rates and high unemployment are just two of the factors that are likely to hold back prices and sales.

Property experts say that although first-time buyers and Bank of Canada rate cuts have helped restore stability to a market that slumped from late 2008 to early this year caution is still needed.

‘We should be less fearful than we were six months ago, but I don’t think we should be exuberant yet. The resale markets in Canada are very strong. May figures were pretty good, and June numbers will be even better,’ said Will Dunning, an economic consultant who specializes in the housing market.

‘But by July and into the fall there will be an offset of considerably slower activity. I don’t think it’s likely to go off a cliff. It’ll depend on what happens in employment and the broader economy, and how that affects confidence,’ he added.

Indeed the latest data from the Canadian Real Estate Association suggest that Canada’s residential property market, which has withstood the financial crisis much better than its hard-hit US neighbour, has been showing signs of improvement for several months.

May resale home prices rose 0.4% to $319,757, topping the previous record set a year earlier and the first year-over-year increase since May last year. Also sales activity climbed for the fourth month in a row.

The association, which represents more than 97,000 real estate brokers and agents, now expects sales activity to continue improving.

Philip Soper, chief executive officer of Brookfield Real Estate Services, an arm of Canadian property giant Brookfield Properties, expects a period of stabilisation over the next year.

Unemployment is one of the biggest dangers for the recovery. The jobless rate increased to an 11 year high in May.

http://www.propertywire.com/news/north-america/canadian-property-market-200907073299.html

reviewed by Moishe Alexander, CF CEO

The story portrays a young couple getting their first mortgage. It talks about how cash-strapped they are, and the difficulties they’ve experienced in affording a new home.

The story then goes on to say:  “What really helped? The 2.75% interest rate they were offered. It ultimately allowed them to move from a $1,800-a-month apartment into their own home.”

The couple then warns: “But we don’t have a lot of [wiggle] room.  We can go up to 4%, but then we’re done.”

So, illogically enough, they chose a variable-rate mortgage.

The person who recommended a variable to these folks should be examined.  A variable–rate mortgage is the last option a risk-susceptible homeowner should be considering.  Prime rate can move 1.25% before you know it.

In Canada’s current cycle, the Bank of Canada has slashed rates 4.25% in 17 months. The BoC says they will go no lower. After moving sideways, rates will start rising.  Most analysts expect prime rate to jump at least 1/2 of the amount it fell (i.e.,  at least 2+%).  The main question is when…and no one knows.

Going back to 1991, Canada has seen the following increases to prime:

• 0.75% (In 1 month – Feb 92 to Mar 92)
• 3.50% (In 2 months – Sep 92 to Nov 92)
• 2.50% (In 4 months – Feb 94 to Jun 94)
• 2.75% (In 4 months – Nov 94 to Mar 95)
• 2.50% (In 12 months – Sep 97 to Sep 98)
• 1.25% (In 7 months – Oct 99 to May 00)
• 1.25% (In 13 months – Mar 02 to Apr 03)
• 2.50% (In 39 months – Apr 04 to Jul 07)

The above list includes rate increases over both the short and long term.  A few of the short-term hikes took place inside of longer-term rate-increase cycles, so their effect would have been cumulative (i.e.  they would have added to previous rate increases).

It is worth noting that prime rate has usually fallen within 2-3 years after rising. On the other hand, Canada’s key lending rate has never before been cut to 0.25% in emergency fashion, as we’ve recently witnessed.  Perhaps rates will therefore remain elevated for longer, once they start going back up.

Whatever the case, if you eyeball the data it’s clear that a 2% prime-rate increase is very realistic in a 1-2-year timeframe.  This graph of prime rate since 1991 illustrates that.

This isn’t intended to suggest where rates are going, of course. Past data is too limited and random to draw conclusions.  The point is simply that prime rate can move a lot in 1-2 years. Variable-rate mortgages are therefore unsuitable for folks with little financial breathing room.

A 2% increase in prime would raise payments 31% on a 35-year 2.75% variable mortgage.  On a $400,000 loan amount, that’s $463 more a month. 

If you’re a homeowner on a tight budget, and a 31% payment increase concerns you, don’t be seduced by today’s 2.75% adjustable rates. Look at a fixed-rate mortgage instead, or keep renting and build a financial buffer.

______________________________________________________

Sidebar: With mortgages, there are exceptions to every rule because suitability is dependent on individual circumstances. Always consult a licensed mortgage professional to see what terms make the most sense for your personal situation.

(Prime rate data courtesy of the Bank of Canada)

Canadian Funding Corp points to here – what is hopefully one of the last of a once-robust breed – The Apocalyptic Canadian Housing Market Story:

Judging by the latest real estate data, the Canadian housing market could scarcely be better. Average home prices are up more than 16 per cent this year, and in May they hit an all-time monthly high, according to the Canadian Real Estate Association. By those numbers, Canada didn’t just sidestep the housing market crash that continues to plague the United States, it sailed right through it virtually unscathed. And yet, there are plenty of signs that the Canadian housing market is still sitting on some very shaky ground—and even the potential that Canada’s big housing crash is yet to come.

Yadda yadda yadda.

We all know that the proximate cause of the US recession was the bursting of its housing market bubble: it blew up banks, laid waste to personal balance sheets, and left millions of people stuck in homes whose mortgages were more than their market value.

And then Canada went into recession. Unfortunately, this set up the following error of logic that was repeated in all-too-many Canadian newsrooms:

1. The US is in recession because its housing market blew up.
2. Canada is in recession.
3. Therefore, Canada’s housing market must be blowing up as well.

And so it was the fate of any number of hapless Canadian journalists to be given assignments to bash out pieces that fit this narrative. But these exercises were all doomed to failure. The decline in house prices in Canada is a symptom of the recession, not its cause.

Let’s look at how house prices have behaved since 2003:

US house prices have fallen almost 40% (all changes are expressed in per cent log terms: 100 times the difference in the logs), while Canadian house prices are still within 10% of their peak. There are any number of lazy analysts who have swallowed the faulty syllogism enumerated above and have concluded that ‘Canada is following the US with a lag’. This only makes sense if you think that Canadian house prices rose for the same reasons that US prices rose, and that they have fallen for the same reasons that US prices have fallen. This is not the case. As has been documented at great length here and elsewhere, the Canadian economy has avoided the worst of the bubble and its consequences for the following reasons (among others):

1. We never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada. (So it doesn’t matter if a local housing market goes bust).
   
2. We don’t have Glass-Steagal. The investment banks joined the retail banks some years ago.
   
3. We don’t have mortgage interest deductibility from taxes. So paying down your mortgage is a tax-free investment. So most people want to pay down their mortgages.
   
4. (Except in Alberta), mortgages are fully recourse. You can’t just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.
   

Yes, house prices have fallen. But the linkages that make the US story so compelling don’t exist here. We don’t have banks that are blowing up. We don’t have massive waves of foreclosures (even the Globe and Mail has given up on its series of articles that culminated in this silliness). Nor do we have much in the way of evidence that lower house prices are causing undue inconvenience to Canadians: when Maclean’s decided to jump on the OMGWTFBBQ housing market bandwagon, the best it could could come up with in the way of a victim was some flipper of 7-figure Vancouver condos who got caught mid-flip. Boo-hoo-freaking-hoo.

Moreover, it’s becoming pretty clear that the decline in house prices is not so much a national story as it is one of falling house prices in Vancouver, Calgary and Toronto:

Vancouver is and always will be a special case whenever we talk about housing prices in Canada: its geography makes it extremely difficult for developers to respond to increases in demand. This is the sort of environment in which bubbles flourish so I’m not going to pretend that I can predict movements in Vancouver house prices. In Calgary, the incipient recovery in the oil sector will no doubt establish a floor on housing prices there fairly soon. And there’s even not-entirely-bad news out of Toronto these days. So I don’t see just how the national index is supposed to fall by another 30% or so.

It’s worth following the housing market numbers. But they are going to be at best a coincident indicator in this cycle.

http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/06/the-housing-market-the-nonstory-of-the-canadian-recession-.html

reported by Moishe Alexander, CFC CEO