Monday, June 8, 2009
Executive Summary
- No green shoots in the consumer data
- Mortgage Equity Withdrawal (MEW) is negative
- Consumer credit is negative
- Retail sales are negative
- Rail and port traffic is deeply negative
- Unemployment not as positive as presented
- State tax revenues are negative
- Federal tax receipts? Don’t ask.
I want to counter the recent incantations by the media, fiscal, and monetary authorities that "things are on the mend" and that there are green shoots sprouting all over the place. There are indeed some encouraging signs, but there are an equal number of discouraging signs. This is a time for caution, not complacency.
Let’s break down the economy into its biggest pieces and see what we can find in each of them.
Mortgage Equity Withdrawal
The first thing is that our economy is built on credit. Banks lend money to people who then spend it. That was an enormous component of our prior years of so-called growth, with the ‘housing ATM,’ a.k.a. home equity loans and refi activity, providing one of the larger sources of new credit.
The official term for this source is "Mortgage Equity Withdrawal", or MEW, and it routinely provided $150 – $200 billion of additional spending power each quarter between 2003 and 2006. In 2007 it fell back to "only" $100-$150 billion each quarter, and in 2008 it collapsed and turned negative for the first time in the recorded data series.
The beautiful chart below comes from Calculated Risk.
The importance of MEW to our "way of life" during this period cannot be overestimated. Here is how it worked: As people’s houses appeared to be rising in value – but were actually experiencing bubble inflation, which is very different – they would turn to their bank for a second mortgage or for a HELOC loan. These loans were secured by the value of the house. Much of the money that was loaned (or ‘extracted’) was used to support ordinary consumption expenditures.
If you want to know why retail sales are collapsing, you could do no better than to wrap your mind around the MEW chart above. It represents an enormous amount of money (credit money) that is now not only gone from the economic landscape, but is like a mighty river that has reversed its flow.
by davos