Wednesday Goldman Sachs became the latest "authority" to say that the United States may be slipping toward an outright recession, and that the housing and credit market problems would be the primary cause.
In a research report Goldman Sachs said that the latest economic data indicate that the recession has arrived or soon will and that there will also be a decline in consumer spending, something that didn't happen during the tech bust recession of 2001.
It is clear that the housing downturn is beginning to have
a huge impact on the larger economy, something that was manifest in the jobs
and employment report issued by the Department of Labor Bureau of Labor Statistics
last week. Unemployment rose to 5.0 percent in December from 4.7 percent in
November as the number of unemployed increased by 474,000 to 7.7 million.
Over 10 percent of the increase in unemployment was in the construction industry where 49,000 jobs were lost. Since employment in construction hit its peak in September 2006, 236,000 workers have become unemployed within the general construction category with residential construction accounting for the decline. A separate category called "Residential Specialty Trade Contractors" showed another chunk of job losses; employment in this sector declined from 2,297,300 in December 2006 to 2,159,200 last month.
In the subset of the financial sector referred to a "credit intermediation" 7,000 jobs disappeared in December. This brings the total loss in the category to 79,000 since layoffs began in February, 2007.
We have talked endlessly about the impact of the housing slowdown on financial institutions and this does not appear to be getting any better. Now builders are also feeling the pain. One of the leading U.S. homebuilders, KB Home, announced Tuesday that it was posting a net loss of $772.7 million or 9.99 a share for the fourth quarter of 2007 which ended on November 30. This was nine times the loss that analysts had expected.
A big part of the loss came from a charge due to changed accounting procedures for tax reasons, but KB has been forced to cut the prices of its homes and to renegotiate the terms of some of their credit lines. The average price of a KB home was $247,800 in the fourth quarter, 12 percent lower than one year earlier. The firm is confronted with a huge inventory and many more cancelled sales contracts than anticipated. Builder D.R. Horton has also been forced by its lenders to modify some of its loan terms.
But banks and builders are only the front line when it comes to the housing industry. Think of the number of people and companies whose livelihoods are tied to the health of the housing industry - real estate agents, title company employees, interior designers, manufacturers of PVC plumbing pipe, lighting fixtures, and carpeting, and all of the people who distribute, sell, or transport the products - the list is close to endless.
Just yesterday a major furniture manufacturer in North Carolina announced it was closing one of its manufacturing plants and laying off over 100 employees. The North Carolina furniture industry has been troubled for some time but the housing slowdown was blamed for this latest development.
Four days before Christmas the 122 employees of Customized Structures Inc., once the second-largest modular home manufacturer in New England, learned that their jobs were gone as the company unexpectedly closed its doors.
You can probably expect more of this, a lot more.
As stated above, the factor that kept the 2001 recession both shallow and short was that consumers continued to consume. It was generally thought that it was the money homeowners were refinancing out of that four bedroom 2 bath piggybank that had already appreciated substantially in value that provided the source of the income for that consumer spending.
That isn't going to be an option this time around.
The administration needs to open its collective eyes and take a hard look at the snowball that the housing slowdown is threatening to become. Perhaps Federal Reserve Chairman Ben Bernanke will announce some monetary moves in his remarks today that will modify what looks like a bad situation.**VIDEO(1051)**