4% revised 2nd qtr GDP growth — median incomes below 2000 pre-recession levels

Two articles this morning point up the disconnect between bull markets, economic growth and the well-being of the average US citizen. While revised 2qtr GDP figures show improved growth, the NYT points out that median income levels have not reached levels achieved prior to the last recession–and that the current level of pre credit turmoil growth is unlikely to be sustained through the end of the year.

If strong economic growth and an appreciating housing market failed to bring improvement to median incomes…

U.S. 2nd-qtr growth recovers, jobless claims up
From Reuters
7:22 AM PDT, August 30, 2007

WASHINGTON — The U.S. economy grew at an annual rate of 4 percent in the second quarter, as strong business investment led the fastest pace of expansion since early last year, the government reported today.

The Commerce Department raised its estimate of gross domestic product — the measure of total goods and services output within U.S. borders — from a 3.4 percent gain that it published a month ago. That was in line with Wall Street economists’ forecasts and far outstripped the first quarter’s anemic 0.6 percent rate of expansion.

However, the rebound in growth is not likely to be sustained. Since the April-June quarter, a credit squeeze stemming from rising defaults for sub-prime mortgages has disrupted financial markets worldwide and led policy-makers and analysts to scale back estimates for U.S. economic growth in coming quarters.

Indeed, other government data showed that jobless claims unexpectedly rose last week, with the number of unemployed people still on the benefit rolls after drawing an initial week of aid the highest since mid-April.

“We need to see more data, but there must now be a real suspicion that companies have started to recognize that maintaining earnings growth in the current environment will be difficult with their current staffing levels,” economists at High Frequency Economics wrote in a note to clients.

A Sobering Census Report: Americans’ Meager Income Gains – New York Times
Editorial
Published: August 29, 2007

The economic party is winding down and most working Americans never even got near the punch bowl.

The Census Bureau reported yesterday that median household income rose 0.7 percent last year — its second annual increase in a row — to $48,201. The share of households living in poverty fell to 12.3 percent from 12.6 percent in 2005. This seems like welcome news, but a deeper look at the belated improvement in these numbers — more than five years after the end of the last recession — underscores how the gains from economic growth have failed to benefit most of the population.

The median household income last year was still about $1,000 less than in 2000, before the onset of the last recession. In 2006, 36.5 million Americans were living in poverty — 5 million more than six years before, when the poverty rate fell to 11.3 percent.

And what is perhaps most disturbing is that it appears this is as good as it’s going to get.

Japan’s Warp-Speed Ride to Internet Future

What we have here, is a failure, to communicate…

It’s one thing if we in the US have to “endure” wallet-size grainy video on the internet.  It’s quite another if the cost and speed of broadband service provided by US corporations is restricting the capacity for US innovation and competitiveness in the “information” economy.  Penny profits and pound losses.

Japan’s Warp-Speed Ride to Internet Future – washingtonpost.com
By Blaine Harden
Washington Post Foreign Service
Wednesday, August 29, 2007; Page A01

TOKYO — Americans invented the Internet, but the Japanese are running away with it.

Broadband service here is eight to 30 times as fast as in the United States — and considerably cheaper. Japan has the world’s fastest Internet connections, delivering more data at a lower cost than anywhere else, recent studies show.

In a Tokyo demonstration using ultra-high-speed broadband, a life-size, high-definition image of a distant colleague is projected onto a screen.

Accelerating broadband speed in this country — as well as in South Korea and much of Europe — is pushing open doors to Internet innovation that are likely to remain closed for years to come in much of the United States.

The speed advantage allows the Japanese to watch broadcast-quality, full-screen television over the Internet, an experience that mocks the grainy, wallet-size images Americans endure.

Home Prices: Steepest Drop in 20 Years

Home Prices: Steepest Drop in 20 Years: S&P Says Housing Prices Fell in 2Q by Steepest Rate Since Its Index Was Started in 1987
Financial News – Yahoo! Finance
Tuesday August 28, 9:58 am ET
By Vinnee Tong, AP Business Writer

NEW YORK (AP) — U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor’s began its nationwide housing index in 1987, the research group said Tuesday.

The decline in home prices around the nation shows no evidence of a market recovery anytime soon, one of the architects of the index said.

MacroMarkets LLC Chief Economist Robert Shiller said the declining residential real estate market “shows no signs of slowing down.”

The report came a day after the National Association of Realtors said sales of existing homes dropped for a fifth straight month in July while the number of unsold homes shot up to a record level.

The S&P/Case-Schiller quarterly index tracks price trends among existing single-family homes across the nation compared with a year earlier .

A separate index that covers 20 U.S. cities fell 3.5 percent in June from a year earlier. A 10-city index fell 4.1 percent from a year earlier.

Home Depot supply division deal price drops 18% to $8.5 billion

Home Depot Hit As Credit Crunch Squeezes Deals – WSJ.com
By HENNY SENDER, DENNIS K. BERMAN and ROBIN SIDEL
August 27, 2007; Page A1

The global credit crunch has begun to put a squeeze on the buyout boom, with banks and private-equity firms forcing Home Depot Inc. to sell its struggling wholesale supply unit for much less than what had been agreed to just two months ago.

Home Depot’s board yesterday agreed to sell Home Depot Supply for $8.5 billion to Bain Capital, Carlyle Group and Clayton, Dubilier & Rice, about 18% less than the price hammered out in June when the buyout boom was at its peak.

In addition, Home Depot itself will hold about 12.5% of the unit’s equity, people familiar with the matter said, and guarantee some of the debt issued by the banks to finance the acquisition. That’s significant because if the banks can’t sell the debt in bond markets, and it sits on their balance sheet, they have to mark down its value, which some can ill-afford to do.

Drop Foreseen in Median Price of U.S. Homes

Drop Foreseen in Median Price of U.S. Homes – New York Times
August 26, 2007
By DAVID LEONHARDT and VIKAS BAJAJ

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.

Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.

The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.

While the housing slump has already rattled financial markets, it has so far had only a modest effect on consumer spending and economic growth. But forecasters now believe that its impact will lead to a slowdown over the next year or two.

PL timberland subdivisions: real estate market dynamics hit home

Both the PL bankruptcy and Humboldt County General Plan Update Process are taking place in an unprecedented economic climate. Both involve long-term planning in a short to mid-term economic crisis. While the debate continues on whether the turmoil in real estate markets (see elsewhere on this blog) will impact the economy as a whole, national housing market dynamics have key county planning goals by the short hairs: long-term stability for the timber industry, rational build-out of the county housing supply and affordable housing targets.

High foreclosure rates from resetting adjustable rate mortgages and flattening and now falling national housing prices have impacted mortgage market investments and the availability of capital in the both housing and investment financial markets.

The Humboldt County Economic Index website has two interesting charts: one showing median sale prices and another showing foreclosure rates in Humboldt County. Although there is no numerical data linked to the charts it appears Humboldt housing markets are not immune to overall national and statewide trends. Total foreclosures in Humboldt County began to climb from about 70 in 2006 to over 200 and still climbing as of June 2007. After remaining relatively stable through most of the 90’s the inflation adjusted median sales price doubled from around 75k to over 150k between 2000 and 2006 and then fell to around 150k in 2007. Both of these trends are consistent with national trends in foreclosures and median housing prices.

Timber prices, particularly for fir, have been at a consistently low trough in cyclical price swings since mid 2006 when changes in the national housing market first began to occur. Check the Random Lengths site to see for yourself. In addition tightening credit terms and standards have impacted both short-term housing sales and mid to long-term prospects for recovery in national housing markets. Home equity loans, traditionally the mainstay of DIY remodeling and home improvement markets and an important component of lumber demand during housing market weakness have been seriously impacted by the recent market turmoil. Reductions in home equity loans to homeowners due to falling home equity and tightening loan standards are likely to impact redwood prices in the coming year. Not a pretty picture. Timber markets look poor for the next three to five years.

Enter the PL bankruptcy in November 2006 January 2007. It’s now easy to see why PL picked this particular point in time to make the opening gambit on its coming timber end game. With a high debt service costs, dwindling high-quality supply, the fir market in the tank and the potential for reductions in redwood prices on the horizon it’s now or never. PL appraisers are now faced with the challenge of appraising PL assets at a value that exceeds PL debts in order for PL to maintain control of the company throughout the bankruptcy process. Since timber values and comparable sales valuations won’t do it the pressure is now on at the county level to establish PL’s right to subdivide and sell PL / ScoPac timberland assets into rural residential markets. Hence the recent article in The Independent and the recent KMUD news report on KMUD radio last Monday the 21st regarding the potential conversion of PL timberlands to de facto rural residential status.

From the Independent:

County: Pacific Lumber Land Being Eyed for Subdivision
Planners Have Been Contacted by Appraisers Interested in PALCO Holdings for Residential Use
BY DANIEL MINTZ – INDEPENDENT STAFF WRITER
August 21, 2007 — Page A1

The county has identified a “disturbing trend” of targeting timberland for real estate speculation, and a planning super­visor has said that his department has been contacted by appraisers of Pacific Lumber holdings who are more interested in value based on residential use, not timber…

Supervising Planner Tom Hofweber told commissioners that the county’s timberland is threatened, PALCO’s in particular.…

When Eel River Sawmills shut down and sold its land, most of it went to “a variety of owners who had various management intents,” Hofweber continued. He warned that real-estate speculation has the county’s forests in its cross-hairs.

“In terms of changing landscape, there is something afoot in Humboldt County with respect to the valuation of these lands,” said Hofweber. “It is look­ing like it is tending more toward their value based on residential value rather than how much standing timber there is, and what the timberland value is.”

…Dan Opalach, the timberland ­investment manager for Green Dia­mond Resource Company, said there’s little data on whether smaller parcels with residential elements takes proper­ties out of timber production. He said the state’s forestry department has seen an increase in timber plan applications and acreage in the decade beginning in the early 1990s. And the state’s records show that only 1,000 acres of timber­land has been converted to other uses over the past 25 years, Opalach con­tinued.

Opalach said talk about conversion trends has to be fleshed out with data. “What would it take to convince me?” he asked. “I’d like to see a map.” Finally, he said that the preferred alternative for the General Plan has policies that will unnecessarily reduce land profitability. “Much of the county’s TPZ [timber pro­duction zone] land will be significantly devalued without producing timber production benefits,” said Opalach.

While the Planning Commission looks for trends to substantiate conversion of timberlands to other uses the conversion of PL timberlands to small lot ownerships, whether 40’s or 160’s, is a trend in and of itself. The demographic and economic composition of Humboldt County’s future lies in the balance.

Check out this quote from the Forest Review Committee’s input into the General Plan Update Process:

“Subdivisions to create small lots in or adjacent to timberlands increase the land use conflicts between timberland and non-timberland property owners. Litigation costs increase in the interface between timberland and residential lots…

“Allowing small lots into TPZ may discourage timber production because these lots are often purchased and used primarily for residential purposes and may be adjacent to small parcels with landowners who may object to timber harvesting activities.”

Subdivision of Scopac timberland into rural lots suitable for rural residential use is a de facto conversion of timberland from the industrial supply base.

Subdivision of a property the size of Scopac in the middle of a real estate market with rising foreclosures and dwindling median prices not seen for many decades may be the most effective proposal yet to create “affordable” housing in Humboldt County–for those with cash down payments, strong credit and “family-home” wage jobs willing to risk continued declines in housing prices. However as prices decline many homeowners will see their own net worth decline substantially. For those with limited equity in their homes such declines will mean they owe more that the property is worth. For those currently mortgaged and working at the mill this will be a tough row to hoe.

For ranchers hoping that their way of life will continue for another generation the news is mixed: their equity positions in timberland will rise substantially based on comparable sales of similar ownerships, but the industrial supply base and the continuation of the PL sawmills as a market for local sawlogs is seriously in question making it likely that future generations will have little choice but to subdivide the ranch — even if its current owners can keep afloat through the timber downturn.

More on this topic to come, I’m sure.

Home Depot Talks On Wholesale Unit Get Hostile

Home Depot Talks On Unit Get Hostile

Equity Groups Work
To Set Deal; Banks
Challenge Terms

By DENNIS K. BERMAN and HENNY SENDER
August 24, 2007; Page A10

Home Depot Inc. last night was close to accepting about $1.2 billion less for its wholesale distribution business in the sale to three private-equity firms, people familiar with the matter said.

But there were still substantial doubts about whether the deal would close before a deadline yesterday night, as three major banks continued to balk over the financing.

The situation was becoming increasingly ugly, people familiar with the matter said, with some of the most senior figures on Wall Street trying to manage their exposure to a deal beset by twin crises in both the housing and credit markets. The banks — J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. — were last night preparing for the possibility of lawsuits from the private-equity firms over the matter, those people said.

stocks surge 500 points — economist lifts wizard’s curtain

Between the last hour of trading yesterday and the first hour of trading today stocks surged up over 540 points. Yesterday’s end-of-the-day rally was truly impressive based as it was on no discernible good news whatsoever. The Fed announced its adjustment to the discount interest rate this morning. Think anyone knew of the Fed decision yesterday afternoon?

Business and Financial News – New York Times
U.S. stocks surge after Fed rate move
Relief rally loses some steam as credit-related concerns linger
By Kate Gibson, MarketWatch
Last Update: 11:37 AM ET Aug 17, 2007

NEW YORK (MarketWatch) — U.S. stocks remained higher Friday but significantly pared gains as investors mulled the impact of the Federal Reserve’s move to cut its discount interest rate in an attempt to ease concerns over liquidity.

“This morning’s move by the Fed is largely symbolic and suggests the Fed is willing to act in the event conditions in the financial markets deteriorate further, but we’re far from being out of the woods,” said Mike Malone, trading analyst at Cowen & Co.

After rallying 321 points, the Dow Jones Industrial Average ($INDU) was up 135 points, or 1%, to 12,980.6, with 23 of its components ahead.

Economics Blog : ‘Lifting the Wizard’s Curtain’
August 17, 2007, 10:31 am
Economists React: ‘Lifting the Wizard’s Curtain’

Economists weigh in on the Fed’s surprise decision to cut its discount rate to 5.75%, while leaving the more important federal funds rate unchanged.
# At the risk of lifting the wizard’s curtain and ruining this gesture, I need to point out that a cut in the discount rate is not an ease, and in fact from the standpoint of mechanics is barely relevant, as borrowing at the window was minimal through Wednesday. The Fed is no doubt hoping to capitalize on the past. Prior to 2003, when the discount rate was lower than the funds rate, cutting the discount rate was the most powerful tool in the monetary policy toolbelt. Indeed, prior to 1994, when the Fed began announcing changes in the funds rate target, a discount rate move was the ONLY move that was explicitly announced. Many market participants will think of the discount rate cut in those terms, which is not the correct way to consider it. Instead, this should be thought of as another (indeed, probably the last) intermediate step short of an ease. –Stephen Stanley, RBS Greenwich Capital

Bernanke stands out for 25…

Central banks’ easy virtue, easy money
By Julian Delasantellis

There’s an old story about the late British statesman Winston Churchill at a party. Probably on one of those many nights where never in the field of human excess had so much cognac, brandy and scotch been consumed by a person who historians now say was not an alcoholic, he staggered up to a socialite matron and posed a question:

Churchill: “Madam, would you sleep with me for 5 million pounds?” (In the 1930s, when the British pound was worth more than twice as much to the US dollar than it is now, this was a
particularly impressive sum over which to surrender one’s virtue.)
Woman: “My goodness, Mr Churchill … Well, I suppose … we would have to discuss terms, of course.”
Churchill: “Would you sleep with me for 5 pounds?”
Woman: “Mr Churchill, what kind of woman do you think I am?!”
Churchill: “Madam, we’ve already established that. Now we are haggling about the price.”

Thanks to last week’s events in the financial markets, we now know the price at which the world’s three largest central banks, the Bank of Japan, the European Central Bank and the Federal Reserve Bank of the United States, will drop their posturings about the importance of setting good examples regarding promoting sound banking, lending and credit usage policies and put their principles up for sale.

If the world’s stock markets lose, oh, say, US$2 trillion of valuation or so in a month, well, it looks like it’s at that point they start “discussing terms”. Since March, I’ve written a number of times in Asia Times Online about what has come to be known as the “subprime crisis”, but it was at the end of that first March 6 article, Rocking the subprime house of cards, where I first postulated that this situation would eventually degenerate to a point where central banks and bankers would be called on to intervene. This happened last week.

Congress Pimps for Wall Street

Congress Pimps for Wall Street
By Albert Keidel
Special to washingtonpost.com’s Think Tank Town
Thursday, August 16, 2007; 12:00 AM

The current bill on China’s exchange rate that is working its way around Capitol Hill will do nothing to help the U.S. trade deficit or U.S. jobs. It will instead encourage speculators to buy into Wall Street China schemes. The bill, with noisy encouragement from New York, pretends to protect American trade and labor interests, but would succeed only in micromanaging the Treasury Department by imposing unworkable rules for identifying currency manipulators. This is but the latest, shameless push in an effort begun five years ago to bully China into forcing currency movements large enough for speculators to cash out millions in unearned profits.

Many have accepted by now, and at least one sponsor of these various current bills has admitted, that even a major change in China’s exchange rate will not affect the U.S. trade deficit. America’s trade red ink reflects U.S. domestic factors, such as credit card overload, high consumption levels and low family savings rates. And a major boost in China’s currency will not restore American jobs lost to the relentless march of technology. Chinese imports have not reduced American manufacturing output. On the contrary, output is growing very well, thank you. But the U.S. is constantly saving on labor costs, as it has been for decades — long before China’s trade came on the scene.