Last week we got a whole series of bad reports on the state of the economy. New and existing home sales both remain near their lowest level for the downturn, as house prices continue to drop at the rate of 2% a month. New orders for capital goods, a key measure of investment demand, fell by 2% in April. Excluding the volatile transportation sector, new orders were still down by 1.5%.
On Friday, the Chicago Purchasing Managers Index fell by more than 5 percentage points from its April level, approaching its low for the downturn. The employment component of the index did hit a new low.
These reports might have led to gloomy news stories, but not in the US media. The folks who could not see an $8tn housing bubble are still determined to find the silver lining in even the worst economic news.
For example, National Public Radio told listeners that the new home sales figure reported for April was up from the March level. While this was true, the April figure was only 1,000 higher than a March level that had just been revised down by 5,000. April new home sales were 4,000 below the sales level that had originally been reported for March. USA Today touted a "surge" in durable goods orders, which was also based on a sharp downward revision to the prior month's data.
The media have obviously abandoned economic reporting and instead have adopted the role of cheerleader, touting whatever good news it can find and inventing good news when none can be found. This leaves the responsibility of reporting on the economy to others.
Any serious examination of the data shows that recovery is nowhere in sight. The basic story of the downturn is painfully simple. We have seen a collapse of a housing bubble which has devastated the construction sector and also caused consumption to plunge.
The construction sector is suffering from the enormous overbuilding during the bubble years. Measured in months of sales, the inventories of both new and existing homes are close to double their normal levels. This inventory will ensure that construction remains badly depressed at least through 2010, if not much longer.
The plunge in house prices has sent consumption plummeting. The problem is not consumer attitudes, as many commentators seem to believe. Rather, the reason that most homeowners aren't buying a lot right now is the same reason that homeless people don't buy a lot of things: they don't have the money.
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The decline in house prices since the peak in 2006 has cost homeowners close to $6tn in lost housing equity. In 2009 alone, falling house prices have destroyed almost $2tn in equity. People were spending at an incredible rate in 2004-2007 based on the wealth they had in their homes. This wealth has now vanished.
Housing is weak and falling. Consumption is weak and falling. New orders for capital goods in April, the main measure for investment demand, is down 35.6% from its level a year ago. And, state and local governments across the country, led by California, are laying off workers and cutting back services.
If there is evidence of a recovery in this story, it is very hard to find. The more obvious story is one of a downward spiral, as more layoffs and further cuts in hours continue to reduce workers' purchasing power. Furthermore, the weakness in the labour market is putting downward pressure on wages, reducing workers' purchasing power through a second channel.
Happy talk will not turn this economy around. The economy needs more demand, which can only be provided by another larger dose of stimulus from the federal government. There are easy, quick and effective ways to boost the economy with additional stimulus.
First, let's give more money to state and local governments so that they don't have to lay off workers, cut back services and raise taxes. This should be a complete no-brainer since this spending will immediately boost the economy.
The government could also provide a large boost to the economy by jump-starting healthcare reform with an employer tax credit (e.g. $2,500 per worker) for firms who do not currently provide coverage. This could quickly get us to near universal coverage as Congress works to restructure the system to contain costs.
It could also provide a $2,500 tax credit to employers for giving workers paid time off. This should both increase demand in the economy and provide workers with more leisure and flexibility at the workplace.
There are other ways in which the government could quickly generate new demand, but these will not be seriously discussed until there is more general recognition that additional stimulus is needed. At some point it will be impossible to conceal the bad news and Congress' attention will return to stimulus. But the media's reality defying happy talk on the economy is delaying this moment.