Andrew Busch

Yesterday, the auto industry released their August sales numbers and they were ugly. Compared to 2009, August 2010 sales plummeted 21% with General Motors Co., Toyota Motor Corp. and Honda Motor Co. all reporting declines of 25% or more. Ford Motor Co. was the tallest pygmy in the group as its sales only dropped 11%. Why such large year-over-year drops?

Cash-for-clunkers, of course! In 2009, this was a stimulus program that thought it was a good idea to take perfectly functional cars and destroy them for a subsidy between $3,500 and $4,500. As the data shows, the program was wildly successful in this purpose as 680,000 units were taken away as sales were moved forward from 2010 to 2009. Like existing home sales, auto sales have been distorted and the process has jumbled decision making not only on the consumer, but also on the producer.

Last week, we had disastrous reports on the housing market that were precipitated by the $8,000 first time home buyers credit. US existing home sales fell 27.2% and US new home sales fell 12.4% as buyers had moved forward their purchases. RealtyTrac reported that home foreclosures rose 4% in July to 325,229. Housing prices appear to have stabilized as the S&P CaseShiller index rose for June, but that was still under the influence of the tax credit. July/August could be ugly. We are not sure to what level housing sales will eventually gravitate towards, but the adjustment process is stomach churning.

The adjustment process to find that level is ongoing and the housing affordability index is reaching new highs. This is a very helpful development and Robert Shiller believes we may only have another 10% of downside risk in housing prices.

However, there is concern that the process will drag on for some time and that the shadow inventory of housing will swell the number of homes that eventually come on to the market. This would depress prices further and keep the downward spiral active. This is why new action may be needed.

But not new government handouts. What we need are incentive based changes to encourage banks to speed up their writedowns of loans and encourage homeowners to not walk away from upside down mortgages. Here’s a step-by-step program for housing and I discussed it last night on Kudlow Report.

Banks refinance underwater loans at current LTVs and homeowner does not take (1099d) loss in home value.
Homeowner gets to refinance at lower interest rates.
Banks take the loss on the drop in value and take the tax write-off for the loss.
Banks then take a 50% stake in any resale profits on the home from the lower value of home and get to take this profit tax free.
Homeowner gets 50% upside from sale of home from new value.

This way, the homeowner gets to stay in the home and has an incentive to keep maintaining it. The bank takes a hit, but gets upside potential on the home. Finally, this helps clear the market to a price that will get new buyers motivated to purchase and reduces foreclosures. It provides incentives for both parties to act.

Most importantly, it speeds up the housing correction by encouraging prices to fall to levels that reflect their current value and thereby encourages buyers to step in and act.

Yes, there are tweaks to this to further incent (40 year amortization for underwater loans) to restrictions on selling the home immediately (transferability allowed for labor mobility?). But these 5 steps should be a building block for Congress to help resolve the housing crisis faster and to spur new job growth.

Tonight at 7:15 PM ET, I’ll be appearing on CNBC’s Kudlow Report discussing policy initiatives for job growth in the United States.

Yesterday, I wrote on the problems with the 99 week extension of jobless claims and how that contributed to higher weekly jobless claims and higher unemployment numbers. Today, I thought it might be good to show where jobs are in the United States. Here’s list provided by Payscale.com and beyond.com:

Physical therapist $59,547 – $72,999; Occupational therapist: $53,477 – $67,321; Sales representative: $32,711 – $48,120; Customer service representative: $28,261 – $39,102; Administrative assistant: $28,227 – $39,415; Retail sales associate: $23,589 – $40,744; Registered nurse: $46,797 – $65,210; Java developer: $62,571 – $85,438;
Project manager: $50,693 – $79,549; Project coordinator: $38,918 – $54,723; Receptionist: $24,419 – $34,652; Sales manager: $51,240 – $84,999; Software engineer: $59,626 – $80,783; Account manager: $42,004 – $61,975; Technical support specialist: $38,669 – $56,614; Cook: $20,020 – $35,250; Financial analyst: $49,593 – $67,778
Note: Payscale.com median salaries for 5 to 9 years of experience.

Full article on WSJ here:

http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704575304575296692796660262.html

The point of what I wrote yesterday was to show that there is not enough being done to get people jobs and training. The current programs are addressing symptoms, not the disease. This is frustrating for everyone, but more so for those without employment. The answers are there and it doesn’t matter which political party finds them. Both of them need to look and be aggressive with solutions.

Yesterday, I wrote on the problems with the 99 week extension of jobless claims and how that contributed to higher weekly jobless claims and higher unemployment numbers. Today, I thought it might be good to show where jobs are in the United States. Here’s list provided by Payscale.com and beyond.com:

Physical therapist $59,547 – $72,999; Occupational therapist: $53,477 – $67,321; Sales representative: $32,711 – $48,120; Customer service representative: $28,261 – $39,102; Administrative assistant: $28,227 – $39,415; Retail sales associate: $23,589 – $40,744; Registered nurse: $46,797 – $65,210; Java developer: $62,571 – $85,438;
Project manager: $50,693 – $79,549; Project coordinator: $38,918 – $54,723; Receptionist: $24,419 – $34,652; Sales manager: $51,240 – $84,999; Software engineer: $59,626 – $80,783; Account manager: $42,004 – $61,975; Technical support specialist: $38,669 – $56,614; Cook: $20,020 – $35,250; Financial analyst: $49,593 – $67,778
Note: Payscale.com median salaries for 5 to 9 years of experience. Full article on WSJ here

The point of what I wrote yesterday was to show that there is not enough being done to get people jobs and training. The current programs are addressing symptoms, not the disease. This is frustrating for everyone, but more so for those without employment. The answers are there and it doesn’t matter which political party finds them. Both of them need to look and be aggressive with solutions.

http://www.cnbc.com/id/38917560

Today, the WSJ carries an editorial from Harvard economics Professor Robert Barro entitled, “The Folly of Subsidizing Unemployment.” It explores a theory I subscribe to (and have been writing about for months) that the unemployment rate is higher than it should be due to the extension of jobless benefits from 26 weeks to 99 weeks.

Barro’s argument is the same one used in the 1990s that led to welfare reform in the United States. “The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.” In other words, the program distorts incentives for people to look and achieve a job.

There is a balance that must be struck between compassionately assisting the unemployed and incenting them to search for work. Barro’s conclusion: “…if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.”

The veracity of this argument shows up in the weekly jobless claims. When Congress allowed the jobless extension to stop, we began to see a large drop in weekly claims which appeared on July 9th. When the program was restarted, we had a surge that culminated with a 500k+ filing on August 13th. Both should have been anticipated.

What a different world we would be in right now if the unemployment rate was 6.8%. We’d be struggling, but the country wouldn’t be at a subterranean 50% consumer confidence level. I think one of the most telling comments from this weekend’s Jackson Hole meeting came from a foreign central banker who said he wanted to get out of the meetings and away from all the doom and gloom in the United States.

This is only one part of the puzzle that needs to be solved for the U.S. to get back on track. But it seems to be a simple one to address.

In an interview with Dow Jones, Standard & Poor’s Ratings John Chambers said, “It is very important for the credit standing of the United States that the Congress considers very carefully what the fiscal commission proposes…It is very important for Congress to take the required steps.” Chambers is the chairman of S&P’s sovereign rating committee that just downgraded Ireland from AA to AA-.

This follows up the comments by S&P in July that warned the U.S. does not have unlimited fiscal flexibility. S&P still maintains their AAA rating for the U.S. but clearly is increasing the rhetoric and pressure to act.

Why? Simply, the US has a deficit problem and a deficit commission. Both are in play with the US running a $1.4 trillion deficit and the President’s deficit commission set to make its recommendations by the end of the year. The Bipartisan Commission on Fiscal Responsibility is tasked with finding ways to reduce federal deficits. However, the first order of business seems to be ousting one of its members.

Former Senator Alan Simpson and current co-chair of the commission sent an email that is causing a stir and calls for his resignation. Sadly, he sent to the executive director of the Older Women’s League (OWL) and wrote: “I’ve made some plenty smart cracks about people on Social Security who milk it to the last degree. You know ‘em too. It’s the same with any system in America. We’ve reached a point now where it’s like a milk cow with 310 million (teats)!” Does this remind anyone of Lyndon Johnson?

Simpson has subsequently apologized, but the damage is done. Serious discussion about what the US can afford with Social Security and what it should pay appears to be taken off the table for the commission. Remember, the Congressional Budget Office has stated that Social Security’s annual expenses will exceed annual revenues (excluding interest) for the first time this year since the 1983 overhaul.

President Obama would do well to assuage rating agencies fears by making a statement to the contrary and putting the commission back on firmer ground. Otherwise by the end of the year, the commission will likely devolve into partisan bickering and the US credit rating will follow.

http://www.cnbc.com/id/15840232?video=1574423833&play=1

Today at 11:30 AM ET, I’ll be appearing on CNBC’s The Call to discuss corporate tax cuts.