What's Hot and What's Not

Volume 15 Issue 9
September 2010

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By:
U.S. Senator John Seymour (ret.)

NATIONAL ECONOMY: In a word, IT SUCKS! The U. S. Department of Commerce revised their Gross Domestic Product (GDP) numbers for the second quarter. Originally announced at 2.4%, they now say that a closer look reveals that GDP growth slowed to 1.6% in the second quarter. Quarterly GDP growth for the last year goes from 1.65% in the third quarter of 2009, to 5% in the fourth quarter of 2009, 3.7% in the first quarter of 2010, and now 1.6% for this last quarter.

Despite the shallow political cheerleading by Treasury Secretary Tim Geithner, "Welcome To The Recovery," and Vice-President Joe Biden, "The "Stimulus Is Working," the reality is that our economic growth has slowed and the immediate outlook is for more of the same.

According to the U.S. Department of Labor, 131,000 jobs were lost during the month of July and expectations are for another 110,000 jobs lost in August. The unemployment rate remains at 9.5%.

Enough already with the negative economic news. Despite the media's penchant for economic doom and gloom, the threat of a double-dip recession, and a political administration that knows absolutely nothing about growing our economy, here's some positive data that I believe will translate into positive job growth and a real recovery beginning sometime in the fourth quarter of this year or the first quarter of 2011.

The Institute For Supply Management (ISM) Index for non-manufacturing reported an Index reading of 54.3 in July. That's up from 53.8 in June. Any Index reading above 50.0 indicates positive economic growth six months hence. The Index for New Orders rose in July to 56.7, up from 54.4 in June, and the inventory Index fell to 55.5 from 58.5 in the same time period, meaning that retailers' inventories are low and must be re-stocked.

Consumer spending, which represents two-thirds of our economic growth, has been lethargic but remains ahead of inflation. Consumer spending in July rose 0.2% and is estimated to rise by 2% for this year.

With the 2010 Federal Census coming to a close, and the elimination of 525,000 temporary federal jobs, which have been negatively impacting monthly job numbers, private sector job growth will begin to move towards a positive number. That trend should encourage consumer confidence by November and should result in increased Christmas retail sales.

Corporate America has been profitable all year, as a result of making severe cuts in their overhead in 2009 and continuing to increase worker productivity. Their "cash" position has grown to over $2 trillion. That's a 26% increase from one year ago and the highest cash position in a decade. Many are offering overtime pay to employees and hiring "temps" in order to handle increasing workload. Only uncertainty in the future of our economy and the unpredictability of the federal government on business taxes and regulation, are keeping them from investing that cash in expansion and creating new permanent jobs. This will begin to change after the elections on November 2.

Bernanke and the Federal Reserve are committed to maintaining low interest rates and easy money policies in place until such time as employment improves. This assures continuing low mortgage rates and favorable corporate borrowing through, at least, the next two to three quarters.

CONGRESSIONAL ELECTIONS - 2010: Labor Day, historically kicks off the final push towards the elections. With just 63 days left before November 2, dramatic changes are in the winds. According to Charlie Cook, the most credible political analyst in Washington D.C., a tsunami is about to hit Congress and with it, the Obama Administration's anti-business, anti-capitalism and European like social policies.

Last weekend an estimated 300,000 to 500,000 avowed "tea party" activists swarmed Washington and with their demonstration, gave strong evidence that the voters are "mad as hell and not going to take it anymore." Once referred to as a "fringe" group, then called a conservative element controlled by the Republican Party, the "tea party" movement has taken on a life of its own. Having demonstrated that they can take out democrats, as well as republicans, they are now a force with which to be reckoned. In Virginia and New Jersey, they took out democratic Governors. In Massachusetts, they took out a democratic Senator. In Utah, they took out an incumbent republican Senator. In Alaska, subject to counting a few thousand absentee ballots, they will have defeated a republican incumbent Senator.

If I had to give the "tea party" a partisan label, it would be that they are mostly "libertarian." Republican, democrat and independent alike, their common ground is they are fed up with government controlling their lives and raiding their pocketbooks. They are the "little people." They have no known corporate support and certainly no liberal organizational or union backing. They represent the kind of citizen involvement that our Founding fathers originally envisioned. They are a grass roots movement beholden only to their belief that change, real change, is necessary in Washington D.C. and Congress.

It is not uncommon that when economic times are tough, the voters will "rotate the rascals." However, this time, that corps for change will be joined by the "tea party" activists, and together, they will bring a tsunami like change in our federal government.

According to Charlie Cook's very credible analysis, when the blood-letting is over and the ballots have been counted, there is a high probability that the democrats will lose 35 to 45 seats in the House and 4 to 5 seats in the Senate. In order for the republicans to regain control of the house, they need to pickup a minimum of 39 seats. In the Senate, the republicans would need to pickup a minimum of 10 seats. At this point, that appears unlikely. However, even with a pickup of 4 or 5 Senate seats, the Republicans' ability to thwart anti-business legislation will be greatly enhanced.

With a change in the majority party controlling the house, the anti-business, "cap & trade" bill is dead. Further regulatory efforts on business will be minimal and most importantly, stability and predictability will return for the business community. However, the imminent threat of higher taxes remains very real. Despite the strong and valid argument against raising taxes in a recession, the "Bush" tax cuts for individuals, corporations and dividends will automatically expire at the end of this year. Since it will take positive legislation by the House, Senate and President in order to extend these tax cuts, the most likely outcome will be an increase on the personal income taxes for those making more than $200,000 per year. Corporate income taxes will increase. There is a slight chance that higher taxes on dividends might be delayed.

Although none of these new taxes are favorable to business and the creation of new jobs, I believe that most have accepted the reality that higher taxes are coming and have therefore built it into their future business plans.

THE FED WATCH & MORTGAGE RATES: Federal Reserve Chairman, Ben Bernanke, and his Federal Open Markets Committee (FOMC) next meet on September 21. I expect no change in interest rates and a continuation of their current policies in support of the financial markets.

Home mortgage rates continue to edge down, according to Freddie Mac, with the most current 30-year fixed rate mortgage going for 4.42%. That's down from 4.44% in the previous week.

NATIONAL REAL ESTATE: Existing home sales for July were dismal. According to the National Association of Realtors (NAR) existing home sales dropped 27.2% compared to the previous month. Hopefully, it was just an aberration. Just as shocking, was the increase in unsold inventory. Unsold inventories of existing homes for sale rose from an 8.9 months supply in June to a 12.5 months supply in July. Home prices remained pretty flat with the median price rising just 0.7% for the month.

According to Lawrence Yun, Chief Economist for NAR, the drop in sales is the result of the expiration of the federal $8,000 housing tax credit. However, Yun believes that the historically low mortgage rates and firming prices should move many prospective homebuyers off the fence and into escrow.

I believe that what the housing market really needs is couple of months of positive new job growth numbers. That likelihood should occur beginning in October or November. Combined with continuing low mortgage rates and affordable prices, improving home sales are sure to follow.

New home sales were also down in July. According to the U.S. Department of Commerce, the sales of new single-family homes dropped 12.4% compared to the previous month.

Regionally, new home sales were off 13.9% in the Northeast, 8.3% in the Midwest, 8.7% in the South and 25.4% in the West.

Unsold inventories rose from an 8.0 months supply in June to a 9.1 months supply in July.

CALIFORNIA ECONOMY: California's unemployment rate remained unchanged at 12.3% for the month of July. Losing another 9,400 jobs, our unemployment rate is the third highest in the nation. Only Nevada and Michigan exceeded our 12.3% rate.

And while 2.25 million unemployed Californians look for work, what is our State Legislature doing? They are debating whether or not to prohibit the use of plastic bags in our supermarkets and other retail stores!!! You've got to be kidding me!!! Faced with a $20 billion budget deficit, and the worst credit rating in the nation, these "bozos" are arguing about our use of plastic bags to carry the family groceries home!!! Maybe we ought to send them a supply of plastic bags with instructions to place them over their heads and… breathe deep! What we need is a voter initiative that simply says, if you don't pass a balanced budget by the constitutional deadline of July 1, your pay and benefits will be zero, nada, nothing, zip, until you do.

CALIFORNIA ELECTIONS: With 53 congressional seats on the line, gerrymandered districts will insure that few changes will take place. There are just two open seats, one in the Central Valley that the Republicans should hold and one in Los Angeles that the Democrats will hold.

In the U.S. Senate race, Barbara Boxer is in a tight race with Carly Fiorina. According to political analyst, Charlie Cook, this race is rated as a "tossup." Expect Boxer to attack early and often. She is a tough campaigner. If Fiorina can finance an all out offensive, Boxer could be retired.

In the Governor's race, it is Jerry Brown vs. Meg Whitman. Whitman is the voice of "change" and Brown is the voice of "experience." Whitman is very well financed and should win; however, Brown has had more political lives than a cat, and cannot be counted out.

In the state legislative races, gerrymandered districts will insure that the democrats continue to hold majority status in both the Assembly and the Senate.

CALIFORNIA REAL ESTATE: More dreary sales numbers for July. According to the California Association of Realtors (CAR), July sales were down 20.8%. The Unsold Inventory Index rose to a 5.8 months supply from 4.0 months in June. All of the southern California markets did better than the statewide market and much better than the national market. Los Angeles down 17.6%, Orange County down 14.5%, Inland Empire down 13.4%, Coachella Valley down 17.2% and San Diego down 13.7%.

An interesting study by the California Homebuilding Foundation and the Center for Strategic Economic Research, reports that the new housing construction industry historically accounts for about 11% of the states Gross State Product. That's worth about $350 billion and about 1 million jobs….More on this report next month.

DISCLAIMER: This monthly newsletter is posted by Orange Coast Title Company and its family of companies. The opinions expressed herein are solely those of the author and not of management or their employees. Any opinions, comments or criticisms are welcomed at jfseymour@verizon.net.

SOURCES: LA Times, Wall Street Journal, Barrons, Desert Sun, OC Register, Riverside Press Enterprise, San Diego Tribune, DataQuick News, CAR, NAR, NAHB, CBIA, CMBA and MBA.