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Is the worst behind us?

May 7th, 2008 · No Comments

Some people who carry some cloud seem to think so. Notwithstanding a raft of bad figures from the housing market and mortgage suppliers, Treasury Secretary Hank Paulson and Merrill’s John Thain arguing the worst of the credit crisis is over.  Lets look at some of the latest figures.  

In making the case for a housing-market bottom, Moulle-Berteaux notes house price affordability has improved dramatically and the inventory of new homes is falling. That might be true, but as we argued previously, the logic that has propelled house prices ever higher (the belief that house prices can only rise, and very loose credit), are still working in reverse.

Credit is still very tight as banks are in no mood to take on new risk, and the housing correction, now beyond 10% is still not even halfway of the 30% we have to decline to get back to the mean trendline.

There is one figure that gives a ray of hope though. If you would ask me, or almost any economist, what the single most important statistic is, we would have to say labour productivity.

It’s increases in labour productivity that enable higher real wages without producing inflation. If the same amount of workers produce, say 3% more products or services, they could see their real wages (paycheques corrected for inflation, so a good indication of purchasing power) increase by 3% without getting more expensive.

Productivity has accelerated since the mid 1990s due to ICT and companies finally figuring out how best to take advantage of all that snazzy technology. However, real wages have lagged productivity growth (apart from those at the very top), hence the big increase in profits.

This has been due in part to globalization, it’s funny that communist China has arrived on the scene helping American capitalists increase their profitability. Another part of real wages lagging productivity growth is the decline of traditional industries and the power of organized labour.

However, productivity still matters a great deal and since it was up by 2.2% on an annualized basis in the first quarter, handily beating expectations of an 1.5% growth, taking of the edge a little of the awkward trade-off facing the Fed between growth and inflation.

With higher productivity growth, the economy can grow faster without producing inflation. However, the US economy is not producing a lot of inflation at home. They are importing it via the sinking dollar though, having to pay more in dollars for many overseas products and services.

And those seeming to escape that faith because they are priced in dollars, like oil and other commodities, move their dollar price up.

However, we’re not joining the chorus yet in calling a bottom in the housing market, but good news in the statistic that matter most is good news.

Tags: The Markets