As the preliminary data on September roll in they confirm that the recession is continuing in Europe and China and sluggish growth remains in the US. However, new orders and confidence – the most leading of indicators suggest an improvement in tone as the wave of stimulus released in recent weeks (some of it after these surveys were taken) suggests businesses are beginning to see the light at the end of the tunnel. This is how it is likely to be through year end, as leading indicators like equity performance, yield spreads, new orders and confidence pick up well in advance of actual economic activity. Monetary policy acts with a long and variable lag – sometimes very long as we have seen in the recent environment of bank intransigence to fresh lending. Fiscal policy acts faster, and given the new quantitative easing in Europe and the US has a fiscal twist, it may provide a quicker boost – as expected by the infrastructure spending in China.
Nowhere will this be more evident than in the housing market in the US, as the Federal Reserve directly targets mortgage backed securities in an effort to reduce already record low mortgage rates even further. With single family housing starts and permits now 20% higher than a year ago, and existing home sales and units under construction up roughly 10%, there is no doubt low interest rates have boosted activity. The problem is that even a 20% lift in single family activity translates into only $20 billion in new inflation adjusted GDP over the coming year – contributing a scant 0.1% gain to our $15 trillion economy. Add in improvements in multifamily construction, brokerage commissions, etc and you might get to 0.2%. Good, but not great. Far and away, the housing recovery’s biggest boost to real GDP growth will be via an improvement in home prices which lifts consumers’ willingness to borrow and banks’ willingness to lend. The average price for existing single family homes was up 7.5% from a year ago in August – though it was down fractionally in the past two months. Some of this gain reflects a shift in mix, as stressed sales (foreclosures and short sales) made up only 22% of sales this August versus 31% last year. This shift alone may account for 3% of the increase. There is also a bias in that home prices rose much faster in the West – perhaps reflecting the lower number of stressed sales (volume growth was weakest there) – where home prices are the highest.
Nonetheless, it must be seen as good news that home prices on non-stressed properties are now rising faster than inflation. Given record low interest rates, in some markets the expected cost of owning a home – the mortgage rate minus the expected appreciation – may once again be negative. For home owners who are underwater – roughly one third of mortgage holders – this is of limited benefit. However, for the two-thirds of debtors in the black and the 50% of homeowners who own their homes free and clear, a return to appreciation may mean a return to borrowing against home equity – though never with the fervor of the pre-Lehman binge. In 2007, consumer borrowed $1 trillion (with a T) more than their income to boost spending power. Today, they are still paying off debt (though primarily from forgiveness rather than pay downs.) It is not hard to see a far greater than $20 billion increase in consumer borrowing against appreciated real estate in the coming year – dwarfing the impact of improved residential construction. The contest for growth in 2013 will be to see if improved consumer borrowing can offset the retrenchment in federal activity that will come with the (however modified) fiscal cliff.
Tale of the Tape
With six weeks to go before the election, we still see the race for the Presidency as too close to call. True, Governor Romney has had a tough couple of weeks with his comments n Libya and the 47% — and those woes continue this week with the release of his 2011 tax return. However, polls continue to suggest a very tight race – especially in the Electoral College where it really counts. A review of the changes in the polls since late June – when Romney was at his strongest right after the announcement of Congressman Ryan as his running mate – is instructive in evaluating how the electorate is changing in the US. The impact of the Tea Party and money are particularly clear in the results – and the money issue is one of the key reasons we feel the race is far from over. The amount of money that will be spent – on TV in particular – over the next six weeks will be staggering as both camps are well armed. Indeed, spending in the next six weeks will rival the total amount spent in previous Presidential campaigns.
We focus on two polls – Rasmussen tracking and Gallup tracking – due to their size and frequency, which provide better information on both the level and trend in expected votes. Both were among the more accurate polls in 2008. By contrast, swings in reported poll leadership in the Press are often the result of new polls with a different bias, which shift the mix in calculated averages. Rasmussen and Gallup have been steadfastly the most advantageous for Governor Romney. Indeed of 80 national polls taken since May 15th, Governor Romney has led in only eleven — and eight of those were Rasmussen or Gallup polls. It is instructive that these polls both had Governor Romney up by one point on May 16th, and both have a dead heat today. In between, the nomination of Congressman Ryan lifted Romney to a 4 point lead in Rasmussen and a two point lead in Gallup. The Democratic National convention gave President Obama a 5 point lead in Rasmussen and 7 point lead in Gallup – now evaporated. The latest polls include the period after Governor Romney’s 47% remark – which apparently has not hurt him, showing the stability of each candidate’s base.
More importantly, the Real Clear Politics’ (RCP) tally of the Electoral College has shifted only marginally over the past six months. On May 3rd, Obama had 253 electoral votes leaning his way – these comprise the base states won by Gore, Kerry and Obama over the past three elections plus New Mexico (won by Gore and Obama) and Nevada. Since then Nevada has slipped to toss up. Obama remains tantalizingly close to victory – but victory requires that like in 2008 he win states that were out of the reach of Gore and Kerry. According to RCP, Obama leads in seven of the eight toss up states, all of which he won in 2012 – FL (29), OH (18), VA (13), CO (9), NV (6), IA (6), and NH (4) – trailing only in NC (15) which he barely won in 2012. It is here that the power of the Tea Party and money are most obvious. In four swing states that Obama carried by more than 9% in 2008, he is leading by only 2-2.5% — CO, NV, IA and NH. These states are less urban than FL, OH and VA, where his smaller lead from 2008 has held up much better. In OH and Florida, where the Democrats have marshaled their time and money – because a victory in either means retaining the Presidency – his 2008 lead has been diminished by 0.5% and 1.1% respectively. Still, Obama’s lead in FL is a scant 1.7%. The President has a solid 4.5% lead in VA, but those 13 electoral votes alone will not close the deal. That makes OH the low hanging fruit – and worth all the marbles. Here too money will matter, because if Obama’s lead slips in OH he will likely lose ground in the rest of the swing states as well – and the story in the media will shift to advantage Romney. This is why Obama proposed trade sanctions against China’s auto parts industry last week to rally his union troops and why Romney and Ryan are headed for a three day swing through the state next week.
A final measure of the impact of money is the shift in perceived control of the Senate. According to RCP polls, if the election were held today, Obama would win with preserved control of the Senate 52-48. Republicans would pick up only one seat – taking seats away from Democrats in conservative ND, NE, and MT, but losing seats in liberal ME and MA. Even if Republicans hold IN, and picked up CT and VA, they would remain 50-50 with the winner of the Presidency controlling the Senate. Indeed, at this point that scenario (Presidency and Senate controlled by the same party) is the most likely outcome. The Democrat’s retention of the MO senate seat following Congressman Akin’s implosion shifted a wave of funding to CT and VA benefitting those candidates temporarily. Both races are back to neck and neck – in part because the money wave has been answered. In MA, Rep. Scott Brown has fallen behind Elizabeth Warren in recent polls, partially due to a post-DNC speech bump – but more likely because the Democrats have framed her election as preserving the Democratic majority in the Senate. Finally, Tammy Baldwin has surged in WI polls to take a lead over former Gov. Tommy Thompson who depleted his coffers in a brutal battle for during his primary. Democratic spending has been aided by the need for Obama to shore up this traditional Democratic stronghold in the face of Congressman Ryan’s nomination. The state remains closely split following the debates over Governor Walker’s policies and the recent reversal of the hard fought collective bargaining agreement by a federal judge. Can anyone doubt that even more money will be poured into these narrowly divided swing states over the coming six weeks?
Bottom line, we still see the election as too close to call and are prepared for a lot of volatility in the polls. Some argue that it will come down to the debates. Maybe. In our view it will come down to money shaping the narrow group of undecided’s view about the debates. As noted above, the furor over Governor Romney’s remarks on Libya and the 47% and the release of his taxes does not appear to have moved the needle in the polls. Both bases are large and steadfast, so spin and turnout are likely to determine which way the narrow center moves – taking both the Presidency and the Senate along for the ride. A paired win of the Executive and senior Legislative branch of Congress bodes well for a more rapid resolution to the very avoidable fiscal cliff. As a result, we remain more bullish on mid-2013 – if only because uncertainty about which direction America is headed will be clearer on Nov 7th.