2011 Mid-Year Economic Update

NOVANEWS

Regardless how well the U.S. stock market has risen over the past two years, we cannot forget that the U.S. economy remains in a recession, which is just one month shy of the longest recession in over 100 years.

by Mike Stathis

Over the past several months I have been pointing to the impressive earnings from U.S. corporations. I have also noted numerous upward revisions in 2011 earnings per share (EPS), which of course implies a higher stock market. As a consequence, I have been bullish throughout this period, as well as over the previous year. At the same time, I discussed my expectations of a weaker economy in the second half of the year.

Although we are now seeing early signs of expected weakening of an economy that has been propped up through artificial means, investors have jumped the gun a bit, perhaps as an excuse to trim down positions in advance of what is historically a weak period of market performance in the summer months.

From an absolute sense, the U.S. economy has shown very little improvement from 2008. We can only see a relative improvement from the trough in late 2008 to early 2009. But these relative improvements have come from taxpayer subsidies. Even still, there have been virtually no improvements in the labor market. Meanwhile, the real estate market continues to weaken.

Perhaps most worrisome is the fact that the U.S. economy has become highly leveraged while improvements have been absent.

However, there will be no “double-dip” recession as everyone has been discussing because such a term has no validity. This can easily be confirmed by anyone who truly understands economic cycle theory. Apparently, very few do. The fact is that the recession which officially began in December 2007, never ended in June 2009 as officials claimed. Therefore, this “double-dip” rhetoric is merely a psychological play on words designed to create these perception that a recovery was in progress.

See here to understand why the concept of a double-dip recession is invalid.

The recession is now in its 42nd month.

Why do so many government and Wall Street economists, analysts, journalists and bloggers continue to discuss the potential for a double-dip recession?

First, you have to understand that all government and Wall Street economists serve as cheerleaders for America’s fascist regime. Thus, they are the last source of reality. Regardless which side of the Washington mafia these hacks side with, merely by pointing to or casting aside thoughts of a double-dip recession accomplishes the same goal; fooling Americans to think that the recession ended in June 2009.

Why would opposing sides of the Washington mafia want to hide the truth?

If Americans truly understood reality, they would call for an end to America’s fascist government, which would threaten both families of the Washington mafia; the Democratic and Republican Parties.  Already, the tea party movement, which was initially focused on a call to an end of the Washington mafia was hijacked early on by the Republican Party. One could argue that it was formed by elements of the GOP.

When you read economic related articles published by the Associated Press, Reuters, the New York Times, Washington Post, so on and so forth, the puppets of propaganda make certain to reference the lie that the recession ended in June 2009.  As a means to thwart any consideration that America is in the midst of a depression, these spin master utilize a simple psychological tactic, by referring to the recession as the “Great Recession,” as opposed to the another Great Depression.

On the other hand, the perma-bear extremists are perhaps even worse, as they will never advise their Kool-Aid drinkers to buy into the stock market, regardless how much it declines.

While some insist that a double-dip recession is approaching, others insist it’s not a possibility. Either way, those taking either position have no idea what they’re talking about. Many of them claim to be economists, investment experts and so forth. Once you consider that they spend most of their time blogging and making media appearances, you will understand why they have such a miserable track record.

If you conduct adequate due diligence on these individuals, you will inevitably find that they are nothing more than bloggers, media whores and snake oil salesmen; all clowns whose real expertise is in marketing and sheep-herding. Regardless of their angle, they are all dishonest because they have no idea what they are talking about so they rely on their media connections and Internet network.

Now that I got that out of the way, I would like to state what I consider some important points:

• The recession which began in December 2007 is still in progress.

• This recession is one month shy of the first and most severe recession during the Great Depression.

• America is in the midst of its Second Great Depression.

• This depression will last at minimum until 2020; it could last much longer.

• There will never be a real recovery from this depression for most Americans.

• There will be no hyperinflation in the U.S. as a result of the depression.

• The depression will heighten due to inflation, although we will see short deflationary periods.

• Europe faces a high chance of a long deflationary period.

• The European Union will most likely be very different by 2020 than it is today.

• If Germany were to leave the EU, it would surely collapse.

• The vast majority of jobs lost (90%) since December 2007 (more than 9 million) will never return.

• The U.S. stock market no longer serves as a gauge of the health of the U.S. economy.

• The U.S. stock market will remain volatile for many years, with strong rallies and large corrections.

• Gold and silver prices will collapse to $300 to $400 and $7 to $12 at some point within the next several years.

• With rare exception, real estate has never been a good investment from a financial standpoint.

• Oil prices will remain high as long as the U.S. remains as war in the Middle East.

• It is very likely we will see World War III by or before 2020 (it could be argued to have already begun).

Since the catastrophe in Japan began, analysts had been downplaying its impact to both Japan and the global economy. However, I previously stated that the effects of Japan’s lingering catastrophe were being downplayed relative to estimates from Wall Street and government officials. I maintain this view.

In fact, the IMF has recently made radical modifications to Japan’s 2011 GDP growth, placing the country in recession territory.

While I do not feel that $100+ oil has been a significant drag on the U.S. economy (at this point), it has added a good deal of pressure to emerging economies, especially in Asia and South America. Not only have high fuel costs excessively increased food and transportation costs in these nations, the overall inflationary effects have also heightened wage pressures.

Combined with peak capacity utilization seen in some emerging nations (Brazil and Indonesia), it should be clear that inflationary pressures are spreading across the globe, albeit slowly. Additional inflationary pressure has mounted as the result of large capital inflows from financial institutions and other investors looking to take advantage of high interest rates in Brazil, India and other nations.

Over the past several months, hacks and clowns found in the financial media have focused on QE2 as a means to distract from a variety of more important issues. The reality is that QE2 has not resulted in any DIRECT inflation in the U.S.  While it has heightened inflation in many parts of the globe (which has spilled over into the U.S.) there are many other issues of higher concern. Thus, if you have been duped by the QE2 drama, you have been paying attention to the wrong sources.

Overall, earnings from U.S. corporations continue on a blistering pace, with pre-crisis highs in sight. However, earnings have weakened a bit over the past few weeks. Disappointing earnings and forward guidance from technology blue chips like Hewlett-Packard, Microsoft, Cisco and others are clear signs of more stalling ahead.

Waning guidance from retailers was expected, due to soaring cotton pricing. For some reason investors had not adequately factored this into the market prior to last month when soft line retailers collapsed after missing earnings and reporting weak guidance. However, aside from a few mishaps, earnings generally remain strong although this momentum is clearly decelerating.

Meanwhile, Southeastern Europe remains in a free fall, while much of northern Europe is doing relatively well for now. Emerging nations in Europe promise to add additional significant burden to advanced EU members (Germany, Denmark, Switzerland, and Sweden) through bailouts for weaker EU members. Moreover, strength seen in the franc and krona continues to weigh on export trade from these nations. Brazil is facing a similar problem. I see no positive developments in the UK.

What does all of this mean?

Earnings are strong, yet the economy has shown no real signs of improvement?

Remember, earnings are the only thing that matter to the stock market; well mostly. Interest rates also matter but it would appear that they won’t be a consideration for some time.

Also keep in mind that the stock market moves largely based on earnings; reported and forward estimates. Thus, it is critical to understand the ability of corporations to meet future earnings expectations. This is where the importance of the economy comes into play.

Is it possible to have strong earnings in a weak economy?

With each given year, this is becoming more possible due to the decoupling of the U.S. economy with the business side of corporate America.

How does that make sense?  After all, those of us residing in the U.S. have always heard that the stock market serves as a gauge of the health of the economy, right?

That may have been true in the past, but things began to change once NAFTA was passed. As discussed inAmerica’s Financial Apocalypse nearly 5 years ago, as U.S. corporations shifted millions of jobs overseas, they have also shifted entire facilities. As a result, more than three billion consumers in Asia (many with high savings and low debt), corporate America has been gradually shifting its revenue dependency overseas. This trend will only add to the exportation of good jobs overseas.

China GDP forecast 2050.

China Gross National saving by institutional sector.

China household savings rates have been increasing over past 15 years.

China vs the global consumer market.

From this chronic relationship alone, living standards for the vast majority of Americans will be ratcheted down a couple of notches indefinitely. As I have discussed in the past, this is a trend that promises to strengthen each year. And it poses a particularly daunting scenario for U.S. workers.

The consequences of the historic securities fraud by Wall Street, and Washington’s multi-trillion dollar banking bailout and stimulus packages ensure a more downside to living standards. Washington’s long-standing fiscal irresponsibility and one-sided policies supportive of corporate America will continue to whittle away the living standards for the majority of Americans indefinitely, or until Washington decides to steal wealth from other nations through wars.

Some might counter that the U.S. has already begun stealing wealth in the Middle East. However, the wealth it is stealing from Iraq represents a wash (at best) due to the trillions of dollars being wasted on this war. The only winners here are the insiders connected to Washington, who bilk taxpayers via excessive expenses billed by private contractors and other insider profiteering. George Bush Senior’s association with the Carlyle Group serves as a role model for this other level of fraud.

Perhaps the most tragic consequence of these wars, second only to the unneeded loss of lives, is the fact that Washington and the media have made puppets out of most Americans. Those who stand to lose the most are actually doing the dirty work for the profiteers. They have managed to fool the tea party and virtually every other American who is fed up and frustrated.

Recently, trustees for the Medicare trust fund announced that the fund is now projected to exhaust its funds in 2024, not 2029 as estimated last year. As well, trustees for the Social Security trust fund announced that the Social Security retirement program will run out of money in 2036, not 2037 as previously thought.

Those who have been bought off by the healthcare mafia, the corporate elite and the fascist regime in Washington have convinced the American people that they must accept austerity measures, such as cuts to Medicare and Social Security. However, the reality is that Americans are allowing the war in the Middle East to siphon off their Medicare and Social Security.

Finally, as I have discussed many times in the past, if the U.S. limited its annual healthcare expenditures to that seen in Canada, the UK, Japan, and Europe on a per GDP

basis, it would actually begin recording annual budget surpluses starting in 2020.

Rather than address the real problem threatening the insolvency of Medicare and Medicaid, Washington has fooled the American people to think that these entitlement programs are bloated and unsustainable due to their inherent structure. This is simply not true.

The main reason for the dire financial state of Medicare and Medicaid is due to unchecked healthcare inflation, which has risen by double digits over the past decade.

Meanwhile, Social Security can easily be fixed by raising the income limit for payroll taxation. However, Washington has chosen to delay this simple fix to Social Security because they know that the longer they wait, the more difficult it will be to fix. This will build momentum for privatization of Social Security, which (as discussed in America’s Financial Apocalypse) would add nearly $1 trillion in fees to Wall Street. That means higher fees and lower returns. As well, it promises to shortchange minorities and women.

This might seem obvious to some, but defense spending has been the largest budgetary item in the U.S. for several years. Yet, when Washington discusses the need to reduce the debt, they never discuss real cuts to defense spending other than a reduction in VA benefits.

Media distractions.

America’s media monopoly plays along with the illusions pumped out of Washington by dramatizing the fake death of bin Laden, all while spicing it up with mention of bin Laden’s porn collection. Yet, no one in the media ever bothers to ask what benefits America is receiving from the wars in the Middle East, TSA and DHS procedures. As a result, most Americans never ask these questions because the media has complete control over their minds.

At the end of the day, the American people only have themselves to blame for their diminished living standards because they have been suckered to believe the countless lies from Washington and the media, all while lining up for obvious distractions in order to keep real news from being broadcast. The current obsession with Congressman Weiner is a perfect example of this tactic.

Who gives a damn about Weiner and his wiener?

Report on it once and let that be the end of it. Move on to issues that matter.

What will the U.S. media obsess on as its new scandal once it has played out the Weiner circus show?

Will there be a new sex scandal?

Maybe they will “expose” Bernie Madoff’s obsession to porn.

I think you get the point. The Zionist-controlled media machine continues to replace celebrity gossip and TMZ trash with real news. This is being done of course in order to keep the masses distracted, uninformed and to encourage them to stop thinking so that they will accept without question everything the media tells them. This mechanism applies to the financial media as much as the general media.

Accordingly, the American people are also to blame for losing their retirement savings to Wall Street fraud because they have not stormed Washington in protest for criminal indictments, nor have they demanded real Wall Street reform. And they keep watching CNBC. They keep reading the Wall Street Journal and the New York Times.

Have you forgotten how these media organizations hid, denied and lied about the realities of the economic collapse?

YouTube – Veterans Today –

U.S. Debt Credit Ratings

Last month, Standard & Poor’s downgraded the outlook for its credit rating of U.S. debt, emphasizing the need for Washington to raise the debt ceiling while implementing austerity measures prior to the 2012 election.On June 2, Moody’s followed suit with warnings that U.S. debt would come under ratings review with downward bias if the debt ceiling is not raised and measures to control spending have not been passed soon.

All this has done is fuel the momentum to effectively squash Medicare. I smell something fishy with regards to the timing of these announcements by the rating agencies.

Inflation

The Consumer Price Index (CPI) rose 0.4% in April. Of more relevance, the CPI rose at a 6.2% annualized rate over the last three months. Elevated energy prices continue to drive headline inflation. Although prices are down significantly from April, energy pricing advanced in May after bottoming earlier in the month. Over the past three months, energy prices have risen at a 42.8% annualized rate.

The core CPI rose 0.2% in April. In 2011, the monthly core rate of inflation has remained stable, varying between 1.6 and 2.4% annualized since December. In part, the low rate of core inflation continues to be a price restraint in rent and owners’ equivalent rents resulting from the oversupply of housing.

The price of owners’ equivalent rents has risen 0.1% in each of the last seven months at a 1.2% annualized rate.Transportation prices rose 1.4% in April mainly due to increased fuel prices. Of particular interest, the price of new vehicles has risen at an annualized 10.1% rate in the last three months, adding one-quarter of a percentage point to the 2.1% annualized core rate of inflation. However, manufacturers have changed the timing of new car releases which is likely to alter the seasonal adjustment. The price of new cars has risen only 2.2% over the last year.

Medical care prices rose 0.4% in April, and at a 4.1% annualized rate over the last three months.  Medical care commodity prices (mainly for prescription drugs) have risen at a 6.8% annualized rate over the same period.

Apparel prices rose 0.2% in April. Clothing prices have declined by a 4.9% annualized rate over the last three months, compared with a 4.9% annualized rate of inflation for the three months ending in January.  This should come as no surprise if you recall my discussion of the reaction by retailers to high cotton and other textile prices.

Education and communication prices rose 0.1% in April. Education prices have risen at a 1.4% annualized rate over the last three months, while communication prices have declined by a 0.9% rate.  Education prices have increased by a 5.8% annualized rate over the last 10 years, versus a decline of 1.1% annually in the price of communication.

Over the last two years, inflation in the Producer Price Index (PPI) for finished goods has advanced more than three percentage points faster than the CPI (5.9% versus 2.7%). Two main factors account for this difference.First, the PPI is a goods index, so it does not measure inflation in services. As a result, food and energy account for much more of the PPI the CPI.

Furthermore, this makes the PPI more sensitive to fluctuations in these prices. When non-core prices collapsed in late 2008 and early 2009, the PPI declined by a 9.7% annualized rate over nine months.

In contrast, the CPI decreased to an annualized rate of only 3.8%. Thus, the more recent rise in the PPI relative to the CPI is a result of soaring oil and food prices.

Second, the low inflation in rents has helped keep down core consumer prices, but not producer prices since the PPI does not measure services. In other words, the PPI has not benefited from the deflationary adjustment due to the correction in housing prices and equivalent rents. As a result, over the past 24 months, the core PPI has risen by only 3.1% (1.5% annualized) while the core CPI minus shelter has gone up 3.8%.

Manufacturing and Consumption

The Philadelphia Fed manufacturing index dropped to 3.9 in May from 18.5 in April, well below the consensus (20.0) and most Wall Street forecasts. The new orders index fell to 5.4 from 18.8, the shipments index sank to 6.5 from 29.1, and the supplier delivery time index dropped to -2.3 from 11.2.U.S. manufacturing activity expanded in May at the slowest pace in 20 months, confirming a slowdown in economic growth.

The Institute for Supply Management’s (ISM) index of manufacturing activity fell to 53.5% in May from 60.4% in April. Since the index remained above 50, it marked the 22nd straight month of growth (according to the ISM). However, the decline in May was the biggest since 1984.Construction spending for March (slightly) increased seasonally adjusted annual rate to $765 billion, up by only 0.5% from an 11-year low of $761 billion reached in February.

Although manufacturers in most industries reported growth in May, they also reported problems due to the rising costs of fuel, chemicals, metals and other inputs.High prices for oil and other commodities have also dampened consumer spending, which has led to less demand for factory goods. However, consumer spending is still respectable given the rising costs of food, energy, and healthcare in the face of a 1.6% decline in real wages over the past two years.

Three industries contracted: printing; furniture; and food, beverage and tobacco. All three are closely linked to spending by consumers.And an index of manufacturers’ inventories swung from growth to contraction. That suggests manufacturers are replenishing their stockpiles at slower paces after selling off excess goods that they produced during periods of stronger demand.

The survey also found that the overall economy grew for the 24th straight month. This of course is pure fantasy based on an isolated metric.

Housing Market

On May 31, 2011, Standard & Poor’s released its data through March 2011 for its S&P/Case-Shiller Home Price Indices. According to this data, the U.S. National Home Price Index declined by 4.2% in Q1 of 2011, after having fallen 3.6% in Q4 of 2010. The Index hit a new recession low with the Q1 data, and posted an annual decline of 5.1% versus Q1 of 2010. Nationally, home prices are back to their mid-2002 levels.

Based on the latest data, the 10– and 20-city composite pricing has declined from peak to trough by 33.5% and 33.1%, respectively, making the real estate collapse worse than the 31% decline seen in America’s First Great Depression in the 1930s (there was at least one other depression prior to this time in the 1800s, but the characterization is difficult due to vastly inadequate record-keeping and much difficult methods of data collection and calculation).

This latest decline in home prices is in line with my original forecast of a 30% to 35% decline made in 2006.

The Case-Shiller 20-City index fell by 0.8% in March, pushing the index to a new post-bubble low. Over the prior six months the rate of monthly decline averaged more than 1.0%. In nominal terms, the March number is 0.8% below the previous post-bubble low made in April 2009. In real terms, the March number is 5.4% lower.

The recent decline in housing prices has wiped out nearly all of the increase in real prices since the beginning of 2000. The real value of the 20-City index is currently only 5.2% above its January 2000 level.Based on the March data from Case-Shiller, prices have declined in real terms for 12 of the 20 cities since 2000, with both Portland and Seattle showing gains of just over 1.0% over this 11-year period.

The biggest losers have been Atlanta, with a real price decline of 25.1%; Las Vegas at 26.0%; Cleveland at 26.3%; and Detroit with a real price decline of 48.9%.Since 2000, nearly all of the cities in the bottom tier of the housing market have shown the worst performance.

In other words, homeownership has been an especially bad investment for moderate-income families over this 11-year period. Since 2000, real prices for the bottom third of the market fell in San Francisco and Tampa by 14.7% and 15.1%, respectively. In Chicago, Minneapolis, and Las Vegas the real declines were 33.3%, 35.8% and 39.2%, respectively.The biggest declines reported for the bottom tier of housing were seen in Phoenix at 46.6% and Atlanta at 53.1%. (Data for pricing tiers is not reported for Cleveland and Detroit because the samples are too small. However, I would expect these cities to top the real price declines seen in Phoenix and Atlanta.)

Remember that these figures refer to the drop in real house prices since January of 2000. Price declines from the peak in 2006 are much more severe in most cases.The March data show prices dropping in 18 of the 20 cities, with Seattle (0.1% increase) and Washington, DC (1.1% increase) posting the only gains. Prices are now 4.3% higher in Washington than a year ago. Thus, DC is the only city with a year-over-year increase.

Several months ago I discussed why the DC housing market has fared relatively well. Remember, Washington has been on a hiring spree (although it has trailed in job additions over the past year).

The biggest price declines in March were seen in the Midwest. Housing prices fell by 1.8% in Cleveland, 2.0% in Detroit, 2.4% in Chicago, and 3.7% in Minneapolis.Over the last three months prices have fallen at a stunning 22.5% annual rate in Chicago and a 34.6% annual rate in Minneapolis. In both cities the bottom tier has accounted for a disproportionate share of decline, with price declines in March by 9.9% and 6.4%, respectively.

Even more alarming, over the last three months prices in the bottom tier have fallen at a 50.4% and 55.9% rate in Chicago and Minneapolis, respectively. Prices in Charlotte declined by 2.4% in March, boosting the annualized rate of decline to 18.0%. In Boston prices fell by 1.7%, raising its annual rate of decline to 12.9%.

While prices are likely to continue downward over the next several months, I feel that many of the cities in this index are near their bottom. The April data on pending home sales was extremely weak.

The chart below depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index recorded a 5.1% decline in the first quarter of 2011 over the first quarter of 2010. In March, the 10- and 20-City Composites posted annual rates of decline of 2.9% and 3.6%, respectively.

Thirteen of the 20 MSAs and both monthly Composites saw their annual growth rates fall deeper into negative territory in March. While they did not worsen, Chicago, Phoenix and Seattle saw no improvement in their respective annual rates.In March 2011, 12 cities – Atlanta, Charlotte, Chicago, Cleveland, Detroit, Las Vegas, Miami, Minneapolis, New York, Phoenix, Portland (OR) and Tampa – fell to their lowest levels as measured by the current housing cycle.

The recent data has caused many economists to claim a “double-dip” in the housing recession. This is complete nonsense, as we never rebounded from the slump to begin with. As discussed in previous issues, the relative rebound in prices seen in 2009 and 2010 was largely due to the first-time home buyer’s tax credit. After excluding the results of these subsidies, there has been no recovery or even stabilization in home prices at any time since the decline began in late 2006.

The next shows the index levels for the U.S. National Home Price Index, as well as its annual returns. As of the first quarter of 2011, average home prices across the United States are back at their mid-2002 levels. The National Index level hit a new low in the first quarter of 2011, declining by 4.2%. It is now 5.1% below its 2010Q1 level.

Eleven cities and both Composites have posted at least eight consecutive months of negative month-over-month returns. Of these, eight cities are down 1% or more. The only cities to post positive improvements in March versus their February levels are Seattle and Washington D.C. with monthly returns of +0.1% and +1.1% respectively.

Here, I show historical Case/Shiller condo price data for the five major cities (in terms of economic power) since the start of the housing bubble. As you can see, relative

Case Shiller March 2011 condos

to the overall residential housing price decline, condo prices have held up better. The following data is approximate. Since reaching a peak, condo prices have declined:

…in Los Angeles by 37%

…in Boston by 18%

…in San Francisco by 32%

…in Chicago by 37%

…in New York by 16%

Before we take a closer look at each city, it is important to consider possible reasons for the smaller decline seen in the condo market in most of these cities.

First, consider that most condo owners tend to be singles or younger married couples without children. Moreover, both spouses tend to be income earners. Thus, overall, they have more money they can devote to housing.

Second, condos tend to be situated in densely populated areas where jobs are plentiful, rather than in remote areas. This too helps increase the pool of available buyers which boosts the market price.

If you are wondering why New York suffered the smallest decline in condo prices, I should remind you that the villains (Wall Street) came out of this mess as winners.

The table below summarizes the Case/Shiller housing data for the 10– and 20-city composites, from peak to trough. Based on the latest data, the 10– and 20-city composite pricing has declined from peak to trough by 33.5% and 33.1%, respectively.

It seems very likely that my original (worst-case scenario) peak-to-trough forecast of –35% will materialize over the next several months.

Notice that the largest decline thus far has occurred in Las Vegas, followed by Phoenix and Miami. The smallest decline has been in Dallas followed by Denver.

In order to understand where housing prices in each city are headed from here, one must have a really good understanding of local and broad economic variables. I can tell you that every single real estate consulting firm I have come across has been absolutely clueless. And I have come across some very prominent firms.

As expected, the Pacific region has been hit hardest by the correction in the real estate bubble, along with Florida.In contrast, the Sunbelt states have fared the best. The reason for this is quite simple. The Pacific region experienced the largest increase in housing prices, while the Sunbelt states experienced the smallest price increase.Other regions which experienced a large rise in real estate prices (such as New York City) have been able to keep a good part of its real estate bubble inflated due to the impact of the financial industry. Smaller financial centers, such as Boston, Greenwich and Stamford, Connecticut have also fared well for the same reason.

Over the past several months I have made mention of the shadow inventory of houses. When the media makes mention of the shadow inventory, it typically only discusses those homes that are in late stages of the foreclosure process.

The next chart shows the total potential shadow housing inventory based on payment status and foreclosures. As you can see, this number is approaching 6.5 million, and

Potential shadow home inventory.

rising. This number represents approximately 10% of all single family residential homeowners in the U.S.

Certainly, only a small percentage of the 5.3 million homes not already in the foreclosure process will end up on the auction block. Furthermore, the process will be spread through several years. However, this data alone ensures there will be several more years of excessive foreclosures.

In addition, there are other elements of the shadow inventory to keep in mind.

First, there are millions of homeowners who have wanted to sell but have chosen to wait for the market to rebound. These are the more fortunate homeowners who merely wish to change homes or relocate to another city by choice. Others have been forced to sell due to a job loss, relocation, financial hardship, or for medical reasons.

Second, over the next 15 to 20 years, millions of aging baby boomers will sell their homes as they opt for condos, retirement communities, or move in with their adult children. While this trend is not likely to cause any noticeable impairment in the housing market in any given year, over time it could cause a large inventory buildup if builders do not adequately account for this long-term trend.

We have already seen how home builders have failed to see the full severity of the real estate collapse, as they were late in halting new home starts.

Increasing Defaults

Bank Card and Second Mortgage defaults increased in the month of April, as reported by S&P Indices and Experian on May 18, 2011.

S&P/Experian Consumer Credit Default Indices showed an increase in Bank Card and Second Mortgages default rates for the first time in at least five months. Bank Card

Consumer Defaults.

defaults went up from 5.59% in March to 5.91% in April and Second Mortgages increased from 1.42% to 1.51%. First Mortgages experienced a fairly large decrease in default rates down to 2.16% from 2.33%, while Auto Loan had a small decrease to 1.45%.

“We had seen default rates fall across all major categories and most major cities during the prior six months, but given April’s data that might be coming to end. In addition, there are some significant differences across credit types and MSAs. Bank Card default rates went up in April, after having fallen each of the past 11 months; and the data indicate that the rate of default on credit cards is still 5.90%, more than twice any of the other loan classes. We see a similar situation in the Miami Composite Index. While well below the 10.26% rate we saw for Miami in November 2010, that market is registering default rates of 5.40%. The other four MSAs we follow registered no higher than 2.60% in April. Like most economic recoveries, while there will be general trends we do expect to see differences across loan classes and regions.”

-David M. Blitzer, Managing Director and Chairman of the Index Committee for S&P Indices.

This comes from a man who claimed the real estate market had bottomed in late 2008, then later in 2009.

The table above summarizes the April 2011 results for the S&P/Experian Credit Default Indices. These data are not seasonally adjusted and are not subject to revision.

Labor Market—Department of Labor

A. Establishment Survey Data

Total nonfarm payroll employment was little changed in May (+54,000), following gains that averaged 220,000 in the prior 3 months. Private-sector employment continued to trend up (+83,000), although by a much smaller amount than the average for the prior 3 months (+244,000). In May, job gains were seen in professional and business services, healthcare, and mining. Local government employment continued to trend down. Employment in other major industries changed little.

B. Household Survey Data

The number of unemployed persons (13.9 million) and the unemployment rate (9.1%) were essentially unchanged in May. The labor force, at 153.7 million, was little

Lingering high unemployment rate.

changed over the month.

The unemployment rates (not seasonally adjusted) for adult men (8.9%), adult women (8.0%), teenagers (24.2%), whites (8.0%), blacks (16.2%), and Hispanics (11.9%) showed little or no change in May. The jobless rate for Asians was 7.0%.

In May, the number of long-term unemployed (those jobless for 27 weeks and over) increased by 361,000 to 6.2 million; their share of unemployment increased to 45.1%.

The civilian labor force participation rate was 64.2% for the fifth consecutive month. The employment-population ratio remained at 58.4% in May.

In May, 2.2 million persons were marginally attached to the labor force, about the same as a year earlier (these data are not seasonally adjusted.). These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months.

Among the marginally attached, there were 822,000 discouraged workers in May, a decrease of 261,000 from a year earlier (these data are not seasonally adjusted).

Unemployment rates by duration remains very high.

Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.4 million persons marginally attached to the labor force in May had not searched for work in the 4 weeks preceding the survey (for reasons such as school attendance or family responsibilities).

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged in May at 8.5 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

As bad as things may seem according to the official data, the fact is that reality paints a much worse picture. As I have continued to insist, the U.S. never recovered from the recession that officially began in December 2007. As it stands today, the U.S. remains in the longest recession since the Great Depression.

The remainder of this report can be read on www.avaresearch.com