'Green Shoots' of Recovery? Don't Fall for the Media's Economic Triumphalism

By Joshua Holland, AlterNet. Posted June 22, 2009.

That was then; what happens now? Americans' household wealth -- assets minus debt -- has dropped for seven consecutive quarters; it's fallen to the tune of $13.8 trillion since the middle of 2007 (which represents the loss of about 20 percent). In just the first three months of this year, American families lost almost a half-trillion dollars in the value of their homes and almost thee times that number in stocks and other equities. So we're broke.   

And our credit's maxed out -- American homeowners now own, on average, just 41 percent of the equity in their homes, an all-time low. The picture in terms of revolving debt (you know, the plastic) -- almost $1 trillion worth in the U.S. -- isn't much better; last month, U.S. credit card defaults also reached an all-time high.  

Americans are "de-leveraging" -- paying down or defaulting on debt and putting some pennies away for a rainy day. In the first three months of this year, U.S. households shed over $100 billion worth; they paid down credit card debt at a rate unseen in 30 years.  It's a good idea to live within one's means, of course, but the trend represents what's known as the "paradox of thrift": when things get tough people save their money, and dollars put in the bank aren't spent in the economy at a time when they're needed most.

According to Barron's: 

De-leveraging -- paying down debt and boosting savings -- will continue to weigh on consumer spending even after employment and income eventually turn up, which is still far away. That's what makes this cycle different from the ones before.  

In the past, the hits to wealth were concentrated in equities, which were held mainly by the well-to-do. And they were cushioned by their real estate, private business holdings, fixed-income securities and ample cash. In the bubble, however, even the rich got into hock with multiple homes that they now can't afford to carry and can't unload.

In other words, investors may be feeling a bit less bearish based on the fact that unemployment claims are down a fraction, but most Americans continue to feel the pain. And don't look for a new wave of consumers in developing countries to step up and fill the void -- that's incredibly unlikely over the short  or medium terms.   

And there are a number of other factors to consider when weighing the likelihood that a robust recovery is in sight.

Real Estate Hasn't Hit Bottom  

Of late, one of the green shoots being touted is some modestly good news -- or less terrible news -- in the real estate market. Housing starts -- new construction -- were up slightly last month, indicating to some that we might be reaching a "bottom" in the real estate market's decline.   

But a deeper look suggests that there's not much reason to rejoice. Starts were up 17 percent in May over April's figures, but April was dead; new construction in May was still down by almost half compared to the same period last year.

Dean Baker also notes that new mortgage applications are very low, and builders' confidence is in the tank -- those in the construction industry aren't expecting a robust recovery anytime soon. Baker suggests that builders moving up planned projects to take advantage of the first-time homeowners' tax credit, which expires in November, is a likely cause of the rise in starts.   

During the growth of the housing bubble, there was an enormous boom in construction, and inventories of unsold homes are now at about twice their historic levels. Economist Robert Schiller predicts that real estate prices may continue to decline for years to come, as they did in Japan following the burst of its real estate bubble in the 1990s.  

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Joshua Holland is an editor and senior writer at AlterNet.

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