Maybe the troubles in the subprime mortgage market will turn into some sort of nasty financial contagion that will dramatically worsen the broader housing market and nudge the economy into recession. But I have a difficult time seeing that happen as long as jobs and incomes are growing. For starters, the 97,000 jobs added in February isn't such a bad performance, considering the terrible weather that month that also seemed to quash retail sales. And if recent history is any guide, that jobs number will be revised higher.
Then you have this week's Manpower hiring intentions survey. The results, according to Lehman Brothers economist Ethan Harris, are "consistent with job growth of approximately 178,000 per month. Last quarter, the series pointed toward job growth of 195,000 per month versus an actual realized rate of growth of 170,000. In short, despite the decline, the data [support] the notion of a still-strong labor market heading into the middle of 2007." (And strong income growth from those jobs is evidentially supported by the continuing flood of tax money into the federal government, now at its highest growth rate since last summer.) On the retail sales front, Harris also notes that the 2.8 percent jump in catalog purchases and the corresponding 1.6 percent drop in department store sales are consistent with a picture of "consumer[s]" choosing to stay home rather than venture out in the cold."
As for the housing market, it's worth noting the following housing statistics, courtesy of economist Ed Yardeni: 1) Even though a record 0.54 percent of outstanding loans are in foreclosure, the previous record was just a touch lower at 0.50 percent in the second quarter of 2002; 2) even though 7.78 percent of subprime loans are 90 days or more late, that's not nearly as bad as in 2002, when 11.49 percent were seriously delinquent. As Yardeni puts it: "I won't lose any sleep over those numbers." FYI: The current TradeSports betting market odds on the chances of recession stand at 27 percent, about 5 points higher than a month ago but lower than former Federal Reserve Chairman Alan Greenspan's guess of a 33 percent chance.
Time to tax private equity?
Charles Grassley of Iowa, the Senate Finance Committee's ranking Republican, has been floating the idea of taxing private equity firms' carried interest compensationthe profits they make after selling a companyat the 35 percent ordinary income tax rate instead of the 15 percent capital gains tax rate. I guess Congress is scrambling to grab what revenue it can to pay for a fix to the alternative minimum tax. But keep this in mind when picking on private equity: It may be having a great effect on the economy if America's is anything like Great Britain's. A landmark study by the Centre for Private Equity Research at Nottingham University found that while employment at U.K. firms taken private dips by 5 percent in the first year, it rises by 21 percent after four years, with productivity doubling in the process.