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Wonder if you should worry about the stimulus plan? You should. It’s not big enough. If you’ll give me three minutes of your valuable time, then you’ll understand why.

As reported by The New York Times last week, the House passed an $819 billion “economic recovery” plan. While it sounds like a lot, it’s not. IF it becomes law it will simply offset, more or less, only the immediate annual economic loss due to the:

• Surge in the number of folks that used to be working; and
• Shutdown of the nationwide home equity “ATM network.”

The bill does not begin to address additional reductions in economic activity produced as recession-battered households, fearful of more layoffs, boost their savings rates and curtail consumer spending. The latest figures from the Department of Commerce highlight that, by year–end 2008, consumers had cut their spending by $233 billion/year.

If the powers-that-be screw up and delay the spending plan, then our problems have only begun.

UNEMPLOYMENT

As indicated by Figure 1, below, the number of unemployed hit a low of about 6.7 million people as 2007 began. One year later, their ranks increased as their number spiked to just over 11 million by year-end 2008. As 2009 begins, there are about 4.4 million more unemployed than there were, on average, in 2006 and 2007.

The 4.4 million newly unemployed used to earn a paycheck. As indicated by Figure 2, below, I am ball-parking the missing median paycheck at just under $55,000 per year.

If we assume that the 4.4 million newly unemployed previously earned an annual paycheck of just under $55,000, then this suggests – as implied by Figure 3, below – that their missing paychecks are worth, in aggregate, about $240 billion per year. This $240 billion tab will rise as job losses spread.

HOME EQUITY

As I have previously noted (see No Place Like Homes) the Federal Reserve’s Alan Greenspan and James Kennedy closely examined how homeowners tapped their home equity.

Simply put, Mortgage Equity Withdrawals (MEW) occur when homeowners either:

• Sell their homes, if they have appreciated above their original cost; 
• Refinance their mortgages; and/or
• Draw upon home equity lines of credit.

As indicated by Figure 4, below, actual MEW (the blue line) as calculated by Greenspan & Kennedy, “took off” from a relatively modest pace of $20 billion/quarter up until 2000, and peaked at just over $140 billion/quarter in 2004 and 2006.

While actual values of MEW are not yet available for all of 2008, I have estimated MEW using the:

• Similar Quarterly Cash-Out Statistics reported by Freddie Mac for conforming conventional loans;
• Home price appreciation; and
• Rate Attractiveness, or refinance opportunities created by mortgage rate declines.

This “estimated MEW” appears as a red line in Figure 4.

Figure 5, below, summarizes MEW by year, using actual MEW for 1993 – 2008Q2, and my estimated MEW for 2008Q3 – 2008Q4.

As shown by the blue line in Figure 5, MEW averaged about $430 billion per year between 2003 and 2007. In 2008, however, as home prices sharply declined and credit standards tightened, MEW declined to less than $25 billion. By 2008, this produced – as the chart suggests – a $404 billion hole in consumers’ budgets as they were denied ready access to the “home equity ATM.”

SUMMING UP

Recent layoffs and post-2005 home price declines are dragging down economic activity at a rate of about $650 billion/year:

       
This problem is growing. Once you factor in the $233 billion drop in consumer spending noted earlier, then it’s clear that the $800+ billion recovery plan is not as big as you think. Will it also be too late?
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I used to work with numbers for a living. Now I’m doing my best to pump up the economy as I search for a new job or at least my next idea. Till next time.

REFERENCES
   
I. Artman, Sterling Slivers – No Place Like Homes, 4 Nov 2008.

Bureau of Economic Analysis – Personal Income and Outlays News Release: Table 4, 2 Feb 2009.

J. Calmes, The New York Times - House Passes Stimulus Plan, 29 Jan 2009.

Freddie Mac - Quarterly Cash Out Statistics.