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Boost in Retail Sales Hints at Economic Recovery

Retail sales increased in February, despite major snowstorms in the eastern United States and consistently high unemployment. Judy Woodruff talks to an economist about whether recovery could soon follow.

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    There were new signs today that the great recession may be over. The most encouraging was about retail sales for February. Economists had been expecting a dip, but sales actually were up three-tenths-of-a-percent overall, despite the major snowstorms. But other data showed the effects of the financial crisis linger on.


    In fact, a monthly survey showed consumer confidence slipped. And while a private report this week found new home foreclosures are slowing, more than 300,000 households were put on notice last month, and three million homes are expected to face foreclosure this year.

    Meanwhile, the Federal Reserve reported that total U.S. household debt fell last year for the first time since 1945. Much of that was due to a wave of defaults, people walking away from their obligations.

    Well, to help us unravel these varied economic signals, we turn to Diane Swonk, chief economist and senior managing director at Mesirow Financial, a diversified financial services firm based in Chicago.

    Diane Swonk, good to see you again.

    We seem to have arrows pointing in a lot of different directions. Let's start with these retail sales number — number — up better than people expected, but — so, is this something — does this say the economy is stronger than we thought?

    DIANE SWONK, senior managing director and Chief Economist, Mesirow Financial Holdings, Inc.: Well, it's nothing to pop champagne corks over. That's for sure. I think we are still cracking beers, at best, out there.

    What we seeing is the level of consumer spending fell to such a low level, there is almost nowhere to go but up. We are seeing a lot of pent-up demand. And, in fact, a lot of the spending we're seeing is coming from transferred income, which is everything from Social Security to unemployment insurance being continued, a lot of spending on — not the spending on discretionary, but on necessities out there.

    And we are seeing repair and replacement of things that we have just postponed for so long. There is just nothing else we can do. So, the level of spending is still extremely low, but the momentum in the right direction.

    That said, the data for January will revise down. And so, even though we are moving up, it is sort of two steps forward, one step back. And we could still see this data get revised down as well. So, it really is that level vs. momentum. It kind of feels like we're moving forward in a traffic jam.


    How do you square those retail sales numbers, though, with consumer confidence being down?


    Well, that's exactly it. We're not getting enough growth to feel good about it. We are still at a very low level of economic activity. We are talking about recession lows.

    On the consumer confidence data, we are not at the lowest levels of the height of the crisis during the fall of 2008, but we are back at levels consistent with the 1980s recessions, which was very, very bad economy. People still feel terrible about an economy with 10 percent or more real unemployment in the economy.

    And it's a very frustrating economy, because we're not moving anywhere rapidly. And it's hard to see a lot of light on the horizon. So, this is an economy that is still a lot of troubles in it, a lot of potholes along the road. We are on a very rocky road to recovery. But it's not a very easy road. And it's going to remain that way for some time to come.


    And then you also have the report that consumers are shedding debt, the fastest rate since the Depression, but mainly due to defaults. They are just walking away from the bills that they owe. So, is this a good sign or a bad sign?


    Well, de-leveraging is part of the process of going into too much debt, but it is a bad thing when you have to walk away from it.

    In fact, I think, moving forward, what we going to have to see is, we now see a lot of households that put 20 percent down. They are underwater on their mortgage and they lost their job. The only way they can stay in the house is not just to renegotiate the terms of the loan. They are going to need some principal forgiven. And that is a very controversial issue, but it is our only way to really de-leverage and move forward.

    And, frankly, I think everybody knows now it's better to keep their neighbors in their home, even if it means forgiving some of that debt, than letting that home go vacant, and be vandalized over the next year, and destroy the value of your home.


    Well, what about the foreclosure numbers? It did slow a bit, as we said, but, overall, we are told millions more this year. So, how do you factor that in?


    Yes, again, less bad is good news.

    The rate of deterioration in the foreclosures is slowing. But they're still up, and they are still going to a record high. In fact, I think we will see another record high. In addition to those three million expected, we have 4.6 million homes 90 days or more delinquent. The only good news out there is that the shorter-term delinquencies, 30-day delinquencies, have slowed down quite dramatically.

    That could be good news for 2011. But I think we are still going to see a peak in 2010 of foreclosures, or at least of these loans needing — need some help in restructuring. That said, it's also one of the reasons why you are seeing so many banks, over 400 banks on the troubled bank list right now by the FDIC.

    And you are going to see a lot more bank failures this year as well.


    So, foreclosures continuing to hold back a more robust recovery?


    You know, and this is what we always see, is, we tend to see the legacy. We saw the first part of the crisis was the subprime crisis, which was something structural that happened. It shook us all up.

    The result of that was a recession. And now we are having the residual effects on defaults and foreclosures of the recession, of — people actually lost a lot of jobs, and they simply are in a worse economic situation. That forces this credit card they took on, they are now just defaulting on it, because they can't keep up the payments on the other three or four that they are keeping up the payments on.


    So, finally, is the story this sort of the same mixed economy story we have been telling for the last few months, or is there something positive we can hang on to underneath all these statistics?


    The one thing that I think is positive out there is, we are seeing a new technology investment boom. And it's not just in the investment sector by businesses. Consumers are also turning to technology as well.

    I think we are on the precipice of another technological revolution that really is finally the fruition of the Internet boom or the dot-com boom that was sort of the false start to it in the 1990s. That is the one piece of good news out there.

    Consumer electronic sales are up, very robust. In fact, people are renewing their technology. They skipped Vista. They moved into 2007. They are buying laptops. They're buying flat-screen TVs. So, hopefully, they are watching you in high definition right now.


    Well, we will take every little bit of good news where we can find it.



    Diane Swonk, thanks very much.


    Thanks, Judy.