the audit

A Prophet of Doom Cherry-Picks the Numbers

Gretchen Morgenson, a New York Times Wall Street reporter with a Pulitzer under her belt, is one of the shrewder financial minds in the business press, so it’s always surprising to see her stumble.

November 28, 2005

Gretchen Morgenson, a New York Times Wall Street reporter with a Pulitzer under her belt, is one of the shrewder financial minds in the business press, so it’s always surprising to see her stumble.

But stumble she did in a Sunday piece (subscription required) pegged to the fears of one source, Paul Kasriel, chief economist at the Northern Trust Co., a piece that gets right to the point with this breathless lede:

“Does a financial train wreck lie dead ahead for American consumers and investors?”

Morgenson tells us that “over the last five years, American households have spent more than they earned. In contrast, for almost 30 years beginning in 1970, the opposite was true: households earned more than they spent.” She also reveals what she calls “a stunning figure”: Kasriel calculates that in the third quarter of this year, “households spent a record $531 billion more than their after-tax earnings, on an annualized basis.”

But what exactly does that mean? Is that $531 billion, say, 20 percent more than last quarter’s annualized after-tax earnings, in which case we should all be scared out of our wits? Or is it, perhaps, two percent — or two-tenths of one percent? We never learn.

But we do learn that these same “non-stop shoppers have propelled consumer spending to a record high as a share of gross domestic product.”

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And how high would that be? Well, 76 percent in the third quarter. And how does that compare to saner times? Hmmm. Record high or not, it seems that consumer spending as a share of GDP has barely moved off the 73 percent recorded five years ago, in 2000.

Okay, we’ll still give Morgenson (and Kasriel, her sole source here) the benefit of the doubt. They must have some other, more alarming number up their sleeves to justify that “train wreck” in the lede. Well, no. For what we learn next — written in a tone of disapproval — is that the value of residential real estate across the country is now “a record 204 percent of disposable personal income,” up from 150 percent five years ago.

The presumption seems to be that it’s bad to own property that appreciates. The further presumption seems to be said appreciation is entirely out of hand and bound to evaporate. But is a one-third increase in the value of any asset class over five years really a firestorm out of control? Or is it actually a compounded rate of return of about 6.5 percent? Hint: This fire seems to be burning at nothing more than a pleasantly warm sputter. Or so we are left to guess from Morgenson’s choice of numbers, which strangely measure property prices against personal income, rather than give us a true picture of how much home prices have actually moved.

Next, Kasriel, Morgenson’s beard, tells us that these days 61.7 percent of banks’ total earning assets consist of “mortgage-related holdings,” whereas 10 years ago it was 48 percent, and back in 1987 it was only one-third. Again, the presumption seems to be that banks should limit their mortgage loans to one-third of total loans and investments. But we never learn why that might be, or what they should be investing in instead. T-bills? Casino stocks? Currency futures? Nor are we reminded that the last time banks did shirk on property loans as a percentage of total loans, there ensued a housing slump that in most of the country lasted from 1988 through 1996.

But never mind. There are yet other gauges that “point to danger,” Morgenson intones ominously. Mortgage debt as a share of the market value of residential real estate now stands at 43.2 percent, up from 33 percent in 1987. Our first reaction was surprise that the average homeowner owes only 40 percent of the market value of his property. Actually, that sounds positively prudent to us. But don’t breathe a sigh of relief; here’s Kasriel bringing the reality home: “We have people who don’t have a lot of equity in their houses. If the price goes down, they are going to be tempted to leave the keys in the mailbox and let the lender know it’s his again.”

Really? Just because their mortgage debt used to amount to one-third the resale value of their house, and now it amounts to 43 percent? None of us knows precisely what world Kasriel lives in, but in the one we live in, if your accumulated equity is 60 percent of the value of your asset, you’re not exactly heading to debtors’ prison. We’re guessing that most folks walking around with a $100,000 property on their hands but only $40,000 of debt to pay off on it are feeling pretty good about it.

But in Morgenson’s article, the parade of alarming numbers that look not-so-alarming-after-all upon close inspection never ends. Her last shot: A survey last week by the Conference Board found that shoppers intend to spend $466 on average on holiday gifts this year, down $10 from last year. This, she warns us, is “only the sixth year since 1990 that planned spending has declined, as measured by the survey.” Well, yeah, but there have only been 15 years since 1990. So what do we really learn here? Forty percent of the time, people saying they’re going to trim back a bit from last year’s holiday spending, and 60 percent of the time they say they’ll spend a little more than last year.

Beyond that, why is Morgenson, who has devoted an entire article to cherry-picked numbers that paint a picture of a profligate, shop-til-you-drop populace, now pointing with alarm to a possible two percent decrease in outlays for holiday gifts?

She seems to want it both ways; we’re bad when we spend, and we’re bad when we don’t.

By comparison, you might as well call us Santa Claus. Because we can’t find a statistic in this entire piece that either surprises, dismays or alarms us.

Pass the eggnog.

Steve Lovelady was editor of CJR Daily.