Limping Along

This report isn't good news for those people who think that the national economy is on the road to recovery. Homebuilders are taking a more pessimistic view on their industry and have continued cutting back on the new homes being built because of inventory that remains unsold. Typically, homebuilders want to keep inventory moving on a six-month clip, but it's currently closer to nine.

Conditions are not likely to improve soon. Reports this week on new home construction and previously owned home sales in June are expected to show the housing market remains deeply hobbled. An update on the Obama administration's effort to help those in danger of losing their homes is also expected Tuesday.

While the overall economy appears unlikely to fall back into recession, many analysts expect housing to struggle for some time.

"With growth slumping again, and unemployment hovering near the double digits, we simply don't have the necessary ingredients for a sustainable recovery in housing," said Mike Larson, real estate and interest rate analyst at Weiss Research.

Builders have sharply scaled back construction in the face of a severe housing market bust. The number of new homes up for sale in May fell to 213,000, the lowest level in nearly 40 years. And, at the current sales rate, it would take 8.5 months to exhaust that supply. In a healthy economy, new home inventory takes about six months to exhaust.

Five years ago, at the peak of the housing boom, there were about 460,000 unsold homes on the market. And because of the frenzied pace of sales, it would have taken a little more than four months to exhaust that supply.

You can spin the decline as good news that these builders are cutting back in many parts of the country because the inventory isn't moving, but it means that all the industries that rely on sales downstream (like manufacturers of durable goods - refrigerators, washing machines, dryers, ranges, etc.) are going to see lower sales because they too aren't seeing sales rebound.

Yet, these cuts mean continued job losses - and more importantly states are seeing revenues coming in lower than forecast.

Even in states where budgets were slashed to help get the situation under control, there's worry that it will not be enough for next year. Experts are looking at New Jersey's budget situation and see serious concern over next year. That's even as the state budget was cut and Gov. Christie and state legislatures agreed on a new property tax cap system.

New Jersey was more proactive than most in this regard. Some states, like New York continue limping along with increases in state spending despite no evidence to suggest that revenues will increase. That only increases the likelihood of deficits and the need to balance the budget with still more borrowing that is simply unsustainable.

"As (federal) stimulus winds down and economic growth slows … we expect additional gaps to emerge and more cuts to likely be in the works," the report said. "The Garden State could have a long and arduous road to economic sustainability."

The disappearance of the federal aid will make next year more difficult for New Jersey, though rising revenues might help offset the pain, said Charles Steindel, an economist with the Federal Reserve Bank of New York.

"Obviously if the revenues don’t grow rapidly and you’re losing federal aid, this means you have problems, and these problems could be in the billions," said Steindel, who stressed he couldn’t predict the size of the deficit.

With states across the nation dealing with deficits, Drewniak acknowledged the governor did not erase years of budget problems in his first six months.

If you think the situation in New Jersey is bad - consider that New York, California, Illinois, and others are in worse shape. The stimulus package, which consisted largely of transfer payments is not likely to be repeated (because the federal government itself is spending money it doesn't have and the delayed pain resulting from a day of reckoning over exorbitant spending is coming. It arrived in New Jersey - where the state is finally taking some steps to deal with the budget situation, but other states remain blissfully ignorant of the situation and would rather continue doing business as they always have - with disastrous results.