Goldilocks or Recession? Goldilocks!
Thursday Night Lineup
DEBATE: GOLDILOCKS OR RECESSION?...Mark Perry, University of Michigan economics professor and Carpe Diem blogger will join the market panel in a look at what's ahead for the economy.
Thanks to an invitation from Larry Kudlow, I appeared on a segment of "Kudlow and Company" last night, featuring a discussion based on this recent CD post, and this CD post, with a nice presentation of the graphs from those posts.
My position is that we aren't headed for a recession for the following reasons:
1. We won't have a recession unless and until the Business Cycle Dating Committee of the National Bureau of Economic Research says so, and that committee doesn't look at the value of the dollar, oil prices, financial sector troubles, or even the stock market, when it determines that a recession has started. It looks at industrial production, employment levels, real personal income, and real manufacturing and trade sales. In the discussions about recession, too much attention is paid to the subprime crisis, the falling dollar, the stock market and oil prices, and not enough attention is paid to the 4 variables that really matter - and none of them show any weakness, see this CD post and this CD post.
2. If the serious S&L crisis in the 1980s, when almost 1,500 banks failed (about 1 out of every 10), didn't cause a recession, then a subprime mortgage crisis by itself won't cause a recession. The banking sector has never been more stable than it is today - not a single bank failed in 2005 or 2006 (out of about 8,000), and only 3 have failed in 2007. That has to be a record unmatched at any other time in U.S. history.
3. Consider that in 1987, at the peak of the S&L crisis, there were 184 bank failures (3.5 every week) AND the stock market crash in October, with a 22.6% decline in one day (October 19) and a 31% decline in a week. That would be equivalent today to a 3,000 -4,000 point drop in the DJIA. Further, the unemployment rate in 1987 was 6.2% (vs. 4.7% today) and the 30-year mortgage rate was 11.26% (vs. 6% today). If the economy of 1987 was able to survive a major banking crisis and Black Monday without going into recession, today's much stronger and more stable economy will continue its expansion. See this CD post.
4. The significant increase in derivatives trading and risk-management instruments has helped insulate the U.S. economy from recent credit shocks, oil shocks and a falling dollar. See this CD post.
5. The U.S. economy is much more energy-efficient today than ever before - energy consumption per dollar of real GDP today is about half of the level in 1980 - and can absorb high oil prices better than ever before. See this post.
6. Oil prices will probably start falling by next year - futures trading indicates a price in the low 80s by 2009. And see yesterday's WSJ article "Why $100 Oil Can't Float": "The fundamentals give a clear message: The price is too high to be sustainable." Expect falling prices.
7. The weak dollar has significant benefits for the U.S. economy: Surging, record-high exports, adding about a percentage point to real GDP, see today's trade report, showing a 13.6% increase in exports since last year.