Goldilocks or Recession? Goldilocks!
Thursday Night LineupDEBATE: 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.
Carpe Diem!
7 Comments:
As long as we're talking recession odds, I just updated Political Calculations' recession probability track with the one-quarter averages of the data through yesterday. The current odds of the NBER finding the U.S. economy to be in recession in the next 12 months is 19.1%.
Jim Hamilton's recession probability index, which is perhaps the best early indicator of whether the NBER will find that the U.S. is actually in recession as of one quarter ago, is also down (9.5% after peaking at 26.2% in 2007-Q1).
Nice trade numbers! Looking at U.S.-China trade, it appears that U.S. exports to China have now fully doubled in value twice since January 2001, and since July 2003, have grown at a rate faster than China's export rate to the U.S.
I disagree. You are totally smoking crack if you think the banking sector is as healthy today as it's ever been. Clearly you do not see the carnage in the ABX and CMBX indices. Clearly you do not see CFC and WM gasping for credit. Clearly you do not see the big brokerage houses mismarking the left side of their balance sheets.
Here's a fact, Jack: The financial sector is DELEVERAGING. Banks, brokers, pension funds, and hedge funds are SELLING CDOs and mortgage assets, not to mention other junk paper. They do not want that paper on their sheets, and as that paper gradually finds a home somewhere else at lower prices, you will continue to see more and more assets selling for less and less BECAUSE the supply of credit to institutions is going DOWN DOWN DOWN. There are fewer dollars out there to borrow and buy risk assets. That is a fact.
Now, if you think the economy over the last five years was driven by anything other than a booming real estate market and the attendant gains to the financial sector via borrowing cheaply to lend dearly, then you are sorely mistaken. The economy from 9/11 through the summer of this year was build on the misguided belief that home values would continue to appreciate, hence enabling the lenders to continue to lend and the borrowers to continue to borrow.
THAT IS OVER. THAT IS A FACT.
You better believe that there is a recession going on now. California sales tax receitps are down 10% year over year. The same goes for Florida and Georgia. How do you think they look in MI?
The only REASON we do not have the NEBR telling us there's a recession IN THEIR OPINION is the fact that the CPI, GDP, GDP DEFLATOR, and JOBLESS numbers are being managed by the US GOVERNMENT. They are not hiding behind anything, they are managing the numbers, changing the methodology of what, exactly, counts in the jobless numbers. You might read the word of John Williams at ShadowStats.com. You might see that comparing the jobless data from 1987 to today is like comparing Barry bonds old and new. Barry is a cheat just like the govvy is cheating. And if you think I wear a tin foil hat, fine, I really don't care. I've done the work, I see the real numbers. And the fact is that the economy is flat on its a$$ right now and it is only going to get much worse.
Good luck to you.
P.S. And, if the economy is indeed doing so well as you believe, why is Bernanke jamming rates down? I'll tell you why: He knows the fins are in a corner with no way out, he knows that 25% of all homebuyers over the last three years are likely to default. Oh yeah, more defaults in the mortgage space will continue to pressure the banks that made the ATROCIOUS loans to begin with. This is going to take a few years to play out. Dude, I'm telling you it is a horrible mess. Look around and watch the dollar get smacked down every day as the market forces Bernanke to stop raising rates. As gold continues its march up with oil in tow. Man, I am telling you that Mr. Market is voting with its feet. Mr. Market says: "Dude, you better wake up and take a look at WM's and CFC's and C's balance sheet, they are a horror story.
Does the definition of a recession by the Business Cycle Dating Committee of the National Bureau of Economic Research mean anything to a middle class family anymore?
Industrial production might rise but few will actually benefit from an increase in purchasing power as the dollar falls and the cost of imported goods (what isn’t imported anymore) rises.
Employment levels may not decline but purchasing power is declining with the fall of the dollar and the rise in price of imported goods.
Real personal income might rise or be stagnant but but purchasing power is declining with the fall of the dollar and the rise in price of imported goods.
Real manufacturing and trade sales should rise as the dollar falls but but purchasing power is declining with the fall of the dollar and the rise in price of imported goods.
All that we need to put the icing on the cake now is for China to begin dumping dollars in favor of the Euro and/or the Fed to raise interest rates in an attempt to disuade major players from doing the same. If that happens then the S&L crisis would look like a pleasant Sunday afternoon stroll in the park.
Do I care what the the Business Cycle Dating Committee of the National Bureau of Economic Research says regarding the quality of my life and my fellow Americans? Not in the least.
I look to the mall parking lots and see fewer cars, I notice rush hour is easier to navigate and traffic later at night is much, much lighter.
I see real estate for sale signs in such great number that my wife and I have a game that we play when driving—we always try to have at least one real estate for sale sign in view. Sadly it is nearly always possible to have a real estate for sale sign in view.
We haven’t seen “bank” failures like we saw with the S&L crisis but we have seen and are seeing lender failures and plenty of that good old staple of “Lenders Gone Wild” called fraud.
Mortgage Lender Implode-O-Meter
YoY retail sales were the worst in 35 years (data released this week; I've got a chart from ISI I'd love to send to you)... and YoY M3 grows at 15%, the most since the Fed shut the discount window on gold in 1971.
Right, keep telling yourself there is no inflation, that there's growth instead. Here's a news flash: inflation is running at about 8% annually, GDP is about -3% now.
Mark, I saw the program. I think what we're about to witness is the failure of industrial capitalism. In essence you get what you measure and the statistics by our federal government have been so skewed over the last 6 years in order to favor an administration that had to create a lie to go to war. Do you think they are above manipulating a few measly statistics ? That is child's play for this administration. Let's see what happens in 2008 and especially 2009 after they are gone.
Anonymous said...
....an administration that had to create a lie to go to war. Do you think they are above manipulating a few measly statistics?
Article VI, Paragraph II of the Constitution + The U.N. Charter = an illegal war according to U.S. law?
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