- Joined
- Oct 17, 2007
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- New York
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- Centrist
In the wake of the housing bubble that began imploding during the summer of 2006 and led to the onset of an intensifying credit drought beginning a year later, the U.S. economy was buffeted by increasing headwinds. Earlier this year, it appeared to have skirted a recession, but the National Bureau of Economic Research (NBER) has yet to make the final call on that. A fiscal stimulus package briefly revived economic growth during the Second Quarter of this year with real GDP expanding at an annualized 2.8% rate. However, a combination of elevated inflation and steep energy prices undermined economic growth. At the same time, the growing financial contagion spread into the broader financial sector and put the U.S. on the brink of a systemic financial crisis with a near panic taking place on September 17-18, 2008. Following the near panic, money markets grew even more dysfunctional and credit continued to dry up.
On September 24, Federal Reserve Chairman, Ben Bernanke told the Joint Economic Committee, “Real economic activity in the second quarter appears to have been surprisingly resilient, but, more recently, economic activity appears to have decelerated broadly.” In the weeks ahead, one can likely expect to see increasing expectations among economists for a recession. According to research by the International Monetary Fund (IMF), the consensus economic forecast typically lags turns in the business cycle but later forecasters make adjustments to “catch up with the reality of a recession.” Nevertheless, despite those adjustments, they “still underestimate the actual decline” that winds up taking place. Therefore, should a recession occur, that recession could wind up worse than what is envisioned in forthcoming consensus forecasts by economists.
That a recession is imminent, if not in already in its early stages is well-supported by the recent economic data. The latest macroeconomic data suggests that the U.S. economy is now deteriorating fairly significantly and rapidly. Even as the federal government is likely to enact legislation that would grant the Treasury authority to purchase up to $700 billion in troubled assets from the financial sector so as to revive credit market functioning, it is likely too late to prevent the development of a full-blown recession. The die has been cast and there will be a lag between Treasury action and credit market recovery. The confluence of recent data suggests that U.S. GDP growth in Q3 will be sharply lower than that of Q2 (2.8% annualized rate).
• U.S. petroleum consumption dropped to 19.021 million barrels per day for the four-week period ended September 26. That was the lowest figure since the four week period ended October 5, 2001 (toward the end of a recession) when the figure came to 18.985 million barrels per day. To put things into context, the economy in 2001 Q3 was 18.5% smaller than the economy today in real terms and 40.7% smaller in nominal terms. Since the four-week period ended August 29, average daily U.S. petroleum consumption has dropped 6.3%. Petroleum consumption is a broad measure of economic activity and the recent trends suggest a rapid weakening of the economy.
• The Institute for Supply Management’s manufacturing index fell from 49.9 in August to 43.5 in September. That was a 6.4% drop, which very closely mirrors the recent drop in petroleum consumption. The 43.5 figure was the lowest since October 2001. In addition, the prices index fell to its lowest level in 21 months, which suggested a rapid weakening of inflationary pressures, as often happens during economic contractions.
• August factory orders fell 4.0% vs. the 2.5%-3.0% decline forecast by most economists. That was the sharpest decline in two years. Worse, it occurred before the onset of what appeared to have been an accelerating decline in U.S. economic activity in September.
• This morning’s weekly jobless claims report showed jobless claims climbed to 497,000. That is the worst reading since September 29, 2001, when new jobless claims stood at 517,000. Rising unemployment will place added pressure on personal consumption expenditures (PCE). Real PCE presently account for approximately 71% of GDP. Real PCE recorded a negligible increase under 0.1% in August. A combination of recent petroleum consumption data, manufacturing activity, and the dissipating impact of the fiscal stimulus package suggest that real PCE likely contracted in September.
In sum, a recession appears imminent or in its early stages of unfolding. Given the recent data and continuing credit market difficulties, the likely remaining questions are:
• Did a recession commence in Q3 or Q4?
• How deep will the recession be?
• How long will the recession last?
Historic experience concerning credit contraction-driven recessions following the implosion of asset bubbles suggests something closer to the 1980 or 1981-82 recessions (2%-3% decline in real GDP from peak to trough) than the 1990-91 or 2001 recessions (0.5%-1.5% decline in real GDP from peak to trough) is more likely. An even worse outcome is possible should the credit crisis worsen further and/or a federal stabilization plan in the absence of efforts to reduce government spending in other areas lead to a slowdown in capital inflows into the U.S. In terms of duration, a recession of 12-18 months could be somewhat more likely than the 6-12 month variety the U.S. has experienced since 1990.
On September 24, Federal Reserve Chairman, Ben Bernanke told the Joint Economic Committee, “Real economic activity in the second quarter appears to have been surprisingly resilient, but, more recently, economic activity appears to have decelerated broadly.” In the weeks ahead, one can likely expect to see increasing expectations among economists for a recession. According to research by the International Monetary Fund (IMF), the consensus economic forecast typically lags turns in the business cycle but later forecasters make adjustments to “catch up with the reality of a recession.” Nevertheless, despite those adjustments, they “still underestimate the actual decline” that winds up taking place. Therefore, should a recession occur, that recession could wind up worse than what is envisioned in forthcoming consensus forecasts by economists.
That a recession is imminent, if not in already in its early stages is well-supported by the recent economic data. The latest macroeconomic data suggests that the U.S. economy is now deteriorating fairly significantly and rapidly. Even as the federal government is likely to enact legislation that would grant the Treasury authority to purchase up to $700 billion in troubled assets from the financial sector so as to revive credit market functioning, it is likely too late to prevent the development of a full-blown recession. The die has been cast and there will be a lag between Treasury action and credit market recovery. The confluence of recent data suggests that U.S. GDP growth in Q3 will be sharply lower than that of Q2 (2.8% annualized rate).
• U.S. petroleum consumption dropped to 19.021 million barrels per day for the four-week period ended September 26. That was the lowest figure since the four week period ended October 5, 2001 (toward the end of a recession) when the figure came to 18.985 million barrels per day. To put things into context, the economy in 2001 Q3 was 18.5% smaller than the economy today in real terms and 40.7% smaller in nominal terms. Since the four-week period ended August 29, average daily U.S. petroleum consumption has dropped 6.3%. Petroleum consumption is a broad measure of economic activity and the recent trends suggest a rapid weakening of the economy.
• The Institute for Supply Management’s manufacturing index fell from 49.9 in August to 43.5 in September. That was a 6.4% drop, which very closely mirrors the recent drop in petroleum consumption. The 43.5 figure was the lowest since October 2001. In addition, the prices index fell to its lowest level in 21 months, which suggested a rapid weakening of inflationary pressures, as often happens during economic contractions.
• August factory orders fell 4.0% vs. the 2.5%-3.0% decline forecast by most economists. That was the sharpest decline in two years. Worse, it occurred before the onset of what appeared to have been an accelerating decline in U.S. economic activity in September.
• This morning’s weekly jobless claims report showed jobless claims climbed to 497,000. That is the worst reading since September 29, 2001, when new jobless claims stood at 517,000. Rising unemployment will place added pressure on personal consumption expenditures (PCE). Real PCE presently account for approximately 71% of GDP. Real PCE recorded a negligible increase under 0.1% in August. A combination of recent petroleum consumption data, manufacturing activity, and the dissipating impact of the fiscal stimulus package suggest that real PCE likely contracted in September.
In sum, a recession appears imminent or in its early stages of unfolding. Given the recent data and continuing credit market difficulties, the likely remaining questions are:
• Did a recession commence in Q3 or Q4?
• How deep will the recession be?
• How long will the recession last?
Historic experience concerning credit contraction-driven recessions following the implosion of asset bubbles suggests something closer to the 1980 or 1981-82 recessions (2%-3% decline in real GDP from peak to trough) than the 1990-91 or 2001 recessions (0.5%-1.5% decline in real GDP from peak to trough) is more likely. An even worse outcome is possible should the credit crisis worsen further and/or a federal stabilization plan in the absence of efforts to reduce government spending in other areas lead to a slowdown in capital inflows into the U.S. In terms of duration, a recession of 12-18 months could be somewhat more likely than the 6-12 month variety the U.S. has experienced since 1990.
