donsutherland1

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.

oldreliable67

The Philadelphia Fed Survey of Professional Forecasters had this to say back in early August:

The risk of 4Q GDP being negative was revised upward from 30% to 47%.

As early as August, forecasts of economic activity for the 4Q '08 and 1Q '09 were being lowered. Given the data (including that which you cited), it seems likely that forecasts will be revised downward even more.

Tomorrow's employment data should make for interesting reading and if sufficiently traumatic, may well set the stage for another round of rate cuts, perhaps even before the next scheduled FOMC meeting.

Goobieman

Having listened to those on the BDS-left for the last ~8 years, I have to ask:
When -weren't- we in a recession unber Bush?

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donsutherland1

With respect to the very likely onset of a recession, Bloomberg.com reported this morning following the worst decline in monthly payrolls in 5 1/2 years:

U.S. payrolls plunged in September, signaling the economy may be heading for its worst recession in at least a quarter century as the 13-month-old credit crisis on Wall Street finally hits home on Main Street.

Employers cut the most jobs in five years in September as cash-squeezed companies pulled back in an effort to bolster pinched profits. In its last employment report before Americans choose their next president, the Labor Department said the unemployment rate was 6.1 percent, a climb of 1.4 percentage points from a year before.

"If credit markets remain dysfunctional, the current recession could turn out to be as severe as any in the postwar period," said former Federal Reserve governor Lyle Gramley, now senior economic adviser at the Stanford Group Co. in Washington.

donc

Here’s my contribution to the downer thread. Let us hope its only a recession/corecction, not the D word.

< 159,000 Jobs Lost in September, the Worst Month in Five Years
By PETER S. GOODMAN
Published: October 3, 2008
The American economy lost 159,000 jobs in September, the worst month of retrenchment in five years, the government reported on Friday, amplifying fears that an already painful downturn had entered a more severe stage that could persist well into next year.>
Employment has diminished for nine consecutive months, eliminating 760,000 jobs, according to the Labor Department’s report. And that does not count the traumatic events of recent weeks, as a string of Wall Street institutions collapsed, prompting the $700 billion emergency rescue package approved by Congress on Friday.>
http://www.nytimes.com/2008/10/04/bu...my/04jobs.html

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quatrotritikali

Blah. We are already in a recession, heading towards a depression. The latest federal bail-out was so full of pork, which the taxpayers will eventually pay for, that the bailout is not that good of a thing.

The stock market is still falling, the housing crisis is worsening, banks are continuing to fail, gas shortages are now appearing in parts of the U.S. Southeast, 159,000 jobs were lost in September, for a total of approx. 750,000 for the year thus far.

What more needs to happen? What more will happen?

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New World Order

America is in a recession...it needs to prepare now for the onslaught of a depression. The signs are evident over the last several years and now there is an additional 700 Billion for a bailout...total of 10 trillion USD! The debt on every American is astronomical and is a tough nut to crack to pay down even if the economy is booming. America could do a 2nd round of FDR chicanery but should not be recommended as very few of his programs were ever reversed after prosperty but often even increased! An example is the antiquated socialist style Social Security System. Presently the hard earned dollars you put in are not set aside strictly for yourself or your next of kin and are instead used collectively. Very few American's ever see the total value of the money they have put in, and with interest, even a moderate amount monthly for many would be equated to well over a million dollars at the time of retirement. The examples go on on. The best of FDR's programs were the "make work" projects. At least in this case those receiving benefits from the State have the ability to repay the taxpayers kind enough to put out a helping hand.

Beyond that the very best is to slash and burn. Not 10 or 20% but over 50% of the money spent on the Government could be done away with along with the programs they support. Taxes should be concurrently reduced. This includes the supposed rich. The fact that being successful is penalized is still striking to me. They get no special privledges, no extra votes, but yet they personally carry a far greater and disproportionate amount of the burden. Taxes should never be on personal income tax anyway but in this case every person under a predefined poverty income should pay no tax with everyone else paying a flat, per head, tax. In this way whether you make 100,000 or 100 million dollars the tax system would be finally fair. On the other hand I would give greater tax advantages to companies that provide work for the needy and handicapped or give preferential treatment to smaller businesses on their awarding of contracts. Completely STOP any more type of foreign aid unless it is tied to economic development plans like China is doing in Africa where direct benefits can be seen. Dramatically reduce money spent on the UN and reduce the armed forces to an elite "Home Guard" posture able to defend any and all parts of the United States. The list goes on and on but there are many ways to do it. The bottom line is that the US government and nation survived and thrived for the first 150 years and somehow people have swallowed the completely false notion developed over the last 50 years that the country will go bankrupt without ever increasing taxes. If you keep adding programs that require additional funds then naturally you have to find the funds. For too long it was simple...the American taxpayer was handed the bill as if it was a right of the government to take it from you rather than a privledge you offered them that could be taken away at a moments notice. That moment is now...take it away!

donsutherland1

I don't believe the U.S. is headed for depression. A fairly significant recession appears likely.

Such a recession would probably entail:

• A contraction in real GDP from peak to trough of 2%-3%.
• A recession that lasts 12-18 months vs. the 8-month recessions since 1990.
• An unemployment rate that peaks in the 8%-10% range.
• A unwinding of perhaps 75% or more of the annual U.S. trade deficit (approximately $60 billion per month in the January-July 2008 timeframe), with the annual trade deficit falling to or below $175 billion. It would not be implausible if the entire trade deficit disappeared by the end of the recession, especially if the recession proved even more severe.

If the U.S. is to experience a depression, two likely triggers would include a collapse of its financial system (reduced risk on account of the financial rescue package) or a currency crisis (should major foreign creditors cease lending or even try to reduce their holdings of U.S. debt), as has occurred in some financial situations following the implosion of major asset bubbles.

I would have preferred a "clean" bill that focused strictly on the financial system (rescue package, FDIC insurance, etc.). The provisions that have little to do with the financial system should have been excluded from the bill. Unfortunately, they were part of the price required to bring about Congressional agreement on the legislation.

SFLRN

This article might also help further clear up the confusion between a recession and a depression.
The difference between a depression and a recession. - By Juliet Lapidos - Slate Magazine (although it should be noted that academic economists do not have a widely agreed upon definition of what constitutes a hard recession, and a depression).

American

I don't hear anyone talking about the CRA. When are they going to repeal the crap legislation that's been slowly killing the housing market for 30 years. I know many around here want to blame deregulation or some other thing, but all indications point to the CRA (especially the 1995 modification).

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