Well it's time to return to our regular programming having spent much of the last week or so focused on the minor distractions of collapse in the credit markets and the resultant collapse of Western Civilization as well know it. Despite widespread acknowledgement of the reality of that near-death experience and the Fed's miracle of financial engineering the other 90% of the the marketplace and economic news didn't get the attention it deserves. In the excerpts postings you'll find stories on GDP and its' near stall as well as all the other data (Home prices and sales, Consumer confidence and spending and factory orders among others). All of which was NOT, we repeat NOT, good. Meanwhile credit conditions continue to tighten and the economic contagion appears to keep spreading to Europe and Japan. In particular we'll call your attention to the excerpt on Housing where the headline and talking head coverage was almost malfeasantly misleading. We analyzed it earlier this week in a dedidcated post but you'll find more below, especially CalculatedRisk's comments on a recent John Mauldin newsletter that details how no bottom is in sight in Housing. This and similar deeper understandings about the business cycle, etc. should stand you in good stead - a) we're early days as yet in the downturn, b) none of this appears to be generally accepted and c) is not therefore reflected in stock prices. Just to pull the pieces all together here's the pieces we've put up in a sort of logical order.
- The Great Circle: Where We're At in the Business Cyle Reviewing the nature and structure of business cycles and the specific data for this one.
- More Dialog: Facing Harsher Realities in Housing Deep dive on a comprehensive review of the situation in Housing which argues that we're at best approx. 1/4 of the way thru the total adjustment process at best. Depending on how you frame it with further sales and price declines, more huge waves of foreclosures and an extended bottoming process before price declines stop.
- Economic Dashboard: Current High-Frequency Indicators A comprehensive summary and analysis of our complete suite of monthly high-frequency indicators. Two in particular were "interesting" - the indicator of future consumption is combined growth in real wages and employment which has turned negaive. And YOY growth in the real money base continues to shrink because of the credit crisis.
So as you skim over the excerpts we'd suggest reviewing those three posts which provide as complete a framework and simple a toolkit for do-it-yourself economic analysis in easy-to-see graphic form as we can manage. And if you've got any questions about our hyperbolic summary of the troubles in the credit markets may we suggest reviewing the following:
Now in the spirit of "seeing things as they are" we'll ask the semi-rhetorical question - would one of the most conservative and ideological administrations in post-war history be proposing the most sweeping, deep, structural and systematic regulatory reform if the situation wasn't forcing the deepest re-thinking of the financial systems. If you continue to doubt then our first post this morning was particuarly to your address:
Economy
Economy Nearly Stalled in 4th Quarter The economy nearly sputtered out in the final quarter of last year and is probably faring even worse now amid the continuing housing, credit and financial crises. Many economists say they believe growth in the current January-to-March quarter will be even weaker than the 0.6 percent figure of the previous quarter. A growing number also say the economy may actually be shrinking now. Under one rough rule, the economy needs to contract for six straight months to be considered in a recession. The government will release its estimate for first-quarter GDP in late April. Consumers, whose spending is indispensable to the economy's vitality, boosted buying at a 2.3 percent pace in the fourth quarter. That was better than the 1.9 percent growth rate previously estimated but still marked a slowing from the third quarter's 2.8 percent pace. Businesses -- nervous about customers' waning appetite to buy given all the problems in the economy -- cut back sharply on their inventories of unsold goods. That shaved 1.79 percentage points off fourth-quarter GDP, the most in more than two years. Spending by businesses on equipment and software, meanwhile, rose at a pace of 3.1 percent in the final quarter of last year. That was slightly less than previously estimated and marked a slowdown from the prior quarter's 6.2 percent growth rate. Businesses profits also took a hit in the final quarter. A measure linked to the GDP report showed that after-tax profits fell 3.3 percent at the end of last year, after being flat in the prior quarter. There was a bright spot in the mostly gloomy report, however. Sales of U.S. goods and services to other countries grew at a 6.5 percent pace. That was better than the 4.8 percent growth rate previously estimated, although it was down sharply from the prior quarter's blistering 19.1 percent growth rate.
Did Economy Really Escape Fourth Quarter Drop? One tiny nugget of good news in the latest gross domestic product report is that the U.S. economy managed to avoid contracting by eking a 0.6% gain. Or did it? A separate measure of the economy touted by Federal Reserve officials last year — gross domestic income — posted its largest decline, at a 1% annualized rate, since the 2001 recession, according to the same GDP report. GDP is a consumption-based measure, adding up consumer, business and other spending and investment. In contrast, GDI is income-based, adding up things like personal income and corporate profits. GDI is included in quarterly GDP, but not in the first estimate. GDP-based models in Nalewaik’s study pegged odds for the past four recessions at their starting points at 52%, 40%, 45% and, for the 2001 recession, just 23%. GDI-based measures, in contrast, signaled odds of 78%, 44%, 72% and, for 2001, 70%. After all, if GDI is to be believed, the debate may not be whether the U.S. is slipping into recession in 2008, but whether it’s already been in one for months.
· Estimating PCE Growth for Q1 2008 The two month estimate suggests real PCE growth in Q2 will be under 1% - but still positive. Looking at the data, real PCE has been essentially flat for four straight months. Based on various economic reports, I'd expect March to be even weaker. This suggests that real PCE in Q1 will still be positive, but somewhat below the two month estimate of 1%. In Q4, real PCE increased 2.3%, but real GDP only increased 0.6%. With real PCE below 1% in Q1, I'd expect a negative real GDP report for Q1. This is very similar to how the last consumer led recession started in 1990.
· Fisher of Fed Sees US Economy in `Prolonged' Slowdown: Federal Reserve Bank of Dallas President Richard Fisher speaks at a community forum in Waco, Texas, about Federal Reserve monetary policy, the outlook for the U.S. and regional economies and the financial industry. Fisher of Fed Sees U.S. Economy in `Prolonged' Slowdown (vidclip)
· Davidowitz Says Stores Face `Apocalypse' With Consumers: Video March 28 (Bloomberg) -- Howard Davidowitz, chairman of Davidowitz & Associates Inc., talks with Bloomberg's Betty Liu from New York about the outlook for U.S. department stores, the impact of Federal Reserve monetary policy and tax rebates on consumer spending and the economy. J.C. Penney Co., the third-largest U.S. department-store chain, plunged the most in three weeks in New York trading after the retailer cut its quarterly sales and profit forecasts on slower consumer spending. Bloomberg's Julie Hyman also speaks. Vidclip
· Jan Hatzius of Goldman Sees `Consumer Recession' in U.S.: Audio March 28 (Bloomberg) -- Jan Hatzius, chief U.S. economist at Goldman Sachs & Co., talks with Bloomberg's Karen Moskow from New York about the outlook for the U.S. economy and consumer spending, Federal Reserve monetary policy and the financial industry. Vidclip
Home prices may not rebound till 2010 U.S. home prices are unlikely to recover until at least 2010, one of the nation's top housing economists said Thursday, adding that home building this year is likely to post its worst year in five decades. Speaking to the National Economists Club, Frank Nothaft, the chief economist for government-sponsored mortgage buyer Freddie Mac, painted a grim picture of today's housing market. Through the final three months of 2007, he said, sales of existing homes were down 29 percent from the same period two years earlier. Forty-six states had falling home prices in the fourth quarter, and prices nationwide were down 9.3 percent. In the Pacific region, which saw the steepest drop, prices fell an average of 17.2 percent, followed by mountain states, whose home prices fell an average of 12.9 percent. "I don't think we're going to see any improvement in the national house-price matrix until 2010," said Nothaft, a respected government economist who's followed the national housing market for more than two decades. He projected a 16 percent drop in mortgage originations this year, for new home loans and refinancing. He expects foreclosures, which rose by about 1.5 million in 2007, to increase even more this year. If there was any good news in the stark snapshot of the housing crisis, it came from a bit of really bad news. The Freddie Mac economist thinks that new single-family home starts this year will be the lowest in 50 years, back when Dwight D. Eisenhower was president. What's good about that? The plunge in new-home construction means that fewer homes will come onto the market in an environment with few buyers.
Mauldin: Where is the Bottom in Housing? John Mauldin writes: Where is the Bottom in Housing? (hat tips: many!) Mauldin provides a good overview of the housing market. His analysis is based on information from John Burns Real Estate Consulting and T2 Partners. Both Burns and T2 have made their presentations public. There is all kinds of charts and information available, but I'll comment on a couple of points. First, on sales, I think Burns is too optimistic for 2008 and too pessimistic for 2009. Right now we are on pace for just under 5 million existing home sales in 2008, and 600 thousand new home sales (and sales will probably fall further). A forecast for 6 million total sales in 2008 is probably too high. Similarly a forecast of 4 million total sales in 2009 is probably too pessimistic. The reason Burns is probably too pessimistic on total sales in 2009 is because prices will likely decline further than Burns is forecasting (helping sales). Burns is only forecasting a 16% nationwide price decline from peak to trough. Based on the Case-Shiller National index, house prices are already off 10.1% as of the end of 2007 - with much more declines likely in 2008.
Small Firms Find Credit Is Tightening The Small Business Administration has not said publicly that it is worried about a credit squeeze but signs point to a decline in business loans through its main program. Lenders’ credit woes are starting to take a toll on small businesses. Though it may be too early to determine how hard small businesses will be hit, some national surveys show that the businesses are encountering more restrictions at lending institutions, making it harder to get the credit necessary to expand or, in some cases, stay afloat. Last month, a Federal Reserve report found that a third of banks in the United States had tightened their lending standards for small-business loans. Soundings of business owners themselves are mixed because credit availability is not uniform across the country. More than half of those responding to the National Small Business Association’s online poll two weeks ago replied “yes” when asked whether their business had “been impacted by the credit crunch in recent months.” But another group, the National Federation of Independent Business, said that more than a third of the members responding to its February survey said they were borrowing normally, and only 4 percent said there was a problem getting a loan. Euro Money-Market Rates Increase to Highest This Year as Banks Hoard Cash
Fed Auctions Billions in Securities Big investment houses took the Federal Reserve up on its first-time offer Thursday to let them borrow Treasury securities, the latest effort to ease a painful credit crisis. The Federal Reserve auctioned $75 billion worth of Treasury securities. Bidders paid an interest rate of 0.330 percent. Demand was high. The Fed received bids of $86.1 billion worth of the securities. It was the first time the Fed conducted an auction of this kind. The next one will be held April 3. The program, dubbed the Term Securities Lending Facility, was announced earlier this month by the Fed and is intended as a booster shot for financial institutions and for the troubled mortgage market. The Fed said it would make as much as $200 billion worth of Treasuries available through weekly auctions that started Thursday. Big Wall Street investment firms could borrow much-in-demand Treasury securities from the Fed and put up more risky investments, including certain shunned mortgage-backed securities as collateral for the 28-day loans.
- Europe's Central Banks Inject More Funds The News: Major European central banks pumped funds into money markets. The Background: Europe's economy is showing resilience, but authorities sought to ease end-of-quarter strains. The Bottom Line: Rates at which banks lend to each other have nudged higher, toward levels last seen last year at the height of the credit crunch.
Inflation steals the limelight China's already battered stock markets could tumble further against a darkening economic backdrop ahead of August's Olympics Games, as the U.S. recession begins to take its toll and China further tightens its monetary policies to combat runaway inflation. After quintupling in just two years, China's benchmark Shanghai Composite Index has plunged 40% since peaking at an all-time high in October, confounding the expectations of investors who expected the remarkable run to continue through the Games. Troubles in the domestic economy and as well as the international credit crisis weighed on markets, and those troubles are not likely to disappear even after the Olympics, analysts said. While the ongoing unrest in Tibet is unlikely to have much of an impact on the Olympics, the stock market or the economy at large, turmoil never sends a comforting welcome signal to investors, especially when a market is already under pressure.
Japan's Core Inflation Rises, Jobless Rate Worsens -- Japan's inflation rate climbed at its fastest rate in a decade in February and the jobless rate worsened to 3.9% under data released Friday, raising concerns about the health of the world's second-largest economy. The core consumer price index, which excludes volatile fresh food prices, rose 1.0% in February from a year ago -- the fastest reading since March 1998, the Ministry of Internal Affairs and Communications said. Japan has long struggled with deflation, or falling prices, but Friday's data, which also marked the fifth straight month of gains, show that higher prices for imported oil and commodities are adding pressure on living costs. Separate data released by the ministry said household spending was flat in February from a year earlier, an indication that the economy was getting less support from domestic demand, while exports that have long driven the nation's growth are also losing steam.
IMF Will Cut Euro-Area Growth Forecast for 2008 Below 1.4%, De Tijd Says