WRFest 11May08(Economy): Jaime Spoke, Anybody Listening ?
Well we've had our apparantly isolated opinion about the economic situation and outlook - that is
we're not in a recession, we are early in the cycle and the real downturn is just beginning. Also that Housing has a long way to go to bottom out, the credit crisis has morphed into a credit crunch and credit restraint will link and feedback with bad loans to accelerate a slowdown. A view shared only by folks...never mind...you've seen our little list. Anyway just consider the feedback loop implied by this chart as loan standards are growing increasingly stringent and put it together with Dimon's comments.
But apparantly it's really....really official now because Dimon of JPM has basically come out and confirmed all that. Actually we're sorta serious - we're just watching the game with our little white chip. He's got a big stack of blue and red and gold ones. Here's what Magister Jaime had to say:
JPMorgan Chase CEO: Recession is Just Beginning JPMorgan Chase & Co.'s chief executive said Monday that while the crisis in the credit markets appears to be three-quarters over, he believes a U.S. recession is just beginning. "Even if the capital markets crisis resolves, it does not mean that this country will not go into a bad recession," said CEO James Dimon, whose bank saw its first-quarter profit fall by half due to the recent collapse of the U.S. mortgage market. "The recession just started." "We don't know if it's going to be mild or severe," he continued, speaking at a conference in New York hosted by Swiss bank UBS AG. "We're thinking there's a third of a chance that it's going to be pretty bad ... closer to the 1982 recession than the very mild recessions we had in 2001 and 1990."
After the break we've got our usual collection of readings excerpts for your skimming pleasure starting with Prof. Feldstein's point that .6% GDP growth was QtQ changes and doesn't mean that in fact in Q1 things didn't slow down rather abruptly and drastically. A point we'd support from our own figures and stats btw. The other recent economic indicator that got people all excited entirely out of reason was a monthly drop in jobless claims. Below you'll find an interesting chart from Northern Trust that pretty well shoots that one in the head. As well as a superb Economist must-read on the state of the Housing market. Aside from being short and very nicely done it's the first major MSM piece we've seen the recognizes what CalculatedRisk and a few others have been telling us for some time - there's a long way to go in the Housing downturn...especially measured by prices.
There's also a section on the World Economy where Europe is beginning to slow appreciably while the credit crisis impact on lending appears to be spreading there as well. The last few readings speak to some major trend issues that are really worth paying attention to. First off the other data that was misread was exports where growth appears to be slowing. But more importantly are two big structural changes that are beginning to emerge. One is the confluence of major problems that need worldwide management to deal with, meaning that all the risks are increasingly on the downside. The other deep changes is the continuing slow erosion of the dollar's status as the default world currency. This won't happen overnight or even in a few years but it is beginning with possible serious consequences for our freedom of manuver in monetary policy.
US Economy
Misleading growth statistics give false comfort Prepositions matter. The recent government report that US gross domestic product increased 0.6 per cent in the first quarter was very misleading. It implied that economic activity was rising in January, February and March. But the increase actually refers to the rise from the average level in the fourth quarter of 2007 to the average level in the first quarter. Monthly data since January indicate that economic activity and GDP have been declining since the start of this year. Private sector payroll employment peaked last November and has fallen five months in a row, shedding more than 300,000 jobs. Industrial production was lower in March than in December and January. Real personal income net of taxes and transfers is also lower than in January. Real retail sales have fallen since the start of the year. Private housing starts are down 13 per cent in just the two months since January and 36 per cent from a year ago. Although the government does not provide monthly estimates of GDP, Macroeconomic Advisers, a private forecaster, constructs them using the same conceptual approach as the government uses for its quarterly estimates. The company estimates real GDP based on the price level of the year 2000. Its most recent estimates (revised figures to be published this month) show that real GDP rose from an annual $11,649bn last October to $11,701bn in December and $11,777bn in January but fell to $11,686bn in March, a decline of about $100bn in two months. Although GDP declined during the first quarter, the average of the monthly figures in the first quarter ($11,711bn) is higher than the average of the monthly figures for the final quarter of 2007 ($11,675bn). The misstatement that the economy expanded in the first quarter creates an inappropriately sanguine view of the months ahead and therefore reduces the prospect of strong action to prevent the deep decline that may otherwise occur. Although the tax rebates now under way may provide some temporary help, the combination of falling real incomes, declining household wealth and a dramatic drop in consumer confidence suggests further falls in consumer spending and GDP. But the most serious risk is that the rapid fall in house prices – down more than 12 per cent in the past year and falling at a 25 per cent rate in the past three months – will raise the number of negative-equity mortgages, leading to widespread defaults and foreclosures.
Why inflation is not the big problem as painful as higher prices are for consumers, there's reason to believe that economic weakness will be the heftier burden for the economy as the year goes on. Even if financial firms avoid another crisis along the lines of the near-meltdowns earlier this year of Bear Stearns and Countrywide some economists say problems in the financial sector are only beginning to be felt on Main Street."The real economy hasn't yet taken the hit," says Northern Trust economist Asha Bangalore. She says she expects unemployment, recently at 5% after falling into the low 4% range in the housing-fueled economic expansion earlier this decade, to rise to 6% before the current slowdown ends. Bangalore points to Monday's release of the Fed's Senior Loan Officer Opinion survey, which showed tightening standards for all sorts of consumer and commercial loans. "The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey," the Fed said. That means less money is going into the economy to feed consumer spending and business expansion. While a 10% drop in house prices sounds severe, it's easy to see how prices could fall even further if a recession leads to rising job losses - a trend that could send defaults even higher. Blum also notes the companies' thin equity cushions - losses of just 5% on the firms' massive mortgage portfolios could wipe out shareholders - and the accounting problems earlier this decade that resulted in regulatory capital-surplus rules that are only now being rolled back. "There are lots of ifs with these companies," he says. "Their track records aren't especially good."
- Surprise jump in consumer borrowing, Americans barely surviving on credit
- Rebates Will Fail to Spark U.S. Economy as Fuel Prices Soar, Survey Shows
Weekly Unemployment Claims: Continuing Claims at 3 Million Here is our monthly look at
unemployment claims. Note that continuing claims has now reached a four-year high of 3 million. This graph shows the weekly claims and the four week moving average of weekly unemployment claims since 1989. The four week moving average has been trending upwards for the last few months, and the level is now solidly above the possible recession level (approximately 350K).
Labor related gauges are at best coincident indicators, and this indicator suggests the economy is in recession. Notice that following the previous two recessions, weekly unemployment claims stayed elevated for a couple of years after the official recession ended - suggesting the weakness in the labor market lingered. The same will probably be true for the current recession (probable).
(!!!) Map of misery The discrepancy between supply and demand suggests that prices could fall a lot more. By historical standards there is a huge glut of unsold homes on the market. The homeowner-vacancy rate—which includes all vacant homes for sale—has soared to a record level of 2.9%, which means that there are some 1.1m “excess” houses for sale compared with the average between 1985 and 2005. Although the inventory of new homes is falling as builders have slashed their production, the supply of homes for sale is being pushed up by foreclosures even as demand from new homeowners remains weak. By most measures, prices are still above the levels implied by the fundamentals. Using a model that ties house prices to disposable incomes and long-term interest rates, analysts at Goldman Sachs reckon that the correction in national house prices is only halfway through. They expect an 18-20% correction overall, or another 11-13% decline from today's levels. But their models suggest that six states—Arizona, Florida, Virginia, Maryland, California and New Jersey, could see further price declines of 25% or more. Given the typical pace of rental growth, Mr Feroli reckons house prices (as measured by the Case-Shiller index) need to fall by 10-15% over the next year and a half for the rent/price yield to return to its historical average. Again, that suggests the national housing bust is only halfway through. And, given the scale of excess supply, house prices—particularly in hard hit areas—are likely to overshoot.
FedEx Lowers Fourth-Quarter Profit Forecast Because of Surging Fuel Costs FedEx Corp., the second-largest U.S. package-shipping company, said fourth-quarter profit will miss its forecast after surging fuel prices raised costs by at least $100 million more than estimated. Earnings will be $1.45 to $1.50 a share in the quarter ending May 31, compared with its previous target of $1.60 to $1.80, FedEx said in a statement. The shares fell 3.3 percent after the Memphis, Tennessee-based company said the slower U.S. economy is curbing express and freight shipments. Yesterday's forecast marked the second time FedEx pared its outlook this fiscal year under the strain of the rising price of oil, which set records each day this week, and a possible U.S. recession. United Parcel Service Inc., the largest U.S. shipper, last month lowered its forecast as well.
World Economy
European Retail Sales Decline by Record as Faster Inflation Curbs Spending European retail sales declined 1.6 percent in March, the most since at least 1995 and twice as much as economists forecast, as soaring fuel and food costs sapped consumer spending. The drop in euro-area retail sales from the year-earlier month is the largest since the data series began more than a decade ago, the European Union's statistics office in Luxembourg said today. From the prior month, sales declined 0.4 percent. Economists had forecast a 0.7 percent annual decline and a gain of 0.2 percent from the previous month, according to Bloomberg News surveys. A doubling of crude-oil prices in the past 12 months and soaring prices for food such as wheat and rice have undermined consumer sentiment across the 15 nations that use the euro. The European Central Bank, which meets tomorrow to decide on interest rates, has refused to follow its counterparts in the U.S. and the U.K. in lowering borrowing costs after inflation surged since August, reaching a 16-year high of 3.6 percent in March.
- U.K. Factory Production Unexpectedly Drops as Economic Slowdown Spreads
- German March Factory Orders Unexpectedly Decline for Fourth Month in a Row
European Corporate-Loan Demand Begins to Wane A new European Central Bank survey of bank lending in the euro currency zone suggests the global financial-market turmoil that started last summer is now taking a direct toll on corporate Europe. Until now, strong corporate investment and hiring in the euro zone -- often by exporters still selling strongly into emerging markets -- has propped up the region's economy, even as housing markets and consumer confidence have soured. That period, however, now appears to be ending. Friday's ECB survey of lenders in the 15-nation euro zone showed that European banks are tightening lending standards while demand for loans from companies is slowing sharply, a combination that suggests the region's economic slowdown is broadening, analysts say.
Be careful -- real export growth looks to have slowed Unless your family is in the wheat or beans business (wheat and soybeans exports have more than doubled when q1 08 is compared to q1 07; total food and feed exports are up 50% y/y), there actually wasn’t a lot to like in this month’s trade release. Yes, the headline deficit fell relative to February, but February looks to have been a blip. The rolling 3m deficit has been stable at around $59.5b since December. And much of the fall in the deficit came from a big fall in the volume of imported petroleum. Petrol imports (in volume terms) were running ahead of last year’s pace in January and February. The real problem though was on the export side. Export growth looks to be slowing. The headline nominal growth numbers look good. Y/y non-petrol goods exports are up by a healthy 14.8% -- far more than the 3.3% growth in nominal non-petroleum imports. But if the rise in agricultural exports and exports of industrial supplies (petrol, chemicals, metals) is stripped out, export growth was only up 5.2% 8.8% in nominal terms (oops; my bad). Slower growth among those exports whose price hasn't obviously increased is a warning sign. The data bounces around a lot, but it certainly seems that the pace of growth in real US goods exports is slowing. March real goods exports fell back below their level last June (see Exhibit 10). The usually reliable FT missed this part of the story, opting to highlight ongoing growth in nominal exports ("second-highest monthly" total in history despite the down tick from February) rather than the not-so-strong real growth. Dollar depreciation helps, but a slowing world economy hurts. Countries that are spending more on oil may have a bit less to spend on other goods. Plus, in some sectors the US may be hitting capacity constraints. Boeing is a case in point: it needs to get its 787 assembly line sorted out.
A turning point in managing the world’s economy In all, growth of the world economy is forecast to slow considerably, from 4.9 per cent last year to 3.7 per cent in 2008 (measured at purchasing power parity exchange rates). In terms of growth at market exchange rates the slowdown is more significant, down from 3.7 per cent in 2007 to 2.6 per cent. Even so, global growth would remain well above levels in 2001 and 2002 (see chart). This, then, would be a case of “large earthquakes; not too many hurt”. Yet these forecasts coincide with two huge events: the financial crisis and the commodity price shock. The first is described by the WEO as “the largest financial shock since the Great Depression”. The second is the result either of a gathering inflationary storm or of reaching limits to the rate of growth (or, more plausibly, of both). Not surprisingly, the WEO concludes that risks are tilted to the downside. So many can be listed: worsening financial conditions; inflation risks; further adverse shocks in the oil market; and disorderly unwinding of global payments “imbalances”, particularly if investors decide that the Federal Reserve has abandoned its duty to conserve the purchasing power of the dollar. What has brought us to this point has at least five components: the accelerated growth of emerging economies, especially China; the emergence of a huge surplus of savings over investment in significant emerging economies, particularly China and the oil exporters; a long period of low inflation and relatively stable economic activity in high-income countries; financial liberalisation and innovation; and accommodative monetary policies. Emerging economies have been the engines of growth over the past five years: China accounted for a quarter; Brazil, India and Russia for almost another quarter; and all emerging and developing countries together for about two-thirds (measured at PPP exchange rates) of world growth. Yet what shine out to me from this analysis are four longer-term policy questions. This year is a turning point. It is up to us to make it turn in the right direction. It will not be easy.
The Dollar: Shrinkable but (So Far) Unsinkable What are the chances that a day of reckoning is coming, when the dollar would be so weak that America would have to play by the rules that apply to every other country? Come what may — a financial crisis here, a military misadventure there — Americans could count on money sloshing up thick on their shores. Virtually limitless demand for American government bonds has supported the dollar’s value, and kept domestic interest rates down. Americans have been emboldened to spend in blissful disregard of their debts, secure that foreigners would always supply finance. And that devil-may-care spending has in turn fueled economic growth around the world. This dynamic may be so deeply embedded in the workings of the global economy that it could endure for many years to come: The costs of weaning the United States from its credit habit would ripple far and wide. But what are the chances that a day of reckoning is coming, when the dollar would be so weak that America would have to play by the rules that apply to every other country? Recent signs do suggest some fraying in the American relationship with its many foreign creditors. The balance of trade has gotten so lopsided and the question marks hovering over the American economy so thick that some foreign governments are beginning to hedge their bets on the dollar. Russia has been diversifying its hoard of foreign exchange, plunking more into other currencies like the rising euro. In the oil-drenched Middle East, signs suggest a slight shifting to other flavors of money. And markets have been parsing every utterance from Beijing for hints that China may moderate its voracious appetite for dollars.