bizzXceleration: Performance, Value and Profit

Is the U.S. Really in a Recession? Why does anyone still think that the US economy is in recession? But is America really in recession? Experts seem to think so, including Alan Greenspan, Warren Buffet, George Soros and Martin Feldstein, the chairman of the National Bureau of Economic Research (NBER), the academic committee in Boston that determines business cycle dates. But where is the evidence for this belief? To be sure, housing and finance, two important parts of the economy, are in serious trouble. There is a world of difference between a dislocation confined to only one or two parts of the economy, such as housing and finance, and a generalised economic decline. The difference between a general recession and a sectoral slowdown is not just a semantic quibble. For businesses and workers, a slowdown is a period of weak growth, modest job losses and disappointing profits; a recession is marked by mass unemployment and widespread bankruptcies. Most importantly, consumer spending has remained robust. American consumers, far from cutting back to bare essentials as was expected by bearish commentators after the credit crunch, are actually increasing their spending. The evidence of this, contained in the strong retail sales figures for May published last Thursday, was by far the most important economic news of the past few weeks. Yet these figures received almost no media coverage and little market attention. Yet May's retail sales figures revealed a picture completely at odds with conventional wisdom about the US economy.

• U.S. Producer Prices Increased 1.4% in May, More Than Economists Estimated
• Housing Starts in U.S. Fell 3.3% Last Month to 975,000 Pace, 17-Year Low
• 2008 Recession: That’s All, Folks?, Merrill's Rosenberg: Recession Confirmed
• CFOs optimism rises for now but signs point to further declines

Weekly Unemployment Claims Here is another look at unemployment claims. According to the Department of Labor for the week ending June 14, initial unemployment claims were at 381,000, and the 4-week moving average was 375,250. The first graph shows the continued claims since 1989. Continued claims declined this week, but have been trending higher and are still above the 3 million level. Notice that following the previous two recessions, continued 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).

Philly Fed: Manufacturing "Continued weakening", "Cost pressures widespread" Here is the Philadelphia Fed Index for June activity released today: Business Outlook Survey. Note the special question at the bottom on prices. The average expected price change this year is 5.4%! This graph shows the Philly index vs. recessions for the last 40 years. There are a number of times the index was below zero without a recession - so the reading today doesn't mean the economy is in recession. However it is very likely that the economy is already in recession. From the release, weaker conditions and higher prices : “The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased slightly, from -15.6 in May to -17.1 this month. The index has now been negative for seven consecutive months. “

Economic rebound at least a year away Economic woes are expected to continue until at least mid-2009, and things may get worse before they get better, according to a quarterly survey of chief financial officers.The quarterly Duke University/CFO Magazine Global Business Outlook study found 71% of more than 1,000 CFOs surveyed said the U.S. economy will not begin to rebound until 2009. And 54% think the turnaround will happen by next summer at the earliest."This could be the longest slowdown since the double dip recession of 1979-81," said John Graham, director of the survey. There was some positive news from the survey: Overall, optimism rose slightly from the previous quarter.Still, financial chiefs from a broad range of public and private companies hold a grim view of the economy and attribute their pessimism to a tough jobs market and rising inflation. Weak consumer demand and high fuel costs also topped their concerns.CFOs said difficulty in attracting and retaining high quality employees is their the top concern, followed by the difficulty of planning in the uncertain economic environment. Accordingly, they expect employment to fall another 0.2% in the next 12 months. A net 324,000 jobs have already been lost in 2008, the worst start to a year since 2002, when the U.S. economy was just coming out of the last recession. As the economy sheds more and more jobs, businesses said they are increasingly worried about the fallout of rising prices and mounting layoffs. With soaring fuel and food prices, 45% of companies said they have passed along rising costs to customers in the form of higher prices.

Two Bubbles, Two Paths  LATELY more and more people have been questioning the received wisdom about what a central bank should do when confronted by an asset price bubble. That piece of wisdom, shared by Alan Greenspan and Ben S. Bernanke, the former and present Federal Reserve chairmen, holds that deliberate bubble-bursting is something between impossible and dangerous — and thus best avoided. Instead, according to this view, the Fed should let bubbles burst of their own accord, and then be prepared to mop up after. This strategy has modest objectives. It is not intended to prevent bubbles, or even to limit the price collapse when a bubble bursts. Rather, it is designed to limit collateral damage to the rest of the financial system, and especially to the overall economy. The Fed executed such a mop-up-after strategy with great success when the tech bubble popped spectacularly in 2000. Despite the destruction of roughly $8 trillion in paper wealth, not one financial institution of any size failed, and the ensuing recession was so mild that I call it “the recessionette.” In taking up these three arguments, it’s crucial to distinguish between two types of bubbles. The first, what I’ll call “bank-centered bubbles,” are speculative excesses caused or principally fueled by irresponsible — you might say crazy — bank lending. The housing-mortgage bubble was an obvious and painful example. But in other asset bubbles, bank lending plays a minor role, or none at all. The tech-stock bubble was a dramatic example of this second type.I would argue that the central bank’s proper role is fundamentally different in the two types of bubbles. Here’s why:When bubbles are not based on bank lending, the Fed has no comparative advantage over other observers in distinguishing between rising fundamentals and bubbly valuations. It may see bubbles where there are none, or fail to recognize them until it’s too late — or probably both. There are two main conclusions: First, when bubbles are not based on bank lending, the mop-up-after strategy still looks pretty good. When it comes to bank-centered bubbles, however, there are many more things that a central bank can and should do. But raising interest rates to burst the bubble is probably not one of them.

$1.555 Yesterday the Bureau of Economic Analysis released its estimate of the U.S. current-account deficit for the first quarter of 2008. The lead sentence said: “The U.S. current-account deficit--the combined balances on trade in goodsand services, income, and net unilateral current transfers--increased to$176.4 billion (preliminary) in the first quarter of 2008 from $167.2 billion (revised) in the fourth quarter of 2007.” Today’s currency trading closed at $1.555 per Euro. That’s not a record low, but the dollar has fallen dramatically over the last five years. What’s the connection between yesterday’s report on the current-account deficit and the weak dollar? You can see the current account’s steady erosion in the following chart. The dollar has not fallen as precipitously, but the trend is the same: Downward. Once again, why? Because we are so fond of importing goods from the rest-of-the-world. We are continually willing to offer more dollars for a Euro (and other currencies) so that we can buy more goods denominated in Euros (or other currencies): Whether that’s autos or oil. Then the rest-of-the-world reluctantly accumulates those cheaper dollars that it acquires by selling goods to us. Occasionally, such as in the early 1980s and late 1990s, the rest-of-the-world enthusiastically invests in the U.S. That temporarily drives the dollar’s value up as the rest-of-the-world purchases dollars to buy into our stock market. But when the boom ends, the dollar’s value falls. One way or the other, the current-account deficit grows. If you update the chart above in your mind’s eye with the latest current-account-deficit of $176.4 billion, you will notice that the current-account-deficit’s plunge has temporarily halted. That’s typical for an economic slowdown here. You can see that the line heads north in recession, as falling U.S. incomes reduce U.S. import demand. Recovery from recession has always resuscitated our desire for imports and restarted the current-account-deficit’s slide. The dollar’s deterioration may also abate for a while as we purchase less from abroad. But that’s small relief from a long-run trend. If you want what the rest-of-the-world sells, you will offer more of your currency to purchase a unit of their currency. That’s what we have been doing for some time.

Goldman Sachs VP calls for U.S. global policy restructuring As the world's economies become more globalized and the U.S. dollar competes with a stronger euro, America needs to restructure its global policies to attract more foreign capital, Robert Hormats, vice president of Goldman Sachs International, said Wednesday. The next U.S. administration will need to make "important policy changes to take advantage of new global opportunities," Hormats said during a speech at an Asian banking and finance conference at the San Francisco Federal Reserve Bank. Those changes include realizing the U.S. needs to accelerate improvements in its trade balance to reduce dependence on foreign money, boost competitiveness by reasserting the Doha Round global effort and be a leader in global policy creation, he said. The collapse of U.S. domestic savings, compounded by a widening trade deficit and increased consumer borrowing, have contributed to U.S. dependence on foreign capital, Hormats said. "Exports are rising at a much more rapid rate than imports," Hormats said, citing that 95% of the world's consumers now are outside the U.S. "About one-third of the profits of S&P 500 companies come from activities abroad." Hormats also said the Doha Development Round, a set of international negotiations to promote free world trade, is stalling, and the U.S. needs to take initiative to open global markets for goods and services. "If this round falters, and I think in the current moment there's a good chance that it will ... then the U.S. and other trading nations would do well to devote their efforts to improving -- and ensuring firm adherence to --- existing rules and dispute settlement procedures," Hormats said. He said the U.S. needs to focus on improving itself economically, but it also should become a leader in crafting international economic policies.