Tuesday, October 30, 2007

Will We Escape A Recession?

The excerpts below are from an article in Market Watch, that discusses why we may not escape a recession. A question that I have is: is there really a big difference between the economy growing at 1.5% or a -1.5%? I don't think so and we are probably headed for one of those places. Also as the economy slows many forecasters were predicting an economic slowdown in the Q3 - Q4 time frame. It appears that this may have to be rolled back 3 to 6 months. Text in bold is my emphasis.

. . . . many economists are skeptical. . . . . they are seriously concerned that the economy soon could slip into a recession. Economists are advising investors to ignore all festivities planned after the third-quarter gross domestic product report is released on Wednesday morning

It is the growth in the next two quarters where the rubber meets the road. Analysts expect growth in the fourth quarter to slow to around a 1.5% rate, less than half of the third quarter. They call the January-March quarter of 2008 "the dangerous quarter" for a sharp slowdown.

If these worries prove correct, any amount of further Federal Reserve rate cuts expected this week and over the next few months likely won't stop a sharp downturn, but would just soften the blow.

Federal Reserve vice-chairman Donald Kohn seemed to hint at the Fed's powerlessness when he said in a recent speech that the Fed's half-point rate cut in September "will not be able to avert all of the weakness in the economy that may be in train for the next several months."

In addition, the most recent Fed Beige Book report, which is a collection of anecdotal report of the central bank's business contacts, gave off a gloomy glow. And the minutes of the Fed's Sept, 18 meeting reported the Fed staff had trimmed its forecast for growth in the fourth quarter and 2008.

Douglas Holtz-Eakin, former chief of the Congressional Budget Office and now an expert on the U.S. economy at the Peterson Institute for International Economics, said his gut tells him the economy might be weaker at the moment than the economic indicators show.

The key factor, he said, is that business confidence appears to be weakening sharply. The current economic situation reminds him of the slow recovery in 2002. As the economy exited a recession then, the fundamentals improved but job growth remained weak. It turned out the hidden factor was that businesses stayed in a sour mood even though the recession was over.

The fact that business confidence is now at the same low level as 2002 "gives me reason to be more nervous than I otherwise would be," Holtz-Eakin said.

Robert Brusca, chief economist at Fact and Opinion Economics, said he also sensed "there is something going on out there that isn't good...I am concerned about the economy. It is looking pretty weak to me."

One reason the recession fears haven't gained more prominence is that economists are generally loathe to forecast serious downturns.

Carl Tannenbaum, chief economist at La Salle Bank in Chicago, who used to compile economists' surveys from the National Association of Business Economics, said he doesn't recall ever seeing a formal forecast of a recession.

What generally happens in a recession is that the economy starts to slow down, and then growth just falls sharply. None of the complex econometric models in use can forecast this break.

"Most of the models are continuous, where the economy strengthens a bit or softens a bit. It is quite difficult to deal with what could be a step-change, where you get some tipping point where everyone decides it is time to cut back on hiring and capital spending. When that happens, pretty soon everything snowballs into a major slowdown," said Nigel Gault, economist at Global Insight.

In recent months, consumer confidence has dropped, job growth is weak, and the unemployment rate has started to rise.

But, at the moment, economists will go no further than saying the odds of a recession are one-in-three.

But the housing sector, credit crunch and the price of oil price above $90 has economists watching closely.

"There is a feeling out there that there is more bad news to come," said Gault.

Tannenbaum of La Salle Bank said he is beginning to pick up signs that commercial real estate is leveling off. He said this is a good coincident indicator of job growth as new workers need space.

At the same time, almost everyone agrees the housing market will continue to weaken, and home prices may fall sharply.

Tannenbaum says greater job growth is needed to keep out of danger: "If we continue to create 100,000 jobs a month, I think we can work our way through it. But if we get a negative payroll report that is a true negative, that is the kind of chain reaction that could end the expansion," he said.

One factor arguing strongly against a recession is the stock market, which seems optimistic about the longer-term outlook, even as the bond market is priced for bad news.

Another wild-card is the Christmas shopping season, which could always turn out to be better than the current gloomy forecasts.

So the key is whether the economy gets through the October -March period unscathed.

No comments:

Post a Comment