Saturday, February 16, 2008

Is a Recession on the Way? Increasingly, The Data is Pointing That Way

There seems to be less and less good news about the economy. This endless debate about whether or not we are in a recession is of limited value. The real question is can the slide be stopped, because the attempts by the Fed do not seem to be working. From the WSJ economics blog:

The latest ugly sign of an economic downturn: A sharp drop in consumer confidence. The University of Michigan’s consumer sentiment index tumbled to 69.6 in its preliminary February reading from 78.4 last month, marking its lowest point since February 1992 when the economy was emerging from a recession. The component of the index that gauges consumers’ expectations — a possible sign of their willingness to spend — dropped to to 59.4 from 68.1.

The signs of a looming recession are mounting: A contracting labor market (payrolls declined 17,000 in January), falling home prices with no bottom in sight, weakness across the service sector (as seen in the ISM’s non-manufacturing survey) and turbulent equity markets, all compounded by rising oil prices and higher food costs. Among the few remaining strong points: Higher retail sales, due largely to gasoline expenditures and a surprising jump in auto sales; and industrial production, which edged up in part due to higher utility output.

“Economies don’t normally tend to slip gradually into recession, they plunge spectacularly,” says Paul Ashworth, senior U.S. economist at Capital Economics. “That often generates some spectacular discontinuities in the incoming economic data of the sort clearly on display in the latest survey reports.”

Adding to the woes: Consumers’ expectations of inflation over the next year jumped to 3.7% (the highest since mid-2006) from 3.4% previously in the University of Michigan survey. Long-term expectations were unchanged at 3%, however, and market-based expectations of inflation remain relatively stable. But as calls for a Federal Reserve rate cut grow louder, any signs of rising inflation expectations could spook officials who are increasingly worried about rising prices. — Sudeep Reddy

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