Wednesday, December 05, 2007
What is the economy's vector?
Nobody seems to know whether the American economy is strong, or not. My more bearish co-blogger and I have been arguing about it on this page for months. The dollar is weak, which implies a weak economy here, rising energy prices have imposed a substantial "tax increase" (for the benefit of the House of Saud and Hugo Chavez, not Washington, but the point still holds), and the banks are in a world of hurt over mortgages and LBO loans gone bad. None of that, however, slowed the economy during the quarter ended in September, when it hummed along at almost 4%. Naysayers then predicted steep declines in the fourth quarter as the credit crunch unfolded, energy prices continued to soar, and the stalwart American consumer, supposedly beaten to a pulp by resetting mortgages and rising credit card debt, threw in the towel. Only this morning, Martin Feldstein, the top economic advisor for the "morning in America" Reagan Administration, predicted tough times right around the corner:
The American economy is now very weak and could get substantially weaker...
After a surge of above-trend growth in the summer, there is likely to be virtually no rise in real GDP in the current quarter. Almost every economic indicator -- including credit conditions, housing and consumer sentiment -- has deteriorated significantly since the Federal Reserve's October meeting. In my judgment, the probability of a recession in 2008 has now reached 50%. If it occurs, it could be deeper and longer than the recessions of the recent past.
Since Mr. Feldstein deployed that prediction to call for more tax cuts, I almost wanted him to win the day, at least until I remembered that I have a huge stake in the continuing strength of the economy. In any case, the ink was barely dry on the morning's WSJ when the federal government pumped out a series of fresh numbers that made a mockery of the gloomsters. Not only did factory orders rise by an unexpectedly strong 1.5% (at least some of which was attributable to higher energy prices, which cannot be extracted from the total number), but the amazing American labor market surged forward:
Meanwhile, a private sector report on labor market strength projected that business payrolls increased by 189,000 in November. That gain in the ADP report was well above the expectation for a modest gain of 50,000 jobs and caused economists to boost their forecasts for job growth in the government's employment report which will be released Friday.
Ian Shepherson, chief U.S. economist at High Frequency Economics, said he now looked for the Labor Department to show a gain of 125,000 payroll jobs in November rather than the 50,000 gain he was forecasting before Wednesday's report.
Not only are employers hiring faster than expected, but they using the workers they have more effectively:
In other economic news, the Labor Department reported that worker productivity roared ahead at an annual rate of 6.3 percent this summer while wage pressures dropped sharply.
Mr. Felstein notwithstanding, the stock market took off this morning. Half an hour before the close the Dow is still up around 175 points.
10 Comments:
By 
, at
Wed Dec 05, 04:38:00 PM:
While banks may be in a "world of hurt" over bad mortgage lending, as you say, Larry Kudlow presented interesting numbers last night showing the entire sector (banks and brokers) up an average of over 9% this year in market value. The world of hurt doesn't extend to the stock valuation, apparantly.
Today, Kudlow went further and said on the economy, "The recession debate is over. It’s not gonna happen. Time to move on."
Maybe the GOP candidates should challenge the Dem's more aggressively right now, before the knowledge sinks in that we've avoided yet another recession scare. Every time they roll out the "recession" card, we should roll out the "well, then, cut taxes card". Everyone might realize the economy is back in the pink before too long, and we might lose our chance!
By 
Viking Kaj, at
Wed Dec 05, 04:48:00 PM:
From what I have been reading the real issue as far as the markets are concerned is the UNCERTAINTY associated with the sub-prime exposure. This means that the possibility that there are substantial losses out there still to be declared is what is continuing to spook the markets.
How far do we have to go before there is no more uncertainty? Hard to say. But the continuing announcements probably all have some impact.
The real unknowable in this whole scenario is the oil price. If that really starts kicking in we could have inflation without growth (stagflation I think they used to call it). If a little recession can help with oil prices then it might not be the worst thing that could happen.
By Rick Ballard, at
Wed Dec 05, 05:26:00 PM:
TH,
You might toss in the set a floor plan to stop the subprime nonsense. Maybe even mention the continuing orderly exit of the oil speculators.
Who says they don't ring a bell?
By , at
Wed Dec 05, 08:35:00 PM:
IMHO (stupid as that can be) the latest NIE and the ensuing recriminations, plus the continuing quietude of Iraq and Chavez' electoral setback last weekend, may mean LOWER oil prices as the risk factors temporarily abate.
However, by next summer....
-David
By Charlottesvillain, at
Wed Dec 05, 10:21:00 PM:
Dude, you are actually using government stats to support your argument? You'll need to wait for the revisions in three months before you can use these.
Of course there must be a recession at some point. Bad investments need to be purged, and assets reallocted. This is why I hat Paulson's continued efforts to kick the can down the road. We're still in a bubble, and it needs to be popped before real growth can resume. This irrational fear of a cleansing recession smacks of Japan in 1990. They tried to paper over their losses, and they have had zero growth since.
Someone eventually has to pay the debts and take the losses. deferring these are incredibly dangerous.
By , at
Wed Dec 05, 10:36:00 PM:
I don't think it's in question while the Canadians are beating the dollar.
By , at
Wed Dec 05, 10:58:00 PM:
Dear Sirs,
I believe that the world has moved far too quickly and that economic statistics (some originating in the 1930's) no longer accurately depict "the real world". The economy is like the weather: complex beyond analysis. Tomorrow's gurus are the ones who made a lucky random guess today. I wish you and yours and mine peace and prosperity. As Yogi Berra said: "predictions are tough, especially when they are about the future".
Regards,
Roy
By Gary Rosen, at
Thu Dec 06, 03:36:00 AM:
People have been predicting imminent economic collapse for my entire adult life (I'm in my 50s) but somehow we just keep going along. The fact is since we began to implement monetarism in the early '80s economic cycles have been greatly tamed, even in the face of events like the '87 market crash or the insane Internet bubble of 2000.
By Cardinalpark, at
Fri Dec 07, 12:05:00 PM:
TH - I hope you weren't referring to me as bearish (I suspect it was the Villain). I haven't posted much since I rang the bell on the credit markets. Even then, I figured we would skate through the current slowdown with what they call a sift landing.
I remain optimistic that while the economy is slowing, the Fed is committed to ensuring sufficient liquidity to preclude the closure of capital markets and therefore keep the economy growing.
Here's a couple of important indicators to me. Remember how the Fed impose a series of 25 bp Funds increases for about 15 months? Well, when they did that, the Treasury yield curve went virtually flat -- even into a very slight inversion. That means that short maturity interest rates are virtually equal, or even higher than, long rates. If you go into severe inversion, that tends to suggest credit has been severely choked off, and usually predicts recession within 12 - 18 months. Now, we didn't go into inversion -- not severely anyway. We merely went flat. I think that's why we slowed down, why the real estate bubble burst and why the credit markets got a severe case of constipation.
Since the Fed responded by cutting short rates 75 bp, the yield curve has moved into a distinctly positive slope -- short rates are much lower than long rates. This tends to open the liquidity door and after some lag period, credit reopens. The delay is usually because the easiest and lowest risk way for banks to repair their balance sheets is to borrow short (i.e. cheap deposits, priced from short rates) and lend to the Treasury (buy long dated treasuries. Easy money. As the yield curve then flattens when the Fed stops cutting, banks start to lend again because the easy money isn't there anymore.
One other thing...10% market corrections top to bottom are pretty normal in the 6th and 7th inning of an expansion. That's exactly what we just had.
So I think we can take comfort that the economy, though growing more slowly, is unlikely to see 2 consecutive quarters of negative growth (a recession). and furthermore, the ucrrent Fed rate cuts are likely to produce accelerated growth after a lag period.
One more thing. The next time the Fed starts increasing rates? Get out of the way. That will end the expansion.
One man's opinion.
By TigerHawk, at
Fri Dec 07, 12:10:00 PM:
The 'Villain is the big bear, CP. Good points, too. Thanks.
