Agitation is brewing beneath the surface of the apparent calmness of the lake. In spite of the notions out there that "there are no signs of recession", there is actually a large volume of evidence to say otherwise. In fairness, while there are still lingering signs the economy could still be growing, the crisis in credit is far from benevolent. Yet, the consensus, despite the ad hominem attacks against the media that suggest they are perpetuating a recession, is in fact not a receession. Consensus has never predicted one recession. Not in 2001, not in 1990, not in 1982, and certainly not in 1929. Every downturn in progress is always treated as "overblown" and "recovery" is always "in sight." The stock market crash in 1929, so viewed the brilliant economist Irving Fisher and many others, was only temporary and there would soon be a return to prosperity. But as James K. Galbraith observed, the crash galvanized the economy's downward spiral, exposing the imbalances that were allowed to build.
Paul Kasriel, chief domestic economist at Northern Trust Co:
We're not in a recession. We're not going to be in a recession. Recovery is on the horizon. The decks are clear. The economy is in direct drive.
Mr. Kasriel made this comment in late August 2001, during a period when employers were slashing jobs by about 200,000 a month. If that isn't recessionary, I am not sure what is. The point is not to play a pointless "gotcha" game so much as to make a point: the consensus never predicts recessions, even while one is in progress. Kasriel is no lone ranger in this respect. Nevertheless, the 2001 recession had in fact begun six months prior to his comments. In 1982, the consensus economist forecast was for growth of 3%! What we had was one of the most severe recessions in American history.
To this day, our society is paying for the "temporary" economic losses of the early 2000s, because many of those losses have not been reversed. Poverty is up sharply. Manufacturing jobs have vanished, not recovered. Michigan's unemployment rate for October 2007 is at its highest level since the early 1990s, a damning mark on the economic records of our government. In real terms and compared with other world currencies and commodities, the stock market has lost value. Even the low interest rates that were futile in staving off the 2001 recession are now largely responsible for the housing bubble and its subsequent role in exposing the fundamental ills of the global economy and financial markets. Therefore, the decisions made during that recession are contributing to our current downturn. The Federal Reserve avec Bernanke apparently believe consumer cycles can be avoided with low interest rates. The justifications are complex. The attempt to prevent rampant unemployment is noble, but is more effective in bailing out those who were greedy than stopping the spread of unemployment, so workers are left alienated. The rhetoric is getting absolutely desperate.
If it's a 4.9% economy, why does it not feel like one? In truth, the GDP does not necessarily translate to happiness, or environmental soundness, or balanced wealth. It is just as prone to the same abuses as most any other metric of an economy's health, be it income, the stock market, or the unemployment rate. Even if the economy really did grow 4.9% over the summer, 3/4 of Americans still feel the country is going in the wrong direction, the most in years. To be sure, the conventional wisdom that accelerating growth is a sign we won't have a recession is simply not true. There are countless instances where the economy fizzled within weeks of a massive growth spurt. In 1990, the economy grew 4.7% in the 1st Quarter. By the end of the year, the economy was bleeding at a dismal 3.0% rate and GDP per capita did not recover until 1993. In the 1st Quarter of 1973, the economy grew at a 10.6% annual rate only to end up in recession by the end of the year. I recommend reading this to see the visuals of this concept.
The human toll of the early 1990s recession exceeded the conclusions made by those who wished to present the recession as "temporary" and "mild." It was, however, neither temporary nor mild. Homelessness accumulated in the downtown quarters of major cities. The drug wave was recruiting a fresh supply of the chronically unemployed. Most of all, it taught us the consequences of excess and this lesson was swiftly ignored. The economy would eventually level out and begin growing again, but not without the help of the constant delay of the of the day of reckoning. There were work arounds, of course, and they explain how, at $9 trillion debt, we manage to keep growing, albeit without much integrity. Indeed, much of our growth is just a big loan we will one day need to pay off to our lenders, or we risk default and we lose our growth.
But this is 2007, and it seems a more vicious redux of 1990-1991 has grown at a fierce rate. Charity groups report a critically low supply of food even as demand has increased, implying the poverty rate probably rose in 2007 after dipping in 2005 and 2006. The overestimation of income growth has likely widened the presence of poverty.
Durable Goods Orders
Now, the thing about durable goods orders is that they contribute to the consumer spending spectrum of GDP. By the looks of things, this leg of consumer spending is flagging. The durable goods orders fell three months in a row, a clear downtrend. Just as important is that durable goods orders are in fact essentially flat for 2007.
The questionable employment and income data
From Saturday's New York Times:
Nominal personal income (that is, not even adjusted for inflation--which is up about 3% from 2006) may have only grown by a third as fast.
The new [goverment] report concluded that personal income from wages and salaries grew at an annual rate of 1.6 percent in the second quarter, far below the 4.5 percent that had previously been estimated.
So, in real terms, income fell about 1% in the first half of 2007. If this is the case, a recession could have begun as early as May or April of 2007.
And according to Asha Bangalore of Northern Trust...
Assuming October 2007 is the peak of the current business cycles (the choice is arbitrary because October is the latest data point available), it appears that inflation adjusted personal income less transfer payments probably peaked in September.
This report by NT is a real eye-opener as well, showing personal income peaking in September.
But Rover, the GDP hasn't fallen for two consecutive quarters? Well, unfortunately, the GDP doesn't seem to encompass poverty and unemployment. For that matter, the NBER (which is responsible for determining economic peaks and troughs) hardly includes the GDP into their decisions. In fact, the aggressive 1973-1975 recession began in November 1973, during a period when the economy was growing at a 3.9% annual rate.
The employment angle is even more grim
If so, [Robert J. Barbera, the chief economist of ITG] said, he expected the government would revise its estimate of the number of jobs created in the [second] quarter, to as little as 50,000 a month from 126,000 a month. That would indicate that the economy was much weaker than had been thought.
If 50,000 a month was the case for the second quarter, it is quite possible that at least one month experienced negative job growth. At best, job growth was anemic and has been since the beginning of this year. And while the BLS payroll survey says about 1 million jobs were created in 2007, the Household Survey says almost no jobs were created. This graph shows the divergence that has grown in 2007, even while the trend lines were somewhat in line from 2003 to 2006. The point 0% is located December 2006 to show how employment has changed in 2007. Again, BLS says jobs are up 1%; Household says they're flat. Despite the relatively volatility of the household survey, the consistent flatness would seem to justify the notion that job growth was severely overestimated.
Blue is BLS Payroll Survey; Red is Household Survey
The urban cores of America are on the cusp of another economic blow. The sharp deindustrialization of America from 1981 to 2007 was repelled with a rise in the service sector, despite a vast majority of those jobs having produced lower wages than before. Alas, for many urban poor, the alternative is low-skill retail. But the retail sector has been hit hard since 2006. We're essentially in a retailer's recession already.
This graph illustrates this clear trend. It combines the BLS employment data for manufacturing, financial services, retail, and construction. They represent 1/3 of all employment. Employment peaked in January 2007 and began declining rapidly in August.
The consensus forecast for November's employment report is for even fewer retail jobs and only 65,000 jobs having been created. This would make it the lowest consensus for 2007, but based on the sharp rise in jobless claims, I have reason to believe this may prove too optimistic. Wall Street was not expecting jobless claims to soar to 352,000, but instead fall to 330,000.
The uptrend is obvious. Here we see higher lows——that is, we see three successive bottoms that were higher than the previous bottom. This is much different from what we have seen earlier this year when we would have one massive spike and then a downfall. Now, it's not as volatile anymore. Since jobless claims have now breeched 350,000, we are in a real danger zone.
Unemployment in Michigan is at its highest level since 1992. After failing to drop in light of the 2001 recession, it is poised to claim many more Michiganers judging by the trajectory of the graph.
And after all this, people still say there are no signs of recession. These are not the makings of a "soft landing." This has been well observed even before recession-talk gradually entered the mainstream media just this summer. I believe the NBER will announce in March or April that the "peak of economic activity occurred in August 2007." They will note the sharp slowdown in consumer spending that began in September. They will note how durable goods orders began falling rapidly after peaking in July. They will note the sharp slowdown in employment growth that began in February.
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