With oil prices surging, financial markets gyrating and consumers turning cautious, the risks of recession are rising.
The following excerpts from a WSJ article indicate the real possibility for U.S. economy to slide into recession late this year.
A recession-warning gauge devised by Federal Reserve economist Jonathan Wright -- based on yields on the three-month Treasury bill and 10-year Treasury note and the Fed's current target for short-term rates -- calculates the odds of recession in the next year are now at 36%, up from 14% six months ago.
Merrill Lynch economist David Rosenberg put them even higher, at 40%, noting that a slowing economy could pose problems for business and consumer borrowers and deepen the slowdown. And Ian Shepherdson, chief U.S. economist at High Frequency Economics, a Valhalla, N.Y., consultant, sees a 50% chance of recession. "Hopefully, the Fed will recognize that risk and not be crazy enough to raise rates again next month," he said.
The reasons:
But this past week's fighting in the Middle East is shaking Wall Street's confidence. The Dow Jones Industrial Average fell 106.94 points Friday and was down 3.2% for the week, wiping out most of 2006's gains. (Read more.) Stocks of retailers and home builders, susceptible to rising interest rates and tight-fisted consumers, sagged. Yields on long-term Treasury bonds fell below short-term yields, a phenomenon often seen as a harbinger of recession.
Signs of that can be seen at Dunham's Department Store, in Wellsboro, Pa, where some shoppers are complaining about energy costs. John Dunham, the store's president, quoted one customer as saying: "You wouldn't believe -- it cost me $90 to fill up my tank the other day."
It's not only low-income consumers who are pulling back. Makers of boats and recreational vehicles say demand is softening. Fleetwood Enterprises, a maker of recreational vehicles, posted lower-than-expected earnings this past week.
Brunswick Corp., the world's largest maker of recreational boats, cited "significant declines in retail demand" -- unit sales were off 10% in the second quarter -- and pared profit predictions and production plans. The company said demand was weakest for boats costing between $100,000 and $250,000. "We believe the marine business is not alone in experiencing weakness," Chief Executive Dusty McCoy said in a conference call Wednesday.
The University of Michigan's midmonth report on consumer sentiment fell to a reading of 83 in July from 84.9 in June, according to those who saw the report Friday. Consumers' assessment of present conditions fell sharply. Consumers expect consumer prices to rise 3.1% in the next year, down from 3.3% last month, a development likely to please the Fed.
Anxiety about the housing market intensified as well, particularly after a profit warning from D.R. Horton Inc., which had been dubbed the Teflon builder because of the way it stood out for sticking with its guidance for the year. The Fort Worth, Texas, company, which had been expecting to close on 58,000 houses this year, said Thursday night that it now expects to close on only 50,000.
The company's bleaker earnings guidance raises questions about whether the housing market slowdown will prove more painful than many had predicted. Some analysts expect similar bad news from other builders in the coming weeks
I'm pretty much a # junkie. Do I believe there will definitely be a recession? I am not there yet. But I am really worried about the bunch of data came out this week.
The retail sales # is dismal. The consumer confidence #, the oil prices, sharply declining equity market and inversion of yield curve all point to a nasty second half.
On top of these early warning signs, the Fed Reserve has been raising short term interest rate like crazy. They need to stop this now. But the inflationary pressur caused by rising oil prices gives them very little room to maneuver. They are boxed in.
Can somebody tell me if any president in U.S. history experienced two recessions in a row?
If G.W. has the honor to become such 'first timer', he will no doubt be THE worst president in the history.