Posted on 09/28/2007 3:45:12 PM PDT by TheLineMustBeDrawnHere
After perusing the blizzard of U.S. economic data that we've gotten this week, you could easily—and quite plausibly—draw this megaconclusion: The Federal Reserve will cut interest rates again, inflation is under control, and while the economy is weakening, it won't slip into recession. Here is the evidence:
1) Yes, the housing market is still dreadful. New-home sales in August hit their lowest point in seven years and are down 21 percent from a year ago. But don't forget that housing is less than 5 percent of the total economy. It's not the whole ballgame.
2) Employment remains amazingly resilient. Initial jobless claims fell 15,000 to 298,000 in the week ending September 22, the lowest since the week of May 12. The four-week average now stands at a low 312,000. "Initial claims continue to send an upbeat message on labor markets," concludes economist Haseeb Ahmed of JPMorgan. He thinks the economy probably added 100,000 new jobs in September.
3) As long as people have jobs, it looks as if they will continue to spend. Real consumer spending rose 0.6 percent in August, putting the quarter on track for a 3.4 percent gain even if they shut their wallets and purses in September. Consumer income was up 4.5 percent on an annual basis, not counting inflation, so in real terms it rose some 2.5 percent. "No evidence of economic weakness here," says economist Robert Brusca.
(Excerpt) Read more at usnews.com ...
Up with it, so you say...
We need a recession to cure the overspending and debt accumulation habits of government and consumers.
M3 chart doesn’t reflect productivity nor does it account for old money being removed from the system. There are many things cheaper now than a couple years ago, namely 99% of electronics, most clothing, housing, etc. Even prescription drugs are now flat and if you know where to look are cheaper than in many years. Energy isn’t up much in the last year (although it’s up a lot from its all time lows a decade ago). Food started to creep up but has slowed down and probably will continue to (The grocery chain I work for has similar inflation #s to the PPI/CPI for Food). I just don’t see this ‘rampant’ inflation at the moment that some of you claim to see everywhere except in commodities which do not appear to be spilling over into other prices.
"The severe market turmoil seen this month was largely predictable. The seeds were sown in the aftermath of the dot-com bubble collapse, the major decline in the stock market and the 2000-2001 recession. Since corporations built far too much capacity in the late 1990s and households saved too little and piled up record debts, the Fed had to figure out a way to stimulate growth and employment. It did this by lowering interest rates to 1% and promising to maintain that rate for an extended period. As a result households took on vast amounts of additional mortgage debt to buy new houses, helping to stimulate an economic recovery even though both employment gains and capital expenditure growth remained sluggish.
To goose the economy even further, credit standards were lowered, allowing adjustable-rate mortgages (ARMS), undocumented loans, and zero interest rate mortgages. Consumers were actually encouraged by Fed Chairman Greenspan, who publicly stated that homeowners could save a substantial amount of money by taking out ARMs. Vast numbers of people were thereby enabled to purchase houses that they could not otherwise afford based on their income and assets. The result was an unprecedented housing boom and soaring house prices that allowed households to extract hundreds of billions of dollars from their homes through cash-out refinancing, home equity loans and outright sales. At one point such mortgage equity extractions (MEW) were running an annualized rate of about $800 billion. Mostly due to the housing boom and MEW, consumer spending, accounting for 70% of GDP, supported an economic recovery that boosted growth throughout the globe.
In addition these mortgages were sold and packaged into collateralized debt obligations (CDOs) consisting of tranches of quality—senior (rated AAA), mezzanine (AA to BB) and equity (unrated)—and given an AAA rating by the ratings agencies. The CDOs ended up everywhere including hedge funds, pension funds and money market funds all over the globe. As we and others predicted the housing bubble eventually broke, prices started to decline and holders of both subprime and alt-A mortgages began to default in substantial numbers, exposing large amounts of CDOs as the junk they always were. The result is what we have recently been witnessing—a global chain of margin calls bringing down what we have in the past called a house of cards.
The carnage is far from over. Amazingly, one guest on bubble TV today casually referred to the recent market turmoil as "financial gamesmanship" as opposed to what he termed "solid economic fundamentals." This is a widely-held view that has minimized the market decline so far and has prevented widespread capitulation. The implication is that the credit problems and stock market decline is merely a tempest in as teapot caused by some panicky investors who can’t see a great buying opportunity. In our view, nothing could be further from the truth. Some studies indicate that as much as one-half to two-thirds of the increase in output and employment since the last recession bottom were a result of housing, housing-related activities and MEW. That support is now gone and the so-called "financial gamesmanship" is in reality the dismantling of the rickety debt structure built up over a period of years. As the house of cards come tumbling down the economy, which has already been slowing down, seems inexorably headed for a hard landing and severe earnings disappointment. We also point out that housing starts in July were down 39.6% from the peak. Over the past 47 years housing starts have declined 35% or more six times and each time was associated with a recession. The credit and asset bubble today is much larger than in any of the previous instances.
The credit market problems and coming economic dislocations strongly suggests that a major bear market is now underway. As in the bear market of 2000-2002, it is likely that we will see a number of vigorous rallies that investors mistake for the end of the overall decline. One such rally could occur when the Fed first makes a dramatic move toward ease. It should be noted, however, that the S&P 500 soared 5% on the day the Fed first lowered rates in early January 2001, only to fall 44% over the next 21 months."
yeah, if anything inflation is more benign that the data indicates ...
Recessions happen; get over it.
They should be called: corrections.
A recession described as a "cure?" Tell you what, if you think it is a cure, you go first and tell us how it goes. If, after experiencing it, you still feel like the rest of us need one, we'll take a look at how you have fared and perhaps put it up for a vote at the next meeting. Until then, let's consider the issue "on hold". Keep in touch and take copius notes. Better yet, start a blog so we can see your progress through the experience.
We'll see how consumer spending does this holiday season.
From the links here, it looks like M3 includes Eurodollar deposits. You can see the M1s in the US are actually down year over year while the Euro M1 is way up. This leads me to believe the larger amount of M3 in the US is due to almost entirely the Eurodollar. Furthermore, even ignoring that the M3 here in the US is less than or almost identical to that of other countries including Aussie, Canada, UK, Eurozone, China, etc. Pretty much everywhere except Japan (which the dollar is doing just fine against). Again, I believe the dollar is down to other factors, most notably investors/speculators.
I do not really care that much about the value of the dollar if the products I buy all the time are relatively stable (which they are, many are dropping). As I posted in post #11, I do not believe the dollar is dropping rationally, especially since we have better growth rates, higher productivity, and lower unemployment than most of those countries. You think what you want though.
I’ve cured myself, it’s my government I worry about. Here’s my challenge back to you: When Asians savers stop buying our treasuries, will you buy our government bonds and hold them for 20 years? If so report back to us how well you fared in your inflation-adjusted returns.
...agreed. All of my neighbors (public school teachers, casino clerks, government retirees,...) are gone for the evening now, driving around and spending money on mass quantities of cheap fuel, mass quantities of junk food, alcohol, drugs, movies, “cute” clothing, other junk,...
Tell you what: you let us all know when the asian savers stop buying our treasuries, and then we'll see. By the way, don't hold your breath waiting.
And so a recession will do what, exactly, to keep asians buying our treasury notes?
Good article. What’s the source?
One thing is for sure. If folks can’t move up into a larger, nicer home, they will spend money on the one they have right now. That will certainly help stimulate the economy.
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