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Monday, February 11, 2008

A Slightly Different View Of Recessions

Let's look at a second-half graph on US crude supplied. Since I don't have December data yet this only deals with the July-November yearly total. Second half activity is more related to consumption than first half, so it is a particularly good way to measure broad economic activity. Note that you can see not just the recessions on this graph, but their relative amplitude pretty clearly.

If you look at full year totals, you'd see multiple year drops and rises, because first half activity is more general. Second half consumption is a very sensitive indicator of troughs and peaks when it comes to recessions.

Anyway, note the 2007 YoY drop is quite similar to 2001 and 1991. 1982 was far more painful.

I've been sitting here all day trying to convince myself that we AREN'T going to see another drop for 2008, and I'm having a hard time. All I've managed is to produce a fine headache. Retail's not going to be better, building isn't going to be better, manufacturing should be picking up a bit, but will still be weak. If Europe is slowing it's hard to believe that our manufacturing will be getting as much of a boost as we hope. Where do I find the upward momentum?

For what it's worth, you generally see a slowing pattern for a year or two this way that matches the Rockefeller Institute data very well. I don't believe that recessions are at all unpredictable. Most of them are obvious well in advance. Look at 89 and 90, and 99 and 00 on the graph. The YoY drop combined with the 3rd quater Rockefeller Institute "Real" negative state tax receipts, it appears absolutely certain that we did move into a mild recession in the second half of 2007. What's giving me the headache is trying to figure when we could get out. We appear to be a long way from trough.

Data is here.

Update: CR is on a totally different tack than I am, but he's coming up with the same doubts as to a "short and mild" recession. His graphs are a lot prettier than mine!

The chances of it being a mild or short recession are in the very far end tails of the Bell Curve.

CA is a monster economy. The second largest creator of new jobs in the last 12 months has been government. Their Jan sales tax revenues DECLINED by 10% YoY. Inflation adjustment anyone? This year they get to look forward to reduction in property tax revenues.

But what is going to get them the most is they are going to be redlined by lenders, just like Texas and the Southwest was in 1980's. We didn't begin to recover until all our regional and state banks were bought out by BofA, Wells Fargo, Chase etc. Then the credit began to slowly expand and a recovery began. But it was 5 years of depression.

With declining home prices very few loans will get past the appraisal process. The banks will slowly bleed to death. What about all the Option ARM loans where the LTV is increasing every month?

People on Wall Street are touting stocks as cheap. Yet look at projected 2008 earnings; way too high. Record corp profit margins will not last.

As the commercial Real Estate projects wind down, unemployment is going up. 2008 story will be declining RE values in NYC.

Withheld income was neg YoY in Jan 2008 to Jan 2007. MEW, HELOC, and Credit cards are on their last legs. People are hitting the 401K's now and then where is the fuel for any economic growth coming from? I too have been looking for the next source of growth and the only area I see is solar power as it could change the economics very substantially.
WW - all good points, especially the point about government jobs.

This time, the state and local budget problems are such that government employees will be affected. In part, it's because of the timing of the retiree bulge and the drain on state and local governments.

We simply cannot have about 10% of the population (2/3rds retirees) faced with real declining incomes, a decline in the share of state and local gov. spending, a collapse in home values, negative yearly private domestic investment, and stagnant or declining incomes for many workers without taking a very big hit in consumption spending.

I'd say MOST of that hit is yet to come. Wouldn't you?

To me it adds up to an almost unique 2-3 year period that is basically a recession.

I look at the stats for the UK and several European countries, and I'm expecting many of them to see a long slow slump as well.

Asia's going to be badly affected, not least because in many of these countries the cost of food and fuel really impacts their own consumption at the same time that exports will tend to slacken.
The more complex a thing is the greater of a catastrophic event involving it because of the unexpected failure of supposedly unrelated parts.

We have an economy that seems to be based on faith. For example, sub prime faltered and folks thought that it would be limited to subprime. But there were securities and derivatives based off of subprime that became affected followed by second and third order effects. Further it was found that as demand for subprime increased that the standards became laxer and laxer.

Now all kind of consumer loans are affected because, surprise surprise the consumer was depending on credit and asset appreciation to consumer, at least in the marginal areas.

Because we are a service economy it was assumed that we would not be affected by lay offs like manufacturing, but again surprise surprise, folks are laying off as sales drop.

CR says we will be in bad shape if UE hits 8%, but surprise, the UE is already at 8% if we include everyone wanting a full time job as UE. The UE rate is a fiction because it has been 'gamed' to be low.

Bottom line, predictions cannot be made at this time, the figures cannot be trusted, the experts cannot be trusted, history is not a very good guide-we have not had a consumer led recession in modern memory. Most if not all recessions since WWII has been FED led, the fed bumps rates up, manufactures lay off and we go into a recession. Not now.

In any case, it appears we are heading into a recession, it will not be like any recession since WWII, we cannot predict its depth, its length or its effects.

Will it be a Great Depression type?

If you see camps of homeless families we will be there. If you see hopelessness and a desire for a dictator type to save the nation we will be there. If you see children of formally middle class families starving, we are there.

Sans that, we may be on the path, but we are no where near there.
I guess the moral of the story is that banks can't be allowed to police each other and there are sometimes good reasons for regulations. It's important not to repeal restrictions put in place after the Great Depression too. I think that it was easier to deal with downturns when they came fairly frequently. Now people are still having problems believing that we could be in for a rough time. They've lost all those skills they used to have. They've also been encouraged to rely on credit and not savings. That one is going to turn out to be a huge mistake.

I've been in town before and thought about what stores would still be open if there was a depression. I think the shoe stores might do okay, but I bet the galleries go under quick ;)
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