Why Economists Are Betting A Recession Won't Happen

[red-beard]

Why Economists Are Betting
A Recession Won't Happen

By SUDEEP REDDY
December 17, 2007; Page A2

With the financial markets in turmoil and house prices sagging, there is a lot of talk that a recession is all but inevitable.
Yet there's a case that the economy might avoid a painful downturn. In the latest WSJ.com survey of economists, forecasters on average put the chance of a recession -- often defined as two straight quarterly declines in gross domestic product -- at 38%. That's the highest in more than three years, but the forecasters' best bet right now is that the U.S. will skirt a recession.
"A lot of the underlying resilience of the U.S. economy seems a bit unappreciated," says Citigroup economist Steven Wieting. "It's not clear that this is so large a burden that we can't muddle through this."
especially difficult at turning points, and the economy is sending mixed signals. But here are some reasons why the economy might avoid the ditch:
The Fed is on the case.
The Fed, which has cut its main target for short-term interest rates by a full percentage point since August, is expected to ease rates through the middle of next year to cushion the economy from housing and credit woes, and officials are experimenting with new tools in an effort to ease the credit crunch and encourage banks to keep lending to worthy borrowers.
The Fed's actions may have already helped. Recessions typically don't begin when rates are this low, says Joseph LaVorgna, chief U.S. economist at Deutsche Bank. The federal-funds rate, charged on overnight loans between banks, peaked at an inflation-adjusted 3% in the current cycle, far lower than the 4% peak before the 2001 recession and the 5.3% high before the 1990-91 downturn.
"We're putting a lot of faith in the Fed," Mr. LaVorgna says. "A proactive Fed and low rates to begin with are very powerful factors behind keeping us out of recession."
Strong global growth is propping up the U.S. economy.
Global economic growth is raising demand for U.S. goods, offsetting softer domestic consumption. Emerging markets, which buy more than half of U.S. exports, continue to grow, some at an accelerating pace, even as industrialized economies cool.
A weakening dollar -- in part due to the Fed's easing of interest rates -- will help carry the economy through its rough patch. It will help make U.S. exports more attractive to foreign consumers, and help U.S. producers that compete with foreign producers. Moreover, foreign companies may capitalize further on the falling dollar by investing more in the U.S. -- for example, by buying stock in American companies or setting up their own factories in the U.S.
The economy is still creating jobs, supporting incomes.
The job market is signaling a modest slowdown in hiring but not a sharp increase in layoffs. While jobs continue to bleed from the housing and finance sectors, growth in service jobs remains robust and most other sectors remain afloat.
Economists in the WSJ.com survey predict an average monthly gain of about 84,000 nonfarm jobs over the next year, which would keep incomes growing and keep consumers spending. Shoppers defied many forecasts in November, opening their wallets despite concerns about the economy. That suggests the credit crunch and housing declines haven't hit consumers as hard as some analysts expected. Outside of housing, consumers and businesses can borrow at low rates. Moreover, people with the worst credit problems -- the ones least likely to get additional credit -- aren't the biggest spenders.
The housing downturn's pain will continue, but has already done much of its damage to growth.
For much of this decade, residential construction has been a significant driver of economic growth. But since last year, when home building began to tumble, housing's contribution has dropped substantially. Now, the share of economic growth due to residential-sector investment is so low that it has little room to shave GDP further.
One of the biggest questions hanging over the economy remains: How far is the housing market from its bottom? Though many major markets are experiencing steep price declines, much of the country is OK. The S&P/Case-Shiller index, a popular measure of home prices that has shown steep price declines, has limited geographic coverage -- perhaps overstating the extent to which the housing sector's declines will weigh on consumers.
"The states that are having a hard time are where there's been a lot of speculation," says Mark Nielson, chief economist at MacroEcon Global Advisors, which sees economic growth at more than 3% through next year. "Their economies probably will not do as well as the rest of the country."
Government spending remains strong.
And then there is the government -- not just Washington but state and local governments. Spending by state and local governments is contributing 25% of GDP growth this year -- and that is before an election year when officials will resist making cutbacks. "State and local spending is kind of an unsung hero here," Mr. LaVorgna says. It tends to lag federal spending and should continue to perform well next year even if it slows in 2009, he says.
The odds of recession have risen, and the economy's skies are cloudy. But there is a chance the skies will be sunnier by the middle of next year.
Write to Sudeep Reddy at sudeep.reddy@wsj.com

[legion]

I think they had this guy on the "Noon Business Hour" on WBBM, Chicago yesterday.

I disagree with his conclusion. I think the economy will see a recession next year if for no other reason because everyone is expecting a recession and it will become a self-fulfilling prophecy. Oil and other raw-material prices are going up, and the Fed is cutting rates to sate Wall Street. While I hope that a weak dollar improves U.S. Manufacturing and pinches China (with their currency pegged to the dollar, it makes their raw material costs rise), it is definitely making life tougher for Joe-every-consumer.

[turbo6bar]

I've often heard no panel of economists has ever predicted any recession in US history.

The author pays no attention to the credit market woes. The indifference towards this growing problem is dangerous.

[legion]

And doesn't the "dart board portfolio" consistently outperform professional financial advisers? And the DJIA consistently outperforms both? My point is that "professionals" are often rather miopic and fail/refuse to see the interrelationships between seemingly disparate things.

Still, I think most economists get the facts right, but may or may not have the correct conclusions. I think they are valuable to read in drawing your own conclusions.

[jyl]

1. The Fed's rate cuts did not prevent the last two recessions.
2. Europe's economies are rolling over. Ditto Japan. Ex-Jpn Asia's economies remain largely export-driven, hence unlikely to decouple when their customers, the G8, are rolling.
3. Official employment data is a lagging indicator, and turns down after the recession begins. More timely indicators like temp employment have already rolled over.
4. The housing industry downturn has made a direct impact on employment/GDP, but the fall in prices has just started to impact consumer spending. Those who bought before (appx) 2005 still have gains, so mortgage equity extraction remains significant. Further price declines will erase those. The consumer has a lot of balance sheet repair to be done.
5. Most states will fall into serious budget deficits in 2008, and will cut back on spending. The Federal govt's biggest spending priority, the war, is economically unproductive.
6, As Jurgen notes, the financial system is in crisis, a major problem that the author omits to mention.
7. Finally, as legion notes, economists are also a lagging indicator when it comes to recessions.

Originally Posted by red-beard

Why Economists Are Betting
A Recession Won't Happen

By SUDEEP REDDY
December 17, 2007; Page A2

With the financial markets in turmoil and house prices sagging, there is a lot of talk that a recession is all but inevitable.
Yet there's a case that the economy might avoid a painful downturn. In the latest WSJ.com survey of economists, forecasters on average put the chance of a recession -- often defined as two straight quarterly declines in gross domestic product -- at 38%. That's the highest in more than three years, but the forecasters' best bet right now is that the U.S. will skirt a recession.
"A lot of the underlying resilience of the U.S. economy seems a bit unappreciated," says Citigroup economist Steven Wieting. "It's not clear that this is so large a burden that we can't muddle through this."
especially difficult at turning points, and the economy is sending mixed signals. But here are some reasons why the economy might avoid the ditch:
The Fed is on the case.
The Fed, which has cut its main target for short-term interest rates by a full percentage point since August, is expected to ease rates through the middle of next year to cushion the economy from housing and credit woes, and officials are experimenting with new tools in an effort to ease the credit crunch and encourage banks to keep lending to worthy borrowers.
The Fed's actions may have already helped. Recessions typically don't begin when rates are this low, says Joseph LaVorgna, chief U.S. economist at Deutsche Bank. The federal-funds rate, charged on overnight loans between banks, peaked at an inflation-adjusted 3% in the current cycle, far lower than the 4% peak before the 2001 recession and the 5.3% high before the 1990-91 downturn.
"We're putting a lot of faith in the Fed," Mr. LaVorgna says. "A proactive Fed and low rates to begin with are very powerful factors behind keeping us out of recession."
Strong global growth is propping up the U.S. economy.
Global economic growth is raising demand for U.S. goods, offsetting softer domestic consumption. Emerging markets, which buy more than half of U.S. exports, continue to grow, some at an accelerating pace, even as industrialized economies cool.
A weakening dollar -- in part due to the Fed's easing of interest rates -- will help carry the economy through its rough patch. It will help make U.S. exports more attractive to foreign consumers, and help U.S. producers that compete with foreign producers. Moreover, foreign companies may capitalize further on the falling dollar by investing more in the U.S. -- for example, by buying stock in American companies or setting up their own factories in the U.S.
The economy is still creating jobs, supporting incomes.
The job market is signaling a modest slowdown in hiring but not a sharp increase in layoffs. While jobs continue to bleed from the housing and finance sectors, growth in service jobs remains robust and most other sectors remain afloat.
Economists in the WSJ.com survey predict an average monthly gain of about 84,000 nonfarm jobs over the next year, which would keep incomes growing and keep consumers spending. Shoppers defied many forecasts in November, opening their wallets despite concerns about the economy. That suggests the credit crunch and housing declines haven't hit consumers as hard as some analysts expected. Outside of housing, consumers and businesses can borrow at low rates. Moreover, people with the worst credit problems -- the ones least likely to get additional credit -- aren't the biggest spenders.
The housing downturn's pain will continue, but has already done much of its damage to growth.
For much of this decade, residential construction has been a significant driver of economic growth. But since last year, when home building began to tumble, housing's contribution has dropped substantially. Now, the share of economic growth due to residential-sector investment is so low that it has little room to shave GDP further.
One of the biggest questions hanging over the economy remains: How far is the housing market from its bottom? Though many major markets are experiencing steep price declines, much of the country is OK. The S&P/Case-Shiller index, a popular measure of home prices that has shown steep price declines, has limited geographic coverage -- perhaps overstating the extent to which the housing sector's declines will weigh on consumers.
"The states that are having a hard time are where there's been a lot of speculation," says Mark Nielson, chief economist at MacroEcon Global Advisors, which sees economic growth at more than 3% through next year. "Their economies probably will not do as well as the rest of the country."
Government spending remains strong.
And then there is the government -- not just Washington but state and local governments. Spending by state and local governments is contributing 25% of GDP growth this year -- and that is before an election year when officials will resist making cutbacks. "State and local spending is kind of an unsung hero here," Mr. LaVorgna says. It tends to lag federal spending and should continue to perform well next year even if it slows in 2009, he says.
The odds of recession have risen, and the economy's skies are cloudy. But there is a chance the skies will be sunnier by the middle of next year.
Write to Sudeep Reddy at sudeep.reddy@wsj.com

[jyl]

I posted about this in more detail on another thread, but watch the markets - already, the domestic-focused cyclical sectors (consumer discretionary, financials, telecoms) show that the markets expect a US recession. The export-driven cyclical sectors (industrials, materials, technology) will reflect the markets' views about a global slowdown.

[legion]

http://www.foxbusiness.com/markets/industries/finance/article/dollar-pressure-ahead-homesales-data_419898_9.html

Dollar Under Pressure Ahead Of Home-sales Data
SAN FRANCISCO -- The dollar was mostly lower Friday, ahead of the release of new-home sales data for November and Chicago-area manufacturing sentiment for December. "With risks for the U.S. economy vastly to the downside and the Federal Reserve still perceived as being dovish, it is little wonder the greenback is so susceptible to losses, especially at times of geopolitical distress," wrote Terri Belkas, currency strategist at Forex Capital Markets. The dollar index, which tracks the greenback against a basket of six major currencies, was at 76.360, down from 76.700 late Thursday. The euro was trading at $1.4687, up from $1.4605 late Thursday. The dollar was buying 113.23 yen, down from 113.67 yen Thursday. The U.K. pound sterling was at $1.9914, compared with $1.9941 Thursday.

[hytem]

Anybody watch the Lehrer report last night? They did a segment starting out with a lot of gloom and doom about "sub-prime" (=ARM), the housing "crisis", and the impending "recession."
They had four reporters from different parts of the country tell how the housing market and the economy were doing there.

Here was the response:

Philadelphia: housing good, economy good.

Kansas: housing good, economy good.

Michigan: housing bad, economy bad

LA: housing bad, economy good.


Conclusion: Housing is a mixed bag around the country. And it's being negatively affected by the media--people watching TV news are holding off buying. It is bad in Florida and California, where resort properties have been way overvalued by low mortgage rates a few years back (remember those 1% CDs and 2% ARMS? That's the "sub-prime" problem).

The word "recession" has crept into the TV news vocabulary. One reporter remarked that if you wish for a recession, you will get one. In other words, everybody thinks there's a recession, and they stop buying houses and cars. Result: a recession. The media leading the news.

[TheMentat]

One thing is for sure: if it happens, this will be the most widely anticipated recession in history...

[Moneyguy1]

So much of the economy is based on emotion. I wouldn't even try to predict whether there will be a full blown "recession" at this time, although I would not rule out the possibility.

[kach22i]

Originally Posted by hytem

Michigan: housing bad, economy bad

................. In other words, everybody thinks there's a recession, and they stop buying houses and cars. Result: a recession. The media leading the news.

In Michigan it's been terrible the last two years, next year is predicted to be no better. This is not the media leading us, it's our wonderful "I'm a wartime President" making all his friends rich and forgetting the rest of us.

[RoninLB]

The slow and steady Fed rate cuts encourage hopes that they will cut again in the future.

The Fed is encouraging a recession.

[WI wide body]

Originally Posted by Moneyguy1

So much of the economy is based on emotion. I wouldn't even try to predict whether there will be a full blown "recession" at this time, although I would not rule out the possibility.

It's not so much the economy that is emotion based nor is a true recession. What you probably meant is that the markets are emotion based.

[WI wide body]

Originally Posted by RoninLB

The slow and steady Fed rate cuts encourage hopes that they will cut again in the future.

The Fed is encouraging a recession.

That is probably true. But if you think that the Fed is encouraging a recession just wait until China and those other nations acquiring the more than $2 billion per DAY via our trade imbalance decide to cash in those American dollars.

What that is probably going to do the our economy and our standard of living might make a simple "recession" seem like a walk in the park. I hope not but I can see no other result if it's looked at truthfully and honestly.

Any economist who thinks that we can continue on that path with no dire consequences is at best a stupid dip***** and most likely a paid shill.

[Moneyguy1]

Wide:

The economy IS the markets. Psychologically, people react to the "news" they hear on a daily basis.

[WI wide body]

Originally Posted by Moneyguy1

Wide:

The economy IS the markets. Psychologically, people react to the "news" they hear on a daily basis.

You may be insulated from the real world. For Joe Sixpack and much of "the economy" the bull***** that Wall Street and the talking heads on TV puts out is far removed from their lives.

The "economy" most certainly cannot be defined by the mostly brainless actions of the clowns who trade stocks.

[legion]

Originally Posted by kach22i

In Michigan it's been terrible the last two years, next year is predicted to be no better. This is not the media leading us, it's our wonderful "I'm a wartime President" making all his friends rich and forgetting the rest of us.

Yes. Granholm has nothing to do with that.

High taxes, cutting services, highly litigious, pro-union/anti-business laws--they have nothing to do with it.

[Moneyguy1]

Not insulated, not by a longsight. I see every day people make irrational financial decisions. Sometimes it gets very discouraging. I could go into detail, but most folks who "think" already know of what I am speaking.

People heard "housing costs to continue upward" so many were convinced if they didn't buynow, they would never be able to buy. Ever see anyone chosen as the winner in a real estate bidding war by writing a letter to the current owner convincing them that they, the potential buyer would be the best one to take good care of the property? Emotion and greed ramped the real estate prices to a great extent, hyped by the media. Just one example.

Finance is (or at least until I retired was) my bread and butter. People are generally irrational about three things: Politics, Finances, and Religious beliefs. (We could add love into the mix, I suppose......)

[WI wide body]

Originally Posted by Moneyguy1

Not insulated, not by a longsight. I see every day people make irrational financial decisions. Sometimes it gets very discouraging. I could go into detail, but most folks who "think" already know of what I am speaking.

People heard "housing costs to continue upward" so many were convinced if they didn't buynow, they would never be able to buy. Ever see anyone chosen as the winner in a real estate bidding war by writing a letter to the current owner convincing them that they, the potential buyer would be the best one to take good care of the property? Emotion and greed ramped the real estate prices to a great extent, hyped by the media. Just one example.

Finance is (or at least until I retired was) my bread and butter. People are generally irrational about three things: Politics, Finances, and Religious beliefs. (We could add love into the mix, I suppose......)

I agree with most of what you say here but you did not address my point in the previous post that "the market" is not the determining factor per the economy nor to the average working American.

[9dreizig]

Originally Posted by kach22i

In Michigan it's been terrible the last two years, next year is predicted to be no better. This is not the media leading us, it's our wonderful "I'm a wartime President" making all his friends rich and forgetting the rest of us.

That's BS, I grew up in MI, most of your problem there is the autoworkers have been underworked and over paid for so many years they priced themselves out of jobs.. While the rest of us had $20 co-pays the UAW refused to bear even a penny of the health care costs..
In addition the product for alot of years was shoddy, now that it's a decent one, the liberal media refuses to give them a break, hence continuing poor sales. In addition the liberal -pro union government has made it that no company in their right mind would move into Michigan.
The problem is much bigger and has been around much longer than Bush..
Don't forget your president Clinton gave us NAFTA.....