The wrong time for recession
MY COLLEAGUE makes a good case that Europe is on the verge of a double dip. What about America? Its odds of recession have risen in the last month but I’d still put them below 50%. Yes, stock and bond markets have discounted the worst, but the hard data has actually gotten better. First, there was the positive employment report last Friday, largely drowned out by Standard & Poor’s downgrade of America’s credit rating. And we now have three consecutive weeks of relatively low initial unemployment insurance claims, hinting that the labour market’s improvement continued into early August. Finally, this morning we learned that retail sales performed relatively well in July. The 0.5% increase was in line with consensus estimates, but the composition of growth was better than expected: less came from autos and gasoline and more from home electronics, furniture and apparel. Morgan Stanley boosted its estimate of third quarter growth to 3%, annualised. Weekly chain-store sales reports have remained firm into early August, though they’re unreliable. The retail sales news is particularly important because it’s consistent with the theory that the spring surge in petrol prices was a major cause of the economic slowdown earlier this year. Petrol has since dropped back, to $3.67 per gallon as of August 8th, from a peak of $4 and the most recent slide in crude prices should nudge it down further. Beyond this positive data, an argument against recession is that the current composition of economic activity doesn’t look right. The Bank Credit Analyst points out that the economy is typically led into recession by “high-beta” sectors: housing construction, automobile sales and inventories. Yet all three are already at or near recessionary levels. Housing starts have yet to climb off the bottom, automobile sales have recovered only a third of their drop and the ratio of inventories to sales, after spiking during the recession, is now quite low. Just as a recovery needs a self-supporting cycle of rising production, income and spending, so a recession needs the opposite. That is less likely if the most vulnerable sectors are already moribund. Of course, they could be pounded even lower by a large enough shock. The spike in oil prices might have done it, but it is now reversing. What about the equity market sell-off? Goldman Sachs estimates that the roughly 16% decline in stockmarket wealth since late July would knock 0.7 percentage points off growth by the end of 2012, while the decline in interest rates and oil prices would add 0.4 points. That yields a net effect of minus 0.3 points: a drag, to be sure, but not enough to generate recession.Of course, business cycles are heavily driven by psychology. Today the University of Michigan said consumer confidence had fallen sharply. That was led by a decline in consumer expectations of the future, no doubt thanks to relentless bad news about America’s credit rating, Europe and the Dow. If something would just distract the news media from the economy, we might have a chance. Where’s Charlie Sheen when you need him?
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