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Printer Friendly View (with text zoom)Editors: You are welcome to quote from this article, or use it in its entirety, in your publication or on your website, as long as the credit at the end of the article is also included. Readers are also welcome to e-mail, or print and snail-mail it to friends. It is now also available as an automatic RSS feed, assuring that future articles will be sent to you automatically if you subscribe to the automatic feed (it's free). You can subscribe to our RSS feed at: http://www.streetsmartreport.com/RSS or copy the URL to your feed reader. BEING STREET SMART by Sy Harding Why We May Already Be In Recession! August 27, 2010.
First let’s look at the trend.
After an unusual four straight quarters of negative growth in the severe
2008-2009 recession, the recession ended in the September quarter of last year
when GDP managed fragile growth of 1.6% for the quarter, and then improved to
5.0% growth in the December quarter.
It was understood that much of that growth was temporary, fueled by government
spending, and spending by consumers provided with government bonuses and
rebates, as well as temporary rebuilding of inventories by businesses. But it
was expected that with that jumpstart the recovery could continue on its own
legs.
So, it was a bit of a surprise when GDP growth slowed to 3.7% in the March
quarter of this year while those programs were still having an influence. But
economists still expected the economy would grow at a 3% pace in the June
quarter even with those programs winding down, and for the rest of the year.
So, it was a real disappointment when 2nd quarter growth was reported
a month ago as having been only 2.4%. And when additional data became available
for May and June, the last two months of the 2nd quarter, and those
reports were increasingly negative, economists predicted that Q2 GDP growth
would be revised down to only 1.3%.
On Friday, the revision was released, and it showed Q2 growth slowed
significantly, but only to 1.6%, not as bad as the latest forecast.
The media and the stock market, starving for good news, and short-term oversold
after being down 10 of the previous 13 days, took it as a positive.
But let’s get real.
The issue is not whether economists got their forecast right or wrong, but the
degree to which economic growth is slowing. And a trend of 5% growth in the
December quarter, followed by a 1.3% decline to 3.7% growth in the March
quarter, followed by a 2.1% decline to 1.6% growth in the March quarter is a
chilling rate of decline.
Now factor in that economic reports so far for July and August, the first two
months of the 3rd quarter, have been significantly worse than those of May and
June, and significantly worse than economists’ forecasts, with the relapse
pretty much across the board; in the housing industry, manufacturing, retail
sales, consumer and business confidence, the decline in U.S. exports, and so on.
It’s not a stretch then to think that economic growth is declining by another
increment of more than 1.6% this quarter, which would have it in negative
territory, already in recession.
In his speech Friday morning at the annual economic symposium in Jackson Hole,
Wyoming, Fed Chairman Bernanke, while saying he still expects the economy to
grow in the second half “albeit at a relatively modest pace” did not put forth a
very convincing argument, using such phrases as “painfully slow recovery in the
labor market”. . . “economic projections are inherently uncertain”. . . . “the
economy is vulnerable to unexpected developments” . . . “the recovery is less
vigorous than we expected.”
Nor did he seem confident that the Fed’s depleted arsenal of tools to
re-stimulate the economy would be effective if needed. Two of the four possible
actions he mentioned seemed to suggest consumers and markets could be fooled
into confidence with mere talk.
His brief list of four possible actions were, “1) conducting additional
purchases of longer-term securities [bonds and mortgage-related securities]; 2)
modifying the Fed’s FOMC meeting communications to investors; 3) reducing the
interest the Fed pays banks on their excess reserves. And I will also comment of
a fourth strategy, proposed by several economists- namely, that the Fed increase
its inflation goals.”
Providing details on two of the four possible actions, he said, “The Fed’s
current statement after its FOMC meetings reflects the FOMC’s anticipation that
exceptionally low interest rates will be warranted ‘for an extended period’ . .
. A step the Committee could consider if conditions called for it, would be to
modify the language to communicate to investors that it anticipates keeping the
target for the federal funds rate low for a longer period of time.”
And of the fourth possible action in his list of four, he said the Fed could
alter the phrases it uses to communicate its goals for inflation by “increasing
its medium-term inflation goals above levels consistent with price stability.”
That’s scary stuff if those are two of the four actions the Fed sees as its best
options to re-stimulate the economy.
Also of concern, in its report revising Q2 GDP growth down to just 1.6%, the
Commerce Department reported that corporate earnings declined significantly in
the second quarter, after-tax earnings rising just 0.1%, compared to the gain of
11.4% in the first quarter. Meanwhile, Wall Street continues to ratchet up its
earnings estimates.
On the positive side, consumer spending, which accounts for 70% of the economy,
rose 2% in the second quarter, compared to 1.9% in the first quarter. But the
bad news is that the reports since, on consumer confidence and retail sales in
July and August, have been big disappointments.
Putting it all together, don’t be surprised if a couple of months down the road
we learn the economy was already in recession in the current quarter.
Sy Harding is
president of Asset Management Research Corp, and editor of
www.StreetSmartReport.com,
and the
free daily market blog,
www.streetsmartpost.com. These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance. Back to the Top Home Subscribe to RSS Feed
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