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Are we in a economic recession? The short version February 10, 2008

Posted by Daniel Downs in economics, news, political economy.

Are we in a economic recession? The question itself suggests that we could be. The “we” I’m referring to is not just us Americans but rather the rest of world over which Wall Street, the central banks, and the American government oversees. If I were a financial expert, I would say we probably are. Because I am not, I’ll let the experts speak for themselves.

In this short version of my answer, I’m going focus one expert, John Mauldin, whose newsletter, Thoughts from the Frontline, has addressed this very concern. In last week’s newsletter, Mauldin mentioned that Europe is also in a recession. That is in spite of the high prices for a Starbuck venti decaf that ranges from $4-$7 dollars, depending on which country visited.

Okay, what does Mauldin say is causing our recession? The obvious cause is the bursting housing bubble. He also says, based on new housing data:

“[H]ome values are down almost 8% nationwide, with many areas in double digit declines. And it is likely to get worse. 1.3 million homeowners are in some state of foreclosure, or about 1% of homeowners nation wide, and the numbers grows each month. Predictions of 2,000,000 homes in foreclosure made in late 2006 in this letter no longer look ridiculous. No wonder that many (including your humble analyst) forecast a drop of 20% or more in home values.

“Further, there are 2.18 million homes that were vacant and for sale in the 4th quarter. That’s 2.8% of all homes. We are edging ever closer to a national average of 12 months supply of homes for sale this spring, with many more homeowners who would like to sell simply not bothering to list their home. The good news is that if you want to buy a home, you are likely to find a very willing seller at a very good price.”

The last recession (2001-02) was hardly noticed because mortgage equity withdrawals (MEWs) enabled us to increase our consumer spending. “Without MEWs we would have seen two solid years of recession rather than a few quarters, and a decidedly below trend economy. Such large MEWs were possible because of the bubble in housing prices and the availability of cheap and easy mortgages.”

Mauldin goes on to say that this time MEWs will not save us from recession. In other words, consumer spending is slowing down, and a decrease in consumer spending signals a recession.

Further proof of a slow down in consumer spending includes foreclosures, increased credit card delinquencies, and lower retail store sales. He also believes that as housing values slide, consumer spending will slow even more.

Another telltale sign of a recession is rising unemployment. According to Mauldin, “last week jobless claims rose almost 20%, to 378,000. This week they came in at 356,000.” That doesn’t include the 520,000 self-employed who are also out-of-work. As of last week, the unemployment rate was at 4.9%, about 0.6% above the peak. “That level of rise has always been associated with a recession in the post-WW2 period. It is likely unemployment will rise to over 6%, and 7% is certainly possible.”

The following chart by Mauldin shows recent employment trends.

Like many other experts, Mauldin claims government employment data lags behind our real world economy–our declining recessionary economy. But don’t let that bother you; there is still more bad news.

According to Goldman Sachs CFO David Viniar, some key mortgage bond insurers could collapse. “Viniar, speaking at a CSFB conference, said credit markets are trading as if we are in a ‘worst recession’; and there is a ‘total disconnect between the equities market and the credit market.'” (The Bill King Report) So what does that mean? It means credit is costing 13% more that it did.

It also means investors are discounting debt instruments by large amounts to get rid of them.

“Goldman Sachs now estimates that the total loss in the mortgage security world will total $400 billion.”

Mauldin presents another indicator of recession. This one is an index of our economy called the ISM Services Survey, which is available at http://www.economy.com. The index represents about 70% of our economy including retail stores, restaurants, and all types of services.

“For those of you not familiar with the index, a number above 50 suggests the factor being measured is increasing, and below 50 suggests a contraction.”

Throughout 2007, the index remained stable between 53 and 55. In January 2008, the index drastically fell to about 44. This significant contraction “suggests that business expectations are being drastically reduced. Employment expectations are sharply down, suggesting that it will be harder to get a job in the near future. New orders were down severely, as well as all the other forward-looking indicators.” The trend bodes ill for business that relies on consumer spending. (To see the chart, click here.)

The billion-dollar question is whether Washington’s $150 billion economic stimulus plan will make any real difference. Mauldin says it “should add about 1% of GDP into the economy over the last half of the year, and maybe even this spring if they can get it done fast  enough, and that will be a boost to consumer spending.” Maybe….

The good news about recessions, according to John Mauldin, is that they are temporary. Recessions are part of the business cycle. When we live too high on the hog, recessions are means of correction. Being a Christian, I wanted to write, recessions are a form of temperance.

Anyway, there is the short version. I hope to add to this a long version or at least one with diversity of experts.



1. Bad Debt » Blog Archive » Are we in a economic recession? The short version - February 10, 2008

[…] Read the rest of this great post here […]

2. Tim Ramsey - February 10, 2008

I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.

Tim Ramsey

3. Dean Calvert - February 10, 2008

Good info. and read. Will be back soon to read more of your information.

4. Ron Holland - February 11, 2008

I believe Merrill Lynch is correct about the arrival of recession in the United States and Ron Paul and the Austrian economy theory is the only real solution to these problems made worse by the Federal Reserve.. The housing downturn is negatively impacting property sales in second home communities in Florida. This is also slowing sales in NC mountain resorts that depend on Florida buyers.

Still the downturn in prices and building of inventories is starting to attract second home buyers from Florida looking for cool temperatures in our mountains. Also the dramatic decline in the dollar combined with weakness in American real estate markets are beginning to attract bargain hunting European investors.

Ron Holland, Broker/Realtor with Wolf’s Crossing Realty. See http://www.ronaldholland.com Ron markets resale mountain and ski resort properties in NC in Wolf Laurel and The Preserve at Wolf Laurel.

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