Sunday, February 17, 2008

Daily Deliberation #8: What is the state of the economy?

Sorry for another dearth of posts, but my creativity has taken another temporary nosedive, along with the temperature. So I'll leave it up to you, my faithful patrons, to fill in the blanks. Recession or no recession?

21 Comments:

Blogger Harry Eagar said...

The official definition of recession is two consecutive down quarters.

We haven't had one yet.

But we will.

The economy is both highly ramified and insulated by sectors these days -- an odd, apparently self-contradictory state. So some areas will continue to thrive.

Mine won't be one of them.

Disaggregate the aggregates!

February 17, 2008 10:58 AM  
Blogger Peter Burnet said...

No.

Sorry, but my analytical and debating skills have taken another temporary nosedive.

February 17, 2008 11:14 AM  
Blogger Mike Beversluis said...

Why, then, 'tis none to you; for there is nothing
either good or bad, but thinking makes it so

February 17, 2008 11:26 AM  
Blogger lonbud said...

Notwithstanding the wailing, moaning and rending of garments prevalent now among certain high priests of the credit markets, mortgage insurance, brokerage houses, building speculators and real estate financiers -- though their pleas for relief from the terrible justice of the free market's invisible hand are noteworthy -- certain sectors of the economy have fared rather well in this recent time of troubles.

Steel & Iron sports strong relative strength to the broader market, as do the Oil, Oil Service, Electric & Gas Utilities, Protection & Safety Equipment, Biomedics/Genetics, and Precious Metals sectors.

Areas of the economy not likely to feel much love any time soon include Business Products, Computers, Electronics, Finance, Internet, Media, Real Estate, Restaurants, Semiconductors, Software, Telephone, Textiles/Apparel and Wall Street.

Will we have a recession? The only thing certain is that by the time one is reported in the mainstream media and confirmed by government statistics, the real economy will already have embarked on its next round of growth.

February 17, 2008 11:43 AM  
Blogger Harry Eagar said...

Media would be all right -- more than all right -- except that it is being deliberately destroyed by free-range capitalists who have figured out they can loot solid companies, leave the shells and devil take the hindmost.

Like what happened to private municipal bus companies 50 years ago.

February 17, 2008 2:39 PM  
Blogger lonbud said...

Here's an interesting take on the many ramifications in play.

February 17, 2008 7:42 PM  
Blogger Hey Skipper said...

There has been a softening of the domestic air freight volumes over the last several months. I can only put a notional number on it -- a year - on - year reduction of about 3%. That is roughly the reduction in my company's domestic flight schedule.

International volumes appear unchanged.

An important factor to keep in mind (more below) is the weakening of the US dollar. IMHO, that will be an important counterweight to the weakness in the housing market.

I have noted that news stories on the economy always feature a line to the effect of some / many economists predict a whole host of very bad things.

They neglect to mention what the other economists are saying, thereby raising the odds the stories are creating the news.


lonbud:

... though their pleas for relief from the terrible justice of the free market's invisible hand are noteworthy.

Yes, they raise the specter of moral hazard. Unfortunately, often the consequences of holding their collective feeties to the fire is worse, at least in the short term, then the moral hazard problem.

However, with regard to sub-prime mortgages, I am unaware of the government bailing any companies out of their self inflicted problems.

The link regarding currency valuation ramifications is pretty much on the mark, with one exception. I have been traveling to China very regularly over the last year and a half. During that entire period, I have not seen an issue of the Shanghai Daily that doesn't have an article about asset bubble problems (plus the others in the link) flowing from an undervalued currency.

China is messing with the law of supply and demand.

February 19, 2008 11:26 AM  
Blogger lonbud said...

If we take FedEx as a proxy for the larger economy -- a not unreasonable exercise in my view -- a 3% YOY reduction in the company's freight volume/flight schedule says something about the grain of salt one ought take reports of the economy's imminent demise.

The 25% YOY reduction in the price of the company's common stock says something, too, which -- in the light of a nearly 8.5% YOY reduction in the value of the currency in which that stock is priced, says something even more.

I'm not clear on how a falling dollar is counterweight to the weakness in the housing market. Could you say more about that, HS?

China is messing with the laws of supply and demand

The laws of supply and demand are immutable, like the law of karma.

As a broker friend of mine likes to say when people ask him if the market is up or down, 'it depends on what you have in your portfolio.'

February 19, 2008 12:12 PM  
Blogger Harry Eagar said...

As for moral hazard issues, allow me to quote myself from my revidw of Sven Beckert's :"The Monied Metropolis":


Beckert is at his best in describing the contradictions of the intellectual underpinnings of the new bourgeoisie. "In an ironic twist, in their embrace of laissez-faire ideology, bourgeois New Yorkers called upon the state to enforce the laws of the market. Their own power depended on an institution that they saw at other times as an unnatural intervention into economic laws."

February 19, 2008 1:10 PM  
Blogger Harry Eagar said...

Man, this is going to be a test of my aging memory.

I'm at work, with a new computer and new brower.

I cannot see what I am typing in here, although it posts.

No doubt that will encoruage shorter posts.

February 19, 2008 1:12 PM  
Blogger Peter Burnet said...

"the contradictions of the intellectual underpinnings of the new bourgeoisie."?!

Moving to Paris, Harry?

February 19, 2008 2:08 PM  
Blogger Hey Skipper said...

lonbud:

The 25% YOY reduction in the stock price is predicated on a profitability outlook that preceded the housing market problems.

Basically, most of it is pricing the impact of higher fuel prices.

As for the 3% reduction in the flight schedule, that is a function of two things -- softening demand, and the fuel price driven desire to fly fuller airplanes.

The stuff that has come from the company is uses terms like "flat" and "softening" with respect to the domestic side of the airline.

The company expects US GDP to grow slowly in 2008.

The latest issue of The Economist, which is very harsh on the housing market in general, and Bush in particular, is forecasting 1.8% US GDP growth in 2008.

I think that sounds about right.

I'm not clear on how a falling dollar is counterweight to the weakness in the housing market. Could you say more about that, HS?

Our exports our increasing, as is foreign tourism in the US.

I have no idea how much those will compensate for the housing market.

February 19, 2008 4:20 PM  
Blogger Duck said...

Great discussion, all. My personal gut feeling is that we'll squeak by the year without a formal recession.

But the worst aspect of this slowdown is the realization that there is no longer a free market party in the US. The stimulus package that Bush passed with the Democrat congress proves the point. Stimulus, whether in the form of deficit spending from tax cuts or from spending increases (the current president managed both ends of that equation) cannot be equated with "limited government".

I seem to remember needling Mr Judd in many posts going back 4 or 5 years of the problematic nature of the housing bubble, derivatives, energy prices and the deleterious effect of the double deficits on the US dollar. Oh, and the rise of gold prices too. If I cared that much about rubbing his nose in it, I'd dredge up a few of those posts.

February 19, 2008 4:51 PM  
Blogger Duck said...

Sorry, but my analytical and debating skills have taken another temporary nosedive.

You had analytical skills?

February 19, 2008 4:52 PM  
Blogger Hey Skipper said...

The very, very latest from my company:

"US GDP is expected to grow around 2.8% in CY08. Some of that is due to a solid employment market and strong profits from companies not in the financial segment. Also a weaker dollar has meant those outside the US can get a better deal on goods here, so that has strengthened demand for US exports."

February 19, 2008 7:57 PM  
Blogger lonbud said...

Don't forget that rising exports are only beneficial to the overall economy to the extent they out-pace a rising trade imbalance, which, despite eight years of devaluing our currency, has not happened.

Also, how long do you think that employment situation is going to remain solid in the face of rising inflation?

February 20, 2008 8:46 AM  
Blogger Hey Skipper said...

lonbud:

... rising exports are only beneficial to the overall economy to the extent they out-pace a rising trade imbalance, which, despite eight years of devaluing our currency

That is very simplistic.

Within the context of your statement, rising exports would be helpful by definition. However, as China is demonstrating right now, overdoing it isn't a good idea, either.

Besides, there are two other things to consider. The trade deficit is, in fact, falling.

Despite record high oil prices.

Also, trade balance numbers are notoriously inept at capturing spending on services.

Also, how long do you think that employment situation is going to remain solid in the face of rising inflation?

It is funny how some things get reported as fact, yet could not be further from the real thing.

Inflation is solely a monetary phenomena.

Rises in prices due to, say, an increase in the cost of oil, are simply supply & demand in action.

Taking into account hedonic inflation, the actual inflation rate is ignorable.

February 20, 2008 10:40 AM  
Blogger lonbud said...

HS:

The trade deficit is, in fact, falling.

In 2007 the trade deficit was 3.3% smaller than in 2006 but remained above the level of 2005, and above the level of every year back to the dawn of the new millennium.

The trend over the past eight years has been an annual increase of nearly 12%, so I think it's probably a bit more accurate to say we've seen a pause in the trend of deficit increases.

Whether the trade deficit is falling we won't be able to say until FY08 puts up some numbers.

Here is a canary in that employment coal mine.

And I'm interested in hearing an explanation of how hedonic inflation makes a 13% YOY increase in the cost of household necessities (gasoline, up 22% YOY; food, up 6% YOY) 'ignorable.'

Finally, Martin Feldstein was out in the WSJ today with some not very sanguine views on the likely contours of the recession he says we are already in.

February 20, 2008 8:21 PM  
Blogger Hey Skipper said...

And I'm interested in hearing an explanation of how hedonic inflation makes a 13% YOY increase in the cost of household necessities (gasoline, up 22% YOY; food, up 6% YOY) 'ignorable.'

Because one is not the other.

An increase in prices driven by an increase in the cost of an underlying commodity is not inflation.

It is simply supply and demand in action.

That may sound like a distinction without a difference, but it isn't.

Inflation is systemic, there is no escaping it.

However, there is escaping commodity cost increases: buy a smaller car; eliminate unnecessary trips; carpool; eat out less, etc.

I think it is amazing the trade deficit is falling despite the 22% YOY increase in oil costs.

Imagine what would have without that.

The other thing I think is amazing is how far the economic goal posts have moved.

Inflation is quiescent, and even if unemployment increased to 5.5% -- which would be reported as disastrous -- it would be a number nearly all European countries entertain only in their dreams.

I predict US GDP to be within 1/2 percent of flat for the first two quarters, and between 1.5 and 2.5% for CY08.

February 20, 2008 9:55 PM  
Blogger lonbud said...

It's been several days since anyone offered a deliberation on the state of the economy, so I thought I'd poke the skunk a little bit and offer this compendium of current indicators, still hot and steamy as of today's market close:

The price of oil broke an inflation-adjusted all-time record of $103.95 today.

The dollar sank to a 35-year-low against a basket of foreign currencies.

Gas prices hit record highs in several California markets.

General Motors reported a 13 percent drop in February car sales; Ford, 6.6 percent.

A measure of manufacturing output dropped to its lowest point in five years.

The commercial real estate sector is now beginning to display some of the same financial woes that crippled the residential housing market.

Foreclosures outnumber home sales in some U.S. states.

In a 3-hour interview with MSNBC today, Warren Buffett had this to say: I get the figures from many markets on listings and sales, and I've seen something like Dade and Broward County go from 6,000 listings and 3600 sales a month to where they're now, I think, 82,000 listings and about 1500 sales a month.

Fallout from the credit crunch, will likely cause around $900 billion dollars worth of damage to "Main Street."

Just in case anyone was still wondering...

March 03, 2008 3:23 PM  
Blogger Hey Skipper said...

lonbud:

Interesting grist for the mill.

Each of those items, though, are something of a two edged sword.

Rising oil prices are not necessarily a bad thing, particularly if one wants to move away from oil dependency.

Also, the rising oil prices are, in no small part, due to a decline in the relative value of the dollar.

Which is also not necessarily a bad thing, since it makes US exports far more competitive.

Even the decline is house values has a flip side -- there will be lots of people who will become homeowners that would not have been able to before. I sold my house in Michigan last spring at a substantial loss.

To first time homeowners.

Where I live, listings, sales, and prices have been very stable over the last couple years. No, my city isn't the rule, but neither is Dade & Broward County.

Todays NYT reported corporations have huge cash reserves, larger than at any time in the last 40 years.

I think your link putting the putting the cost to "Main Street" of around $900B may well be on the mark. However, the article's conclusion that the consequence will be a reduction in 2008 growth by 1 - 1.5% from what it would have been otherwise is the most important number to keep in mind.

US economic performance in 2008 will be slow to flat. While not a great thing, it isn't a disaster, either.

BTW -- I have heard nothing more about reduced flight schedules.

March 04, 2008 4:13 PM  

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