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Recession in the US: The perfect storm arrives

indiaBPOking

2008-01-09, 10:03 pm

http://www.domain-b.com/economy/gen...rm_arrives.html

Rajiv Singh
09 January 2008

2008 has begun on a grim note for the US economy with Merrill Lynch
and Goldman Sachs both issuing recession calls this w

.

"According to our analysis, this [recession] isn't even a forecast any
more but is a present day reality," says Merrill Lynch economist David
Rosenberg on what his many peers amongst the forecasting and economist
community have been predicting for long - after 16 years, the United
States has finally stepped into recession.

He was commenting on the four key barometers used by the National
Bureau of Economic Research (NEBR) - employment, real personal income,
industrial production, and real sales activity in retail and
manufacturing.

He says these "seem to have peaked around the November-December
period, strongly suggesting that we are actually into the first month
of a recession."

"This isn't about 'labels,'" Rosenberg says. "What is important about
recessions is that while each may have its own set of particular
characteristics, there are also unmistakable investment patterns that
emerge time and time again."

"Friday's employment report strongly suggests that an official
recession has arrived. The recession dating committee at the National
Bureau of Economic Research will be the final arbiters but since it
waits for conclusive evidence it may be at least two years before we
are notified."

Rosenberg's assertion comes on the heels of a Morgan Stanley report in
November last year, which warned that recession was already well on
its way.

Even as Rosenberg issued his warning on Monday, 7 January, Goldman
Sachs economists followed through with a somewhat hedged response
today. In a research note to clients, Ed McKeley, senior US economist
at Goldman Sachs in New York said, "The latest data suggest that
recession has now arrived, or will very shortly."

The perfect storm
Last year, mid-November, Morgan Stanley issued a full recession alert
for the US economy, warning of a sharp slowdown in business investment
and a "perfect storm" for consumers as the housing slump spreads.

In a report 'Recession Coming,' the bank's chief US economist, Dick
Berner, said the credit crunch had begun to seriously damage US
companies. "Slipping sales and tightening credit are pushing companies
into liquidation mode, especially in motor vehicles," it said.

"Three-month dollar Libor spreads have jumped by 60 to 80 basis points
over the last month. High yield spreads have widened even more
significantly. The absolute cost of borrowing is higher than in June."

"As delinquencies and defaults soar, lenders are tightening credit for
commercial, credit card and auto lending, as well as for all mortgage
borrowers," said the report.

Berner also said that the foreclosure rate on residential mortgages
had reached a 19-year high of 5.59 per cent in the third quarter even
as the stagnating pool of unsold properties threatened to trigger off
a 40 per cemt crash in housing construction.

"We think overall housing starts will run below one million units in
each of the next two years -- a level not seen in the history of the
modern data since 1959," he said.

The November report pointed out that though the US job market seemed
to be holding up, an average monthly fall of 138,000 in the number of
self-employed workers over the previous quarter appeared to suggest
that figures were likely to shoot up before long.

"Consumers face what could be a perfect storm," said Berner.

According to Berner, US demand was likely to contract by 1 per cent
each quarter for the first nine months of 2008.

The maestro
Berner's assertion rattled Wall Street for he is known at Morgan
Stanley as the "resident bull." But even bulls turn tail given the
unmistakable signs of a bubble ready to burst.

Earlier on in February 2007, former US Federal Reserve chairman, Alan
Greenspan, warned that the American economy might slip into recession
by the end of the year. He said the US economy was expanding since
2001 and that there were signs that the current economic cycle was
coming to an end.

"When you get this far away from a recession, invariably forces build
up for the next recession, and indeed we are beginning to see that
sign," Greenspan said. "For example in the US, profit margins ... have
begun to stabilise, which is an early sign we are in the later stages
of a cycle." Greenspan said he could not rule out the possibility of a
recession late into 2007.

Importantly, at that point of time, Greenspan also said he had seen no
economic spillover effects from the slowdown in the US housing market.
"We are now well into the contraction period and so far we have not
had any major, significant sdpillover effects on the American economy
from the contraction in housing."

His comments were probably the trigger for a sharp response from
Morgan Stanley's chief economist, Stephen Roach, less than a month
later. For Roach, the situation at that point of time was primed for a
sdpillover.

Bubble to bubble
"From bubble to bubble - it's a painfully familiar saga," wrote
Stephen Roach in a despatch from Beijing (The Great Unravelling, March
16, 2007). "First equities, now housing. First denial, then grudging
acceptance. It's the pattern and its repetitive character that is so
striking. For the second time in seven years, asset-dependent America
has gone to excess. And once again, twin bubbles in a particular
asset class and the real economy are in the process of bursting - most
likely with greater-than-expected consequences for the US economy, a
US-centric global economy, and world financial markets."

"Sub-prime is today's dot-com - the pin that pricks a much larger
bubble," wrote Roach.

"Yes, the US housing market is currently in a serious recession - even
the optimists concede that point. To me, the real debate is about
"spillovers" - whether the housing downturn will spread to the rest of
the economy. In my view, the lessons of the dot-com shakeout are key
in this instance. Seven years ago, the spillover effects played out
with a vengeance in the corporate sector, where the dot-com mania had
prompted an unsustainable binge in capital spending and hiring. The
unwinding of that binge triggered the recession of 2000-01."

"Today, the spillover effects are likely to be concentrated in the
much large consumer sector. And the loss of that pillar of support is
perfectly capable of triggering yet another post-bubble recession."

The pillar of support
Data, released over the past two w

s, from 2007 over into 2008,
provide some indication of the depth of the crisis facing the US
economy:

Holiday sales: Spending between Thanksgiving to Christmas rose just
3.6 per cent over last year, the weakest performance in at least four
years, according to MasterCard Advisors. Sales had grown 6.6 per cent
in 2006 and 8.7 per cent in 2005.

Excluding gasoline purchases, overall holiday sales actually went up a
mere 2.4 per cent, the credit card company said.

Auto sales: US sales of cars and light trucks fell in 2007 to their
lowest level in nine years. The industry reported a 3 per cent drop in
sales in December. Most forecasters predict a further slide in 2008.

Manufacturing: The Commerce Department reported that durable goods
orders declined 0.1 per cent in November, the fourth consecutive
monthly decline. The Institute for Supply Management said its
manufacturing index for December fell below the 50 per cent break-even
point, dropping to an almost four-year low.

Housing: New home sales fell 9 per cent in November to a 12-year low,
down 34.4 per cent over the previous year. Sales of previously owned
homes were down 20 per cent from November 2006. Overall, there has
been a combined 34 per cent drop in combined new and existing home
sales from the July 2005 peak.

MasterCard said that the poor holiday sales portend a slump in
consumer spending, which accounts for some two-thirds of the US gross
domestic product.

The dollar's downward slide against the euro, the yen and other
currencies has resumed in the New Year, fuelling the rise in oil and
gold prices, both of which commodities are trading at record levels.
Oil is at $100 per barrell, up from $61 at the end of 2006. Wheat,
corn, rice, soybean and metals such as copper are all on an upward
swing. Wheat and soybean prices have gone up 75 per cent.

Overall, December has registered the lowest monthly increase in jobs
in over four years with the total increase in payrolls for 2007 at the
lowest since 2003. Of 84 manufacturing industries, only 31.5 per cent
were hiring in December.

With Labour Department's monthly report showing job growth at a
virtual standstill, the Dow Jones Industrial Average (DJIA) fell
257.44 points, or 2 per cent on the same day that the report was
released.

In just three trading days this year, the DJIA has erased more than
half of its gains for all of 2007.

The spillover
Elaborating on the spillover phenomenon in his despatch, Roach said,
"The case for a consumer spillover is compelling, in my view. A
chronic shortfall of labour income generation sets the stage - real
private compensation remains over $400 billion below the trajectory of
the typical business cycle expansion. At the same time, reflecting
the asset-dependent mindset of the American consumer, debt and debt
service obligations have surged to all-time highs whereas the income-
based saving rate has dipped into negative territory for two years in
a row - the first such occurrence since the early 1930s."

"...In my view, that puts the income-short, saving-short, overly-
indebted American consumer now very much at risk - bringing into play
the biggest spillover of them all for an asset-dependent US economy.
February's surprisingly weak retail sales report - notwithstanding
ever-present weather-related distortions - may well be a hint of what
lies ahead."

Roach then goes onto point out, "It didn't have to be this way. Were
it not for a serious policy blunder by America's central bank, I
suspect the US economy could have been much more successful in
avoiding the perils of a multi-bubble syndrome. Former Fed Chairman
Alan Greenspan crossed the line, in my view, by encouraging reckless
behaviour in the midst of each of the last two asset bubbles."

"In early 2000, while NASDAQ was cresting toward 5000, he was
unabashed in his enthusiastic endorsement of a once-in-a-generation
increase in productivity growth that he argued justified seemingly
lofty valuations of equity markets. This was tantamount to a green
light for market speculators and legions of individual investors at
just the point when the equity bubble was nearing its end."

"And then only four years later, he did it again - this time directing
his counsel at the players of the property bubble. In early 2004, he
urged homeowners to shift from fixed to floating rate mortgages, and
in early 2005, he extolled the virtues of sub-prime borrowing - the
extension of credit to unworthy borrowers. Far from the heartless
central banker that is supposed to "take the punchbowl away just when
the party is getting good," Alan Greenspan turned into an unabashed
cheerleader for the excesses of an increasingly asset-dependent US
economy. I fear history will not judge the Maestro's legacy kindly.
And now he's reinventing himself as a forecaster. Figure that!"

Exit strategy
"The exit strategy is painfully simple: Ultimately, it is up to Ben
Bernanke and whether he has both the wisdom and the courage to break
the daisy chain of the "Greenspan put." If he doesn't, I am convinced
that this liquidity-driven era of excesses and imbalances will
ultimately go down in history as the outgrowth of a huge failure for
modern-day central banking. In the meantime, prepare for the downside
- spillover risks are bound to intensify as yet another post-bubble
shakeout unfolds," concludes Roach.

A dire prediction then, at the start of 2007, but well on its way to
realisation now, almost a year later, as 2008 begins on an ominous
note for the US economy.

Fed Up in L.A.

2008-01-10, 8:03 am

"indiaBPOking" <indiabpoking@yahoo.com> wrote in message
news:57fa8535-6ff7-4805-b2c7-4528a08655be@l6g2000prm.googlegroups.com...
> http://www.domain-b.com/economy/gen...rm_arrives.html
>
> Rajiv Singh
> 09 January 2008
>
> 2008 has begun on a grim note for the US economy with Merrill Lynch
> and Goldman Sachs both issuing recession calls this w

.
>
> "According to our analysis, this [recession] isn't even a forecast any
> more but is a present day reality," says Merrill Lynch economist David
> Rosenberg on what his many peers amongst the forecasting and economist
> community have been predicting for long - after 16 years, the United
> States has finally stepped into recession.
> shakeout unfolds," concludes Roach.
>

Sir IndiaBPOking,

Given the fact that so many Americans are in debt up to their eyeballs, do
you believe that there is anything he or she can do to prepare for the
economic hard times that are yet to come?

indiaBPOking

2008-01-10, 10:07 pm

On Jan 10, 2:42 am, "Fed Up in L.A." <not...@la.la> wrote:
> "indiaBPOking" <indiabpok...@yahoo.com> wrote in message
>
> news:57fa8535-6ff7-4805-b2c7-4528a08655be@l6g2000prm.googlegroups.com...
>
>
>
>
>
> Sir IndiaBPOking,
>
> Given the fact that so many Americans are in debt up to their eyeballs, do
> you believe that there is anything he or she can do to prepare for the
> economic hard times that are yet to come?

Good question. I have a simple answer for you. Simply boycott the
American system.

If they ask you to take courses at University of Phoenix to reskill
yourself then dont do it. No need of raking up $20000 dollars in
educational loans per year!
If they ask you to get health insurance then dont get it...complete
waste of money. Instead, do things to keep yourself healthy and lead
a risk-free lifestyle!
If they ask you to get a car insurance...then dont drive a car. Why
waste your daily time unnecessarily in nasty American traffic. Take
the bus or light rail!
If they say that the American dream is to own a home...then trash
their bullshit. Rent a nice home in a relatively cheap city like
Phoenix or Vegas and share it with few other people...you'll reduce
your rental costs to few hundred dollars a month! Avoid home
ownership at all costs! No need to waste money in huge mortgages,
property taxes, maintainance costs and the rest!
Go live in a place where jobs are easily available in all sectors and
industries..like Las Vegas again! Do a full-time job and a second
part-time job for extra money so you can save up and retire early.

There are many other things you can do...but you can think of those by
yourself.

indiaBPOking

indiaBPOking

2008-01-10, 10:07 pm

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