Impending Recession

[August1991]

I'm not normally given to dire predictions of the imminent collapse of western civilization. But I think it's reasonable to predict that the US economy is on the verge of a slowdown/recession, and this is going to affect the Canadian economy.

The question is when it will occur, and how serious it will be. Who knows?

The evidence:

First, take a look at this graph. It shows the number of times the "R-word" (recession) has appeared on (reputable) macroeconomic blogs over the past year. (The article goes on to argue that the US federal government will have little fiscal room to take a counter-cyclical position.... Well, anyway....)

Second, take a look at these economic indicators at the US Census website. They are devastating. The leading indicators (housing starts/sales, construction, durable goods, inventories) are all down. Retail sales are still strong.

Here's what The Economist had to say last week:

IF YOU could watch just one indicator to gauge America's economic prospects over the next few years you should pick house prices. A year ago most economists thought that average prices were unlikely to fall across the nation. Now many of them have begun to worry about the consequences of falling prices for America's economy. Figures out this week from the National Association of Realtors show that average home prices barely rose over the past year, compared with annual growth of around 15% in mid-2005. In some parts of the country, prices are already falling. Adjusted for inflation, the average home is worth less than it was a year ago.

The housing boom has been the main engine of America's economic growth in recent years. Indeed, it is the main reason why the American economy held up better than expected after the stockmarket bubble burst at the start of the decade. Since 2000 the real wages of most American workers have barely budged, yet surging house prices have allowed consumers to keep spending. Over the past five years the total value of American homes has increased by more than $9 trillion, to $22 trillion. These gains helped to offset both the slide in share prices and feeble wage growth.

Falling housing prices? Here's where the problem arises:

The Conference Board Consumer Confidence Index, which had increased moderately in July, posted a sharp decline in August. The Index now stands at 99.6 (1985=100), down from 107 in July. The Present Situation Index decreased to 123.4 from 134.2. The Expectations Index declined to 83.8 from 88.9 last month.

"Consumer confidence lost significant ground in August and is now at its lowest level this year," says Lynn Franco, director of The Conference Board Consumer Research Center. "Less favorable business conditions coupled with a less favorable job scenario have resulted in the largest one month decline in confidence since Hurricane Katrina last year. Looking ahead, the glass remains half empty as consumers are growing increasingly more pessimistic about the short-term outlook."

Some link

This blogger has attracted attention by making predictions about a recession worse than in 2001:

The Biggest Slump in US Housing in the Last 40 Years: These are not my views but those of the Toll Brothers, the famous luxury McMansions homebuilders, as CNN reported last week. Also, as reported by the WSJ today: In his 40 years as a home builder, Mr. Toll says, he has never seen a slump unfold like the current one. "I've never seen a downturn in housing without a downturn in employment or... some macroeconomic nasty condition that took housing down along with other elements of the economy," he says. "This time, you've got low unemployment, you've got job creation, you've got a stable stock market and relatively low interest rates."

True, US unemployment is still very low, the US Fed has not raised interest rates and the US trade deficit is still large.

The question seems to be about "soft landings", and how quickly the dead cat will bounce. Not whether the cat has fallen off the ledge.

Many boomers see their house as a their main source/measure of wealth. It's their nest egg for retirement. A fall in housing prices, or any news about a poor housing market, is bound to make them jittery.

[jdobbin]

I'm not normally given to dire predictions of the imminent collapse of western civilization. But I think it's reasonable to predict that the US economy is on the verge of a slowdown/recession, and this is going to affect the Canadian economy.

The question is when it will occur, and how serious it will be. Who knows?

It doesn't seem like it is coming any time soon.

http://www.msnbc.msn.com/id/14626631/

The one major correction was the insane housing construction that was occuring with no thought to supply.

[rover1]

I quite agree that the most likely scenario is a US recession in 2007 and perhaps before. I cannot say just how serious it will be, but it could be very serious and last for quite a while.

The depth and seriousness are probably both related to just how much the Americans have used their increasing equity in real estate to re-finance and buy consumer items from the resulting loan, thereby increasing their mortgages. sometimes to the point of being larger than the worth of their homes. Falling prices have insured that many owe more than the salable worth of their houses as well. Some of the newer loan and mortgage schemes have encouraged borrowing in this way.

The effect on Canada, of all this, is uncertain. If their recession is long enough and serious enough, it will no doubt have negative consequences here, but as many of our exports have more or less inelastic demand, and since there are some measures that the Bank of Canada can take to mitigate some of the negative, it could be small damage, amounting to a 'slow down'.

We shall just have to wait and see.

[Canuck E Stan]

Many boomers see their house as a their main source/measure of wealth. It's their nest egg for retirement. A fall in housing prices, or any news about a poor housing market, is bound to make them jittery.

August I think you're right, this is the big group that will be affected the most.

More than 50% of people have saved nothing.

The boomers are the ones that will feel a recession more than anyone, with age and health being a primary concern at this point in their life, their nest egg could collapse in very short order.

Many boomers who don't have anything saved for retirement and have nothing saved for that rainy day,which may end up giving up their dream of retiring and have to continue working for a longer period, providing they can. This recession could be a thunder storm for this group.

Twenety years ago the savings rate was 10%,last year it was a negative savings.

“The personal saving rate has been steadily declining for more than twenty years and is now negative. In other words, dissaving is occurring, as personal consumption expenditures (PCE) exceed personal income. U.S. Households are supplementing current income by drawing on assets and increasing indebtedness. Although a number of explanations have been offered to explain this imprudent behavior, we found that most of the steady decline in personal saving rates is attributable to the wealth effect; the propensity of individuals to save less out of current income when asset price inflation boosts their net worth. The decline in the saving rate between 1994 and 2001 is largely due to significant capital gains in equity holdings.”

SIA Research Report

[geoffrey]

Housing inventories aren't a very good measure in the real scheme of things. Industry dependant statistics can ignore the macroeconomic situation for very specific microeconomic problems. The housing industry built like mad, trying to capitalise on a strong market, and now they've realised they built too many houses. Market collapse, not likely. Home values plummeting, much more possible.

The only big downside to that is people will have less equity to borrow against and spend on 'luxury' items. But that's only really assuming the drop will be that big.

The reality of the situation is that the economy is still growing strong, and resource prices are on the way down because of a weak hurricane season which only helps the US. It's a pretty positive outlook.

[August1991]

The depth and seriousness are probably both related to just how much the Americans have used their increasing equity in real estate to re-finance and buy consumer items from the resulting loan, thereby increasing their mortgages.

That's a fair point but I think the evidence is more anecdotal than serious. The problem with falling asset values is the perception of net wealth and the effect this has on expenditure plans. In any case, I would expect the Fed to drop interest rates if a recession occurs. It's not so much that people are going to go bankrupt is that they'll decide to buy less. (In the grand scheme of things, is that a bad thing?)

The effect on Canada, of all this, is uncertain.

It is not uncertain at all. It will affect us. People claim that Canada was exempt from the recessions of the 1970s. Nonsense. But in any case, that was a different time with different problems.

If Americans decide to buy less of our stuff, there's not much the Bank of Canada or "elasticity" can do about it.

More than 50% of people have saved nothing. The boomers are the ones that will feel a recession more than anyone, with age and health being a primary concern at this point in their life, their nest egg could collapse in very short order.

For most boomers, the mortgage has been paid off and they have a pension of some sort plus RRSPs or 401k. A falling or stagnant house price is a psychological burden, at an age when people don't like surprises. It's astonishing the number of older well-off single women who are afraid of becoming bag ladies (bag lady syndrome).

[Canuck, I'm always uncomfortable with stats on indebtedness. For every person in debt, there is necessarily someone else who is saving.]

Housing inventories aren't a very good measure in the real scheme of things. Industry dependant statistics can ignore the macroeconomic situation for very specific microeconomic problems. The housing industry built like mad, trying to capitalise on a strong market, and now they've realised they built too many houses.

Admittedly, the US economy has been chugging along now for about 15 years. The bursting of a dot com bubble and terrorist attacks made a blip but hardly a big one. In some circles, Greenspan had the magic touch.

So, Geoff, you may well be right. There's been housing bubble in the US and the market is correcting. If prices adjust elsewhere properly, and people take this change in stride, and the Fed doesn't over or under react, then it may mean nothing. Consumer spending is still strong, unemployment is down and the trade deficit is still large.

OTOH, those indicators linked above are damning. It's not just the housing market but durables, inventories and car sales that are off.

----

Incidentally, I'm inclined to think the housing market was going to adjust as the boomers approach retirement and face large empty nests. Bush and Clinton, the leading edge of the coming wave, just turned 60. The adjustment just seems a bit early. Maybe the housing market is smarter than I thought.

[geoffrey]

Consumer spending is still strong, unemployment is down and the trade deficit is still large.

OTOH, those indicators linked above are damning. It's not just the housing market but durables, inventories and car sales that are off.

If they are still spending, it doesn't matter if it's on cars or bubble gum. Eventually you just have everything you need from durables... then you just spend on the fun stuff. That situation is just as likely with unemployment and GDP figures where they are at and have been.

[jbg]

Consumer spending is still strong, unemployment is down and the trade deficit is still large.

OTOH, those indicators linked above are damning. It's not just the housing market but durables, inventories and car sales that are off.

If they are still spending, it doesn't matter if it's on cars or bubble gum. Eventually you just have everything you need from durables... then you just spend on the fun stuff. That situation is just as likely with unemployment and GDP figures where they are at and have been.

There have, in post WW I times (i.e. post 1920), been very few recessions (1957-59 and 1990-1 come to mind) that were not precipitated by an inflationary boom or major financial market boom, rife with hyperinflation and shortages of either labor or resources, or both. Inflation is at 3% or under, and the stock market, while high, is not bubbly. Real estate is the one area that worries me a bit.

I am not at all convinced we're heading for recessiont though, as a bankruptcy lawyer, I'd like it.

[August1991]

I am not at all convinced we're heading for recessiont though, as a bankruptcy lawyer, I'd like it.

One of several secrets in life - diversify.

[Toro]

The US is definitely slowing. The question is whether or not there will be a recession.

That's hard to say.

The latest beige book said that everything other than housing was strong. And the OECD expects US growth to accelerate.

But the 10 year TBond has rallied and yields touched 4.75%. And housing is definitely rolling over. OFHEO said that the decleration in the growth rate of home appreciation was the highest in 3 decades. There definitely was a bubble in housing and now its bursting.

IMHO the policies of the government and the central bank pulled consumption forward. I think we'll see below trend growth for the next while.

My guess is that the Fed is done and that the next move by the Fed will be to cut rates.

[August1991]

My guess is that the Fed is done and that the next move by the Fed will be to cut rates.

That might suggest nervousness.

It's an interesting situation. Energy prices are down for exogenous reasons. So, lower energy prices will mitigate these negative leading indicators of rising inventories and falling housing starts.

Then again, the leading indicators may just be a bursting asset (housing) bubble. In that case, we're dealing with perceptions of wealth.

All things considered, I'd say the third quarter GDP stats will be closely watched. When do they come out?

[jbg]

My guess is that the Fed is done and that the next move by the Fed will be to cut rates.

Too soon. While oil is down (relative to the past year only) gold is still not down. That is the commodity, IMHO, in combination with oil, that bears watching. I'd look for a rate cut if oil goes below $50 or gold below $500.

All things considered, I'd say the third quarter GDP stats will be closely watched. When do they come out?

In bits and pieces, during October. The preliminary numbers are often revised. Judging by the stock market's relative strength in the face of the Fed's rate increases, I do not see a recession soon. Remember, the stock market is a leading, not lagging, indicator.

[Riverwind]

Too soon. While oil is down (relative to the past year only) gold is still not down. That is the commodity, IMHO, in combination with oil, that bears watching.

Why? The price of gold has no connection with its practical industrial uses. If you are looking for commodities that indicate underlying inflationary pressures then I would look at copper and steel.

[August1991]

A slumping housing market pulled third-quarter U.S. economic growth down to its lowest level since early 2003.

The economy grew at an annualized pace of just 1.6 per cent in the quarter, the U.S. Commerce Department said Friday. Economists had been projecting a growth rate of 2.1 per cent.

U.S. investment in home building suffered its biggest cut since early 1991 — down 17.4 per cent on an annual basis.

CBC

So far, so mild.