Thursday, February 28, 2008

we're definitely slowing down, but here are my reasons why i think no official recession

yes, we've obviously slowed, and it's really not much fun out there, but here are some reasons why i think we're not heading into or actually in a 'recession.' here they are:

the four-week moving average of unemployment claims, such as it is, has been around 350,000 or so. at 400,000, we will probably be at 0% growth, so claims are still showing sluggish economic growth. the monthly bls (or is it bs?) jobs report is still showing job growth, and the last recession saw more than 200,000 job losses per month.

there is usually massive inventory liquidation going into a recession, and we haven't seen evidence of that yet. it could be that the system is much better in inventory management, but we haven't seen the customary sell-down in inventories.

interest rates are historically low worldwide. and obviously us rates are going lower. the fed has been pumping massive amounts of money into the system, as shown by the rapid growth in m2 money supply. i've also got to think that the bureacrats at the ecb will also finally capitulate and lower rates before long. the fed funds rate equivalent in the eurozone is 4%, and while i think it needs to be reduced to spur growth, 4% isn't a killer. there is a lot of noise about a stagflation environment developing, but the last bout of stagflation in the 1970s saw interest rates/inflation at almost 14% and near double-digit unemployment. even if one believes that the bls statistics are very unreliable, the current near-hysteria is a touch premature.

here's a big one: corporate cash is at a record $1.6 trillion and is at 11% of market capitalization! there are apparently more than two bids for the gm building in nyc at better than $3 billion. there is a lot of cash around, a glut of investable funds. banks have to overcome their trauma and start to lend, but even if they don't, the mountain of cash will find a home, which will spur growth.

the weak dollar is starting to spur export growth; the best guess is that gdp will be bumped by 1% per quarter because of this. developing economies are growing at better than 5% - during the last us recession, the growth for this sector rate fell to 2%. the growth rate still could decline, but it hasn't yet. developing nations account for 30% of world gdp approximately, 2 percentage points more than the us - a huge switch from just a few years ago -- and they should provide a good market for our exports.

as usual, 4th quarter gdp will be revised, and i think it'll be up from the originally reported +0.6% to +0.8%, maybe more. the second quarter is soft, but by all accounts is still positive. then the fed rate cuts begin to kick in - and in the meantime i think we're buying time. i don't think that much of the 'tax rebates' will be spent; most i think will be used to reduce debt. some of will be spent, of course, which can only help the third quarter. and by then the fed rate cuts should be felt in full force.

the overwhelming consensus is that if we are not in recession now, we soon will be. the constant drumbeat on the 'net, on the newsstand and on tv is really getting annoying, as there is probably some sort of self-fulfilling prophecy that goes on. perception is, after all, reality. here's hoping the consensus is wrong.

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