Saturday, March 8, 2008

If It Wasn’t For Bad News, There Wouldn’t Be Any News At All


Today’s Wall Street Journal headline ( said it all: “Jobs Data Suggest U.S. Is in Recession.” There it was: the R-word. Big and bold, splashed across the front page.

The article informed us the economy lost 63,000 jobs last month. The chart reveals job growth has been shrinking for some time. Now we know we’re in negative territory and the number of jobs is falling. Only the quickest are getting seats.

Job Growth

(Click on chart to enlarge)

Recessions shaded

On Monday the Institute for Supply Management reported its February Purchasing Managers’ Index (manufacturing index) at 48.3. Anything under 50 signals contraction. The next chart also portrays a downward trend and a recent fall into negative territory.

Purchasing Managers’ Index

(Click on chart to enlarge)

Recessions shaded

The latest data are no fluke or mere statistical noise. Employment and manufacturing have been weakening for more than a year. The most recent reports confirm the trend. The new revelation is that these measures are finally contracting (i.e. negative). That explains the conclusion that recession has arrived.

Some analysts believe that any downturn will be brief and that the year’s second half will bring a rebound. That’s hard to accept if the residential-real-estate collapse remains at the heart of the problem. Why should deepening recession boost real-estate markets? How can the rest of the economy recover if real estate does not? Are the optimists putting too much hope in the Fed and its interest-rate cuts?

In a March 5 New York Times op-ed piece ( entitled “Double Bubble Trouble,” Stephen S. Roach compared our experience to Japan’s:

“Japan’s experience demonstrates how difficult it may be for traditional policies to ignite recovery after a bubble. In the early 1990s, Japan’s property and stock market bubbles burst. That implosion was worsened by a banking crisis and excess corporate debt. Nearly 20 years later, Japan is still struggling.

“There are eerie similarities between the United States now and Japan then. The Bank of Japan ran an excessively accommodative monetary policy for most of the 1980s. In the United States, the Federal Reserve did the same thing beginning in the late 1990s. In both cases, loose money fueled liquidity booms that led to major bubbles.

“Moreover, Japan’s central bank initially denied the perils caused by the bubbles. Similarly, it’s hard to forget the Fed’s blasé approach to the asset bubbles of the past decade, especially as the subprime mortgage crisis exploded last August.

“In Japan, a banking crisis constricted lending for years. In the United States, a full-blown credit crisis could do the same.

“The unwinding of excessive corporate indebtedness in Japan and a “keiretsu” culture of companies buying one another’s equity shares put extraordinary pressures on business spending. In America, an excess of household indebtedness could put equally serious and lasting restrictions on consumer spending.

“Like their counterparts in Japan in the 1990s, American authorities may be deluding themselves into believing they can forestall the endgame of post-bubble adjustments…...”

The optimists say it can’t happen here; that Japan’s circumstances are too dissimilar to ours: Their crash was deeper, their banks slower to write off bad loans, their central bank slower to reduce interest rates, and so on. But, as Mr. Roach points out, there are some similarities.

(The charts are taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)

© 2008 Michael B. Lehmann

1 comment:

Anonymous said...
This comment has been removed by a blog administrator.