Thursday, May 15, 2008

Half Full? Half Empty?


Yesterday’s Wall Street Journal ( and New York Times ( carried stories that questioned whether we’re in recession and whether recession is likely.

The Wall Street Journal article by Kelly Evans and Justin Lahart began:

“A funny thing happened to the economy on its way to recession: It's taken a detour.

“That, at least, is the view of a growing number of economists -- including some who not long ago were saying a recession was all but inevitable. They note that stock and credit markets have steadily improved since the Federal Reserve intervened to keep Bear Stearns Cos. from bankruptcy in early March, while a series of economic reports have been stronger than expected.

“Economists also cite swift policy responses, including a sharp reduction in interest rates by the Fed -- to 2% from 5.25% last September -- and the distribution of fiscal-stimulus checks to millions of Americans, as factors possibly easing the downturn.”

David Leonhardt’s New York Times article started this way:

“Only a month ago, a recession looked inevitable. Job cuts were picking up speed, and stock prices were falling. The Federal Reserve was cutting its benchmark interest rate rapidly, in an effort to keep the downturn from snowballing. But the notion that the economy could avoid a recession altogether seemed fanciful.

“It looks less fanciful today. The economic news hasn’t exactly been sunny lately, but there also haven’t been any nasty new surprises. If anything, the economy seems to have stabilized. The pace of layoffs has eased a bit, stocks have risen and the Fed has signaled that the rate cuts are over for now.

“And now the economy is being flooded with cash, courtesy of the federal government, and that will surely lift consumer spending in the months ahead. Two weeks ago, the Treasury Department began distributing the tax rebates from the recent $168 billion stimulus package. The effects of the Fed’s interest rate cuts, meanwhile, are still washing over the economy.”

Both the Journal and the Times made clear that problems remained, but the Times was more explicit. Its article examined profits, jobs and pay in some detail.

The Times distinguished between a slowing in home sales’ plunge and an actual sales recovery. Even if home sales are no longer falling freely, that doesn’t mean they’re about to increase markedly. For that to happen, the article continued, prices must fall further in order to improve housing affordability.

Corporate profits soared in the first half of the decade, floating the stock market, too. Now profits have stalled. The stock market won’t head north if profits go south.

Both job growth and pay growth have suffered, too.

Mr. Leonhardt sums his thinking as follows:

“When you step back and look at the whole picture, you see an economy that clearly seems a bit stronger than it was a month or two ago. The government stimulus now coming into the pipeline may well allow growth to stay above zero and for an official recession to be averted.

“To me, though, the odds of a recession still appear to be better than even. I don’t know how else to read the recent employment declines. Historically, when the job market has deteriorated as much as it has recently, it enters a vicious cycle of layoffs, stagnant pay, weak consumer spending and yet more layoffs.

“And even if that cycle is averted this time, the main economic story line for 2008 already looks clear. Further declines in housing prices are baked into the cake. The same goes for weak wage growth. Recession or not, it seems unlikely that the economy will feel healthy to most people anytime soon. “

That seems correct and could be reinforced. The residential-real-estate asset-deflation led the economy into the doldrums, exacerbated by falling profit margins and profits. There is no sign of pending relief in those areas. Until there is, cause for optimism seems scant.

© 2008 Michael B. Lehmann

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