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Why We May Already Be In Recession!

Economics / Recession 2008 - 2010 Aug 27, 2010 - 02:34 PM GMT

By: Sy_Harding

Economics

Best Financial Markets Analysis ArticleFirst let’s look at the trend.
After an unusual four straight quarters of negative growth in the severe 2008-2009 recession, the recession ended in the September quarter of last year when GDP managed fragile growth of 1.6% for the quarter, and then improved to 5.0% growth in the December quarter.


It was understood that much of that growth was temporary, fueled by government spending, and spending by consumers provided with government bonuses and rebates, as well as temporary rebuilding of inventories by businesses. But it was expected that with that jumpstart the recovery could continue on its own legs.

So, it was a bit of a surprise when GDP growth slowed to 3.7% in the March quarter of this year while those programs were still having an influence. But economists still expected the economy would grow at a 3% pace in the June quarter even with those programs winding down, and for the rest of the year.

So, it was a real disappointment when 2nd quarter growth was reported a month ago as having been only 2.4%. And when additional data became available for May and June, the last two months of the 2nd quarter, and those reports were increasingly negative, economists predicted that Q2 GDP growth would be revised down to only 1.3%.

On Friday, the revision was released, and it showed Q2 growth slowed significantly, but only to 1.6%, not as bad as the latest forecast.

The media and the stock market, starving for good news, and short-term oversold after being down 10 of the previous 13 days, took it as a positive.

But let’s get real.

The issue is not whether economists got their forecast right or wrong, but the degree to which economic growth is slowing. And a trend of 5% growth in the December quarter, followed by a 1.3% decline to 3.7% growth in the March quarter, followed by a 2.1% decline to 1.6% growth in the March quarter is a chilling rate of decline.

Now factor in that economic reports so far for July and August, the first two months of the 3rd quarter, have been significantly worse than those of May and June, and significantly worse than economists’ forecasts, with the relapse pretty much across the board; in the housing industry, manufacturing, retail sales, consumer and business confidence, the decline in U.S. exports, and so on.

It’s not a stretch then to think that economic growth is declining by another increment of more than 1.6% this quarter, which would have it in negative territory, already in recession.

In his speech Friday morning at the annual economic symposium in Jackson Hole, Wyoming, Fed Chairman Bernanke, while saying he still expects the economy to grow in the second half “albeit at a relatively modest pace” did not put forth a very convincing argument, using such phrases as “painfully slow recovery in the labor market”. . . “economic projections are inherently uncertain”. . . . “the economy is vulnerable to unexpected developments” . . . “the recovery is less vigorous than we expected.”

Nor did he seem confident that the Fed’s depleted arsenal of tools to re-stimulate the economy would be effective if needed. Two of the four possible actions he mentioned seemed to suggest consumers and markets could be fooled into confidence with mere talk.

His brief list of four possible actions were, “1) conducting additional purchases of longer-term securities [bonds and mortgage-related securities]; 2) modifying the Fed’s FOMC meeting communications to investors; 3) reducing the interest the Fed pays banks on their excess reserves. And I will also comment of a fourth strategy, proposed by several economists- namely, that the Fed increase its inflation goals.”

Providing details on two of the four possible actions, he said, “The Fed’s current statement after its FOMC meetings reflects the FOMC’s anticipation that exceptionally low interest rates will be warranted ‘for an extended period’ . . . A step the Committee could consider if conditions called for it, would be to modify the language to communicate to investors that it anticipates keeping the target for the federal funds rate low for a longer period of time.”

And of the fourth possible action in his list of four, he said the Fed could alter the phrases it uses to communicate its goals for inflation by “increasing its medium-term inflation goals above levels consistent with price stability.”

That’s scary stuff if those are two of the four actions the Fed sees as its best options to re-stimulate the economy.

Also of concern, in its report revising Q2 GDP growth down to just 1.6%, the Commerce Department reported that corporate earnings declined significantly in the second quarter, after-tax earnings rising just 0.1%, compared to the gain of 11.4% in the first quarter. Meanwhile, Wall Street continues to ratchet up its earnings estimates.

On the positive side, consumer spending, which accounts for 70% of the economy, rose 2% in the second quarter, compared to 1.9% in the first quarter. But the bad news is that the reports since, on consumer confidence and retail sales in July and August, have been big disappointments.

Putting it all together, don’t be surprised if a couple of months down the road we learn the economy was already in recession in the current quarter.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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