Recession fears may be unfounded

Discussion in 'Money Talk$' started by TomVols, Mar 17, 2008.

  1. TomVols

    TomVols
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    http://www.rtoonline.com/Content/Article/Feb08/RecessionFearsUnfoundedReport022008.asp

    [​IMG]Consumer spending is continuing at a rate of 2 to 2.5 percent a year, and with the exception of the auto industry, the economy is showing gains virtually across the board.[​IMG]
    Despite continuing turmoil in the housing and financial markets, a U.S. recession is not imminent, The Conference Board reports today.
    "While the correction in the financial sector is just beginning, the correction in the housing sector is nearly over," declares Gail D. Fosler, President and Chief Economist of The Conference Board.
    While the U.S. economy has weakened, business activity and corporate profits continue to rise. Consumer spending is continuing at a rate of 2 to 2.5 percent a year, and with the exception of the auto industry, the economy is showing gains virtually across the board.
    "Exports are booming and imports and import penetration are down," says Fosler. "While there is continuing uncertainty about the economic outlook, economic shocks from the contracting financial sector are not enough to tip the U.S. economy into recession."

    U.S. Economy is Still Resilient
    It has been a long time since the U.S. economy has experienced the kind of sustained downturn reflected in recent stock market declines. The 2001 recession was short-lived, and despite huge losses in the technology and manufacturing sectors, there was almost an undetectable decline in GDP. The last deep recession in the U.S. economy began in 1990. The economy weathered the 1987 stock market crash and the 1988 savings and loan crisis before being plunged into a recession by the Gulf War.

    "Similarities between the current situation and the period leading up to the 1990 recession are striking, but there are also many differences," says Fosler. "The business sector today is fundamentally stronger than at any time since the 1960s, and booming exports are helping support solid and continued structural productivity gains. Also, the policy sector is moving to establish a solid floor of tax and interest rate cuts to support the economy."
    Housing Market Correction About Over
    The housing market correction is about over, says Fosler. Given the lags in the impact of the housing sector on the economy, even at current activity levels, housing will likely subtract about 0.4 percentage points from 2008 growth. Housing affordability is beginning to improve, and with the recent interest rate cuts and home price declines, it should improve further and limit the downside risk. January and February are not big months for housing, but rising affordability bodes well for the spring selling season.
    Demographic trends also favor housing. The rise in households is increasingly outpacing the rise in permits, so the ratio is rising over time and is reaching a point normally associated with recovery in housing activity. The long housing boom of the past 15 years has taken the home ownership rate up from 64 percent to a peak of 69 percent in 2004, reflecting an intrinsic demand for housing. All of this adds up to good structural demand for housing if the credit markets and lending institutions can ease the credit flow.
    Financial Sector Still Struggling
    The business sector, outside of the financial sector, remains strong. U.S. business has engaged in almost constant restructuring, and these ongoing adjustments to changing business conditions have left the nonfinancial business sector generally lean and focused.
    The business sector is also benefiting from the export boom and strength in corporate activities outside the U.S. Exports are rising at about a 13 percent annual rate, and the slowdown in imports means that U.S. companies are taking a larger share of U.S. demand. The improvement in the trade sector alone is likely to add about a half percentage point to growth this year - more than offsetting the decline in housing.
    The bad news is concentrated in the financial sector. Recent data indicate that financial sector profits decreased dramatically over the second half of 2007. Basic earnings data show that financial services profits collapsed from about $10 per share in the second quarter of 2007 to a loss of almost $2 in the fourth quarter. Not only have these losses been substantial, but they have been concentrated in some of the largest financial institutions, both in terms of assets and market capitalization. Top global financial institutions have disclosed roughly $125 to $150 billion in asset writedowns associated with the recent financial turmoil. But when all the dust settles, even if their profitability is damaged, their balance sheets are likely to be little affected. Because of the mark-to-market rules, the writeoffs associated with structured products, including subprime mortgages, are likely to be revalued over the course of the year as the markets begin to trade those securities.
    Soft and Sluggish Consumer Sector
    The consumer sector has weakened gradually over the past two and a half years. Although real consumer spending grew at above 4 percent in mid-2005, it has since slowed to the 2-2.5 percent range. On one level, this slowdown in consumer spending is a response to higher gas prices and low demand for automobiles. But there is very little impact evident from the effects of almost two years of housing declines. Income gains continue to be reasonably strong. Total wage and salary growth is running at about a 5 percent annual rate.
    "On a broader level, it is important to recognize that the slowdown in consumer spending is part of the rebalancing of the U.S. economy," concludes Fosler. "Americans have enjoyed over two decades of continuous consumer spending growth, which is one of the causes for the large trade deficits over the past decade. These gains go well beyond the normal term of an economic cycle and diminish as consumer needs are met or even overmet."

    I am not endorsing the following - just providing an alternative to the torrent of drumbeats we often hear about the "recession"

    Tom
     
  2. Rubato 1

    Rubato 1
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    Sometimes I think these guys miss the forest for the trees. If you ask me (and I know you didn't), some problems are obvious: As financial institutions bankrupt themselves by foolish business practices, either the gov't bails them out or they are heavily invested by foriegners.
    1. The gov't bailout thing will not provide long term solutions, it will only prolong the coming crisis. This is not how the economy was built or behaves. It only allows more foolish business, leading to more bailouts, until the gov't has their fingers in everything. For a truly healthy economy, the economy must run itself, even if it hurts.
    2. Foriegn investors (like the Bank of Dubai) will slowly take over our financial operations, and we will be at the mercy of foriegn powers. If the foreign national banks in our economy were to call their interests due today, we would be hopeless.
    3. To say that the housing crisis is almost over is Baloney. That is only being said because if the gov't says 'recession', then we are automatically in one.

    IMHO,
    R1
     
  3. Tom Bryant

    Tom Bryant
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    I am shocked, I say, shocked that the news media would miss this story. :laugh:

    Seriously, things are not good and might not get better for a short time but the doom and gloom media is going into overdrive to be able to elect which ever one of their choices gets nominated.
     
  4. billwald

    billwald
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    >Consumer spending is continuing at a rate of 2 to 2.5 percent a year

    And it will all go to the oil companies. If I was still driving my old truck 100 miles a day commuting it would cost me $40/day. I don't know how people can still buy big trucks and use them to go grocery shopping.
     

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