IRWIN M. STELZER
Saturday, January 30, 2016
A Recession on the Way?
IRWIN M. STELZER
IRWIN M. STELZER
There will certainly be a recession this year. Unless there won’t. That is the consensus view of economists. The bad news is that even the optimists are having difficulty explaining away the reams of incoming data, and that even the cheeriest of the bunch are predicting a no-to-low-growth outlook for the rest of this year.
Earlier this week the Federal Reserve chair Janet Yellen, speaking for the bank's monetary policy committee, gave some not-very subtle hints that the policymakers view of things is gloomier than it was in mid-December when Yellen announced the committee's "confidence that the economy will continue to strengthen." Now, that confidence, which stirred the Fed to raise interest rates, has been shaken by events. Its economists, who traditionally produce forecasts that prove overly optimistic, seem not to know whether what is ailing the economy will prove temporary or a harbinger of a long, hot summer. Here's the sort of data that has them uncertain of their next move, if a next move there is to be.
Share prices have dropped around 7 percent since the start of the year and, despite an occasional rally – known in the trade as a dead-cat bounce – show few signs of snapping back, or even holding firm at these levels. Fortunately, share prices are not a good predictor of economic performance. As Harvard economist and über Keynesian Paul Samuelson, whose text books shaped the views of generations of students, long ago pointed out, "The stock market has forecast nine of the last five recessions." But for those who believe the real economy follows share prices, even a sharp recovery in those prices would not dispel the uncertainty created by the recent price plunge. Add to that the turmoil that the political season has wrought, and Donald Trump repeatedly asserting that "our economy is in a mess" (he is the only businessman in the race so he should know!), and you might have an explanation of consumers' unwillingness to spend the millions they are saving at the petrol pumps.
Move out of the "might" category into undeniable facts and the news gets worse:
The economy grew a trifling 0.7 percent in the final quarter of last year. The manufacturing sector is already considered to be in recession. Orders for manufactured products that last for more than three years, so-called durable goods, fell 5.1 percent in December, the fourth drop in the past five months, bringing the annual drop to 3.5 percent, the largest decline outside of a recession since 1992, when records were first kept. (Some of the fall was due to the volatile transport sector, but some was also due to a decline in business investment.) Industrial production has declined in ten of the last twelve months.
Corporate profits are down about 5 percent from their summer-2014 peak, and the phrase "profits recession" is heard on Wall Street. Little wonder: Bloomberg analysts reckon that profits of the S&P 500 companies in the last quarter of 2015 had their biggest fall from year-end quarters since 2009.
The Chinese regime's technocrats, once thought to be among the world's great economic managers, now seem flummoxed by slowing growth, uncompetitive and debt-laden state-owned enterprises, violently fluctuating share prices, a weak currency and capital flight, the latter to the tune of $676 billion, one-third of which escaped by circumventing capital controls. Add problems in commodity-dependent economies and the result is a flight to the safety of the dollar, now so strong that exporters are struggling and firms selling into our own market are facing stiffer competition from cheaper-in-dollars imports.
So where to look for cheer? To the auto and housing industries, the service sector, and perhaps the jobs market. Last year a record 17.5 million light vehicles – autos and small trucks, including sports-utility vehicles (SUVs) – moved from showroom to consumers' garages, and industry executives are expecting to do at least as well this year. Low gasoline prices are encouraging consumers to purchase less fuel-efficient, more profitable SUVs instead of the models limousine-driven government policymakers would have them squeeze into, and interest rates are still low enough to make financing a purchase within reach of most consumers.
The housing industry also continues to do well. Sales of newly built homes rose in December by 9.9 percent over the same month in 2015, capping a year in which sales, although still only one-third of their 2005 peak, reached their highest level since 2007. The approximately half-million new homes built last year were no bungalows. They averaged 2,720 square feet, half had four or more bedrooms, a quarter had garages that accommodate three or more cars, and the average price hit $351,000. Sales of pre-owned existing homes, which account for 90 percent of all sales, also shot up in December – by 7.7 percent, year-on-year, making 2015 the best year since 2006. Prices rose by 7.8 percent, to an average of $224,100. But contract signings for the purchase of homes generally regarded a good predictor of sales of existing homes, were flat in December.
Finally, the service sector (health care, finance, professional services, entertainment, hospitality) continues to expand, although at a slower pace towards year end. That has been creating millions of jobs and modestly raising incomes; we will know more about the durability of these trends next week when the new jobs report is released.
Put these and other data together, shake well, and a few conclusions emerge. First, the performance of the U.S. economy going forward will depend in good part on the strength of headwinds from overseas, and they threaten to be gale force despite signs of life in some Eurozone economies. Second, much will depend on the strength of the dollar, which should rise even further in response to de facto devaluations of the yen, yuan, euro and other currencies. Third, the Fed matters. Yellen has said, "I think it's a myth that expansions die of old age. I do not think that they die of old age." If not of old age, then death by unnatural causes, such as murder by a Fed that waited too long to end the distortion of zero-interest rates, and was forced to take them up in the unpromising environment of a slowing economy. Watch for the Fed to scotch plans for a further increase in March. Fourth, despite all the bad news and the ongoing uncertainty in this election year, consumer confidence remains high, perhaps because the improvement in the jobs market trumps all else. That is good news for hotels, restaurants, cruise ships and spas, and for the auto industry, selling to customers driving vehicles with an average age of 11.4 years, matching last year's all-time record for the fleet's age.
My guess: after a flat-to-negative first quarter, the economy will eke out 1 percent-2 percent growth for the rest of the year. In 2017 we will see whether our new president and a new congress can do better, perhaps in response to the further loosening of fiscal policy that is inherent in Republicans' plans for tax cuts and Democrats' plans to ramp up spending on infrastructure.