Optimists were crowing over some superficially hopeful economic signs reported this past week. However, instead of a portant of better times ahead, taken together, the data confirm an almost certain deepening of the US and global recession.
First, the misleading but seemingly positive good news. Second quarter real GDP was officially reported to have increased 3.3%, up from the 1.9% rise previously estimated. Some observers foolishly pronounced "the recession that never was is now over". In realty the recession is only now beginning in earnest. Indeed, the economy is likely to be far worse in 2009 than in 2008.
The 3.3% second quarter real GDP rise was inflated by tax rebate boosted consumer spending, as well as by exports, that were temporarily spurred by both the weaker dollar and the runup to the Olympics. In the current quarter the global economy's strength is eroding, curtaling the demand for our exports.
In addition, an almost certain conceptional error in underestimating the GDP deflator artificially overstates the real GDP growth rate. The undereporting of inflation in the GDP deflator, that I indicated weeks ago and in earlier reports, stems from rapidly rising import prices in the second quarter that are deducted from total inflation to determine the rate of domestic inflation. In the process, domestic inflation was understated and real GDP inflated.
Ironically, when the rate of increase in import prices slows, as they have thus far in the third quarter, the calculations may well produce a consequent step-up in the rise in domestic inflation. And that would tend to depress real GDP, probably enough to produce outright declines. Indeed, without the special factors that boosted second quarter real GDP, it would also have shown a decline.
July existing home sales rose a welcome 3.1% from June. That and other faint signs of improvement have led some observers to mistakenly conclude that the housing sector is finally bottoming. That elusive development is still far off considering the impressive array of housing market negatives. Though existing home sales rose to a 5 million seasonally adjusted annual rate in July, that is still well under the 6.5million rate in 2006 and early 2007. The inventory of unsold homes is continuing to rise, reaching an 11.2 months rate at the current sales pace, up 1.7 months from a year ago. Also, with foreclosures still rising, mortgage credit constrained and retreating employment, among other market negatives, the housing outlook continues bleak.
Among the key economic negative reports this week there was one standout. Personal income declined 0.7% in July even with the last remnants of the tax rebates. The bulk of those tax rebates were paid out in May, boosting personal income by 1.8%. In July, without those rebates and after income taxes, disposable personal income declined 0.5%. Now, with the tax rebates behind us and a continuing retreat in employment and slow wage gains, we are probably just at the beginning of a sustained retreat in personal consumer income and consumer spending.
The recession will become sufficiently evident to not only quell inflation fears and reignite disinflation fears but produce new major financial institution crises that, surprise, will probably even lead to expectations of additional Fed easing.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address:philipbraverman@Gmail.com
Saturday, August 30, 2008
Friday, August 22, 2008
The US recession will be increasingly evident in the data for second half 2008
The US recession will deepen in the second half of 2008. Indeed, there is no sign of a cyclical economic recovery even on the distant horizon. That is the clear conclusion from recent economic reports, continuing financial industry problems and the absence of any effective means in sight for quelling the cascading economic and financial preoblems besetting the US and global economy.
The outsized 0.7% one-month July plunge in the the Conference Board's index of leading indicators, down 4.4% from a year ago, ominously suggests a steepening in the pace of economic deterioration over the next six months. The four week moving average of initial claims for unemployment benefits is firmly in the traditional recession territory of 400,000 plus claimants. This portends a steeper decline in nonfarm payrolls in the next employment report and a continuing rise in the unemployment rate. The US recession is barely beginning. It will widen far beyond housing and the financial community.
The outlook is for further declines in home prices as the still huge excess supply of unsold homes, mortgage defaults and forclosures weighs on the real estate market. The nationwide home price decline is likely to range from 30% to 40%, roughly twice or more the decline thus far. The availability of home mortgage credit remains contrained for all but those with the most pristine credit. Fannie Mae and Fredie Mac and other mortgage market participants remain overburdened with losses as even prime mortgages taken out in recent years are increasingly delinquent. Fannie Mae and Freddie Mac are destined for increased Government involvement, if not an outright Federal takeover. Warren Buffet put it succinctly with his comment "game over" alluding to the two GSE mortgage firms that in recent days had reportedly unsucessfully approached private sources for long-term assistance. The yield speads on these institutions paper relative to Treasuries is widening appreciably. Even with a presumed Treasury guarantee, this past week the Freddie Mac five year yield was 1.13 percentage points above the five year Treasury yield, versus roughly one-quarter percentage point in 2007. Foreign buying interest in thir paper appears to be waning. The rating companies are considering even further downgrades of mortgage-related instruments, including Fannie Mae and Fredie Mac preferred stock, further eroding the instutions access to market funds. These instutions problems are mounting,
Banks and investment banks are confronted with the prospect of further losses, asset writedowns and the need for fresh capital injections. The rating companies, seemingly attempting to compensate for past lapses in judgement, are incrementally downgrading mortgage-backed paper and other questionable assets, especially those for which no realistic market exists. As long as the requirement exists that bank assets be marked to market and that foreclosed properties be promptly sold, bank losses will continue to mount. The report that The Korean Development Bank was a possible white knight interested in rescuing Lehman helped that stock recover and aided other financials. However, the Korean bank (KDB) raised questions over its intentions with a comment that it is just exporing its options. Indeed, KDB would need its Government's approval acquire Lehman. The financial sector will continue to deteriorate as losses and deleveraging persist. That increases the prospect of additional bank failures. That in turn raises questions over the viability of the FDIC without additional assistance. The failure of IndyMac alone required the commitment of 10% of the FDIC's assets.
Temporary market boosts this week included Fed Chairman Bernanke's comment that inflation is expected to moderate over the medium term, suggesting no imminent Fed firming. How could there be a firming when the Fed Chairman correctly characterizes the financial market as fragile, though that is an understatement of realty. The Fed Chairman needed to calm inflation and Fed firming fears generated this week by the 1.2% July spike in the producer price index. However, it is reasonable to expect that inflation pressures will moderate as the global recession takes hold, dampening the demand for resources.
There are continuing signs of a global recession. The UK and the rest of Europe, in particular, are weakening economically. The UK second quarter real GDP was flat, a likely prelude to recession after 63 quarters of growth. Recognizing this reality, the UK pound fell to its lowest level in two years. European business confidence is retreating. The equity market in China is off more than 50% from its peak, an indication of economic and profit slippage ahead. As a consequence, the Chinese government is considering economic stimulus initiatives after the Olympics. There has been a massive speculative Chinese real estate building binge well ahead of any reasonable demand that is imposing its own strains on Chinese investors and lenders. But there has also been unsustainable speculation in other areas of the Chinese economy that may be in the process of being deflated.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address:philipbraverman@Gmail.com
The outsized 0.7% one-month July plunge in the the Conference Board's index of leading indicators, down 4.4% from a year ago, ominously suggests a steepening in the pace of economic deterioration over the next six months. The four week moving average of initial claims for unemployment benefits is firmly in the traditional recession territory of 400,000 plus claimants. This portends a steeper decline in nonfarm payrolls in the next employment report and a continuing rise in the unemployment rate. The US recession is barely beginning. It will widen far beyond housing and the financial community.
The outlook is for further declines in home prices as the still huge excess supply of unsold homes, mortgage defaults and forclosures weighs on the real estate market. The nationwide home price decline is likely to range from 30% to 40%, roughly twice or more the decline thus far. The availability of home mortgage credit remains contrained for all but those with the most pristine credit. Fannie Mae and Fredie Mac and other mortgage market participants remain overburdened with losses as even prime mortgages taken out in recent years are increasingly delinquent. Fannie Mae and Freddie Mac are destined for increased Government involvement, if not an outright Federal takeover. Warren Buffet put it succinctly with his comment "game over" alluding to the two GSE mortgage firms that in recent days had reportedly unsucessfully approached private sources for long-term assistance. The yield speads on these institutions paper relative to Treasuries is widening appreciably. Even with a presumed Treasury guarantee, this past week the Freddie Mac five year yield was 1.13 percentage points above the five year Treasury yield, versus roughly one-quarter percentage point in 2007. Foreign buying interest in thir paper appears to be waning. The rating companies are considering even further downgrades of mortgage-related instruments, including Fannie Mae and Fredie Mac preferred stock, further eroding the instutions access to market funds. These instutions problems are mounting,
Banks and investment banks are confronted with the prospect of further losses, asset writedowns and the need for fresh capital injections. The rating companies, seemingly attempting to compensate for past lapses in judgement, are incrementally downgrading mortgage-backed paper and other questionable assets, especially those for which no realistic market exists. As long as the requirement exists that bank assets be marked to market and that foreclosed properties be promptly sold, bank losses will continue to mount. The report that The Korean Development Bank was a possible white knight interested in rescuing Lehman helped that stock recover and aided other financials. However, the Korean bank (KDB) raised questions over its intentions with a comment that it is just exporing its options. Indeed, KDB would need its Government's approval acquire Lehman. The financial sector will continue to deteriorate as losses and deleveraging persist. That increases the prospect of additional bank failures. That in turn raises questions over the viability of the FDIC without additional assistance. The failure of IndyMac alone required the commitment of 10% of the FDIC's assets.
Temporary market boosts this week included Fed Chairman Bernanke's comment that inflation is expected to moderate over the medium term, suggesting no imminent Fed firming. How could there be a firming when the Fed Chairman correctly characterizes the financial market as fragile, though that is an understatement of realty. The Fed Chairman needed to calm inflation and Fed firming fears generated this week by the 1.2% July spike in the producer price index. However, it is reasonable to expect that inflation pressures will moderate as the global recession takes hold, dampening the demand for resources.
There are continuing signs of a global recession. The UK and the rest of Europe, in particular, are weakening economically. The UK second quarter real GDP was flat, a likely prelude to recession after 63 quarters of growth. Recognizing this reality, the UK pound fell to its lowest level in two years. European business confidence is retreating. The equity market in China is off more than 50% from its peak, an indication of economic and profit slippage ahead. As a consequence, the Chinese government is considering economic stimulus initiatives after the Olympics. There has been a massive speculative Chinese real estate building binge well ahead of any reasonable demand that is imposing its own strains on Chinese investors and lenders. But there has also been unsustainable speculation in other areas of the Chinese economy that may be in the process of being deflated.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address:philipbraverman@Gmail.com
Saturday, August 16, 2008
Market inflation fears are receding for the time being
The equity market continued its bear market rally this past week despite the increased international tensions stemming from the Russian attack on Georgia and all that development's dire long-term implications. The impetus for the further stock market rise was primarily the drop in oil prices, other commodity prices and the strengthening dollar. This positve set of price declines and currency moves overwhemed signs of economic deterioration in Europe and Japan, equity market prices declines abroad and evidence of increases in global inflation, especially in the US.
The Consumer Price Index jumped 0.8% in July for an alarming 5.6% spurt from a year ago. This is the largest increase in almost two decades, And yet the market acted as if the consumer price report actually indicated a surprise weakening in inflation. For example, the yield on Treasury notes and bonds, which moves up and down largely with inflation expectations, declined appreciably. The Treasury 10-year note yield fell to 3.84% on Friday from 4.2% just a few weeks back. The reason of course for a decline in inflation expectations (and Treasury yields) was a continuing decline in commodity prices, especially for oil and gold, and a strengthening dollar. In effect, the market believed that inflation expectations (which are forward looking), should respond to these variables and not the backward looking Consumer Price Index, which was largely boosted by energy and food prices. For without food and energy, the so called core Consumer Price Index was up a more restrained 2.5% from July last year.
With the global economy sliding toward recession, there is bound to be a decline in economic demand for basic resources and a consequent decline in price pressures. The European Union reports that GDP declined at a 0.8% annual rate in the second quarter. This expands the countries in or on the threshold of recession to the US, the UK, the EU, and Japan. Even China's economy shows signs of slowing down. Thus, it is reasonable to expect a general slowing of inflation during the recession and for some time into the recovery period as excess capacity and productivity gains restrain inflation.
But once the global economy is back on track, firmly into recovery and the excess capacity cushion is exhausted, inflation will reassert itself. Considering that the current recession promises to be prolonged, the return of inflation should not be considered a near-term prospect.
In the meantime, the recessionary forces of the housing debacle, credit crunch, consumer financial squeeze, financial institution distress, rising unemployment and curtailed consumer spending will eventually restrain inflation, These forces will also curtail corporate profits. That will ultimately lead to a renewed weakening in equity prices. The temporary improvement in equity prices of airlines and other firms benefiting from the decline in energy prices is just that, temporary.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@gmail.com
The Consumer Price Index jumped 0.8% in July for an alarming 5.6% spurt from a year ago. This is the largest increase in almost two decades, And yet the market acted as if the consumer price report actually indicated a surprise weakening in inflation. For example, the yield on Treasury notes and bonds, which moves up and down largely with inflation expectations, declined appreciably. The Treasury 10-year note yield fell to 3.84% on Friday from 4.2% just a few weeks back. The reason of course for a decline in inflation expectations (and Treasury yields) was a continuing decline in commodity prices, especially for oil and gold, and a strengthening dollar. In effect, the market believed that inflation expectations (which are forward looking), should respond to these variables and not the backward looking Consumer Price Index, which was largely boosted by energy and food prices. For without food and energy, the so called core Consumer Price Index was up a more restrained 2.5% from July last year.
With the global economy sliding toward recession, there is bound to be a decline in economic demand for basic resources and a consequent decline in price pressures. The European Union reports that GDP declined at a 0.8% annual rate in the second quarter. This expands the countries in or on the threshold of recession to the US, the UK, the EU, and Japan. Even China's economy shows signs of slowing down. Thus, it is reasonable to expect a general slowing of inflation during the recession and for some time into the recovery period as excess capacity and productivity gains restrain inflation.
But once the global economy is back on track, firmly into recovery and the excess capacity cushion is exhausted, inflation will reassert itself. Considering that the current recession promises to be prolonged, the return of inflation should not be considered a near-term prospect.
In the meantime, the recessionary forces of the housing debacle, credit crunch, consumer financial squeeze, financial institution distress, rising unemployment and curtailed consumer spending will eventually restrain inflation, These forces will also curtail corporate profits. That will ultimately lead to a renewed weakening in equity prices. The temporary improvement in equity prices of airlines and other firms benefiting from the decline in energy prices is just that, temporary.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@gmail.com
Saturday, August 9, 2008
Only a bear market rally in equities
By its very nature, the latest explosive advance in equities seems nothing more than a bear market rally, destined to be completely reversed. The outsized 303 point increase in the Dow on Friday, a 2.6% rise, is essentially a typical bear market phenomenon. In the current bear market, as well as in previous bear market periods, there were often such outsized spectacular increases. But the same can not be said of periods of cyclical stock market advances. For example,there were no such outsized up days in the cyclical advance between 2002 and 2007. In contrast, in the precipitous 38% 2000 through 2002 bear market plunge that preceeded that last cyclical advance, there were a number of such startlingly sharp daily increases. Indeed, in that particular 2000-2002 bear market there was even a rally that extended for six months, before being erased. But, other factors cuurently suggest that this bear market rally will not extend anywhere near that long.
Also, even with the sharp equity price increases last week, the stock market indices are still well within a longer-term downtrend that is virtually certain to persist. For example, the Friday close in the Dow at 11,732, up 3.6% for the week, remains under its 12,450 200-day moving average. Similarly the Nasdaq, at 2,414 at the Friday close, up 4.5% for the week, remains below its 200-day moving average level of 2,450. The S&P 500 index is similarly below its 200-day moving average. This year's previous bear market rally, in April and May, failed as the various equity indices touched or pierced their respective 200-day moving average levels. Whether that likely pattern actually repeats itself is of course unknown. But those 200-day moving average levels remain important resistance levels.
From the equity markets misplaced point of view, it sees some market positives reinforcing the current rally. Oil and other commodity prices are declining. The dollar is not only stabilizing, it appears to be strengthening. The Fed, as I suggested some time back, is retreating from its threatened firming. We are moving toward the Presidential campaign season, which has tended to be favorable for equities. The Administration and the Fed appear to be committed to solving the nations housing and related financial problems. There are some buybacks of the frozen auction rate securities. And some recent housing data provide at least a semblence of support for the wrongheaded notion that the housing recession is bottoming out. These developments do not adequately justify, nor will they be able to sustain the rally amidst a still deteriorating economy, rising unemployment, a credit crunch, an actually worsening housing picture, the financially stressed consumer and the beginnings of a global recession.
First, the so called market positives are not as equity-market favorable as equity market particpants believe they are. The decline in oil and other commodity prices is partly or largely a reflection of weakening demand amidst a devloping US and
global recession. That does not bode well for corporate profits here or abroad. And as corporate profit projections go, so goes equity market price expectations. The outlook for oil is also muddied by the military conflict between Russia and Georgia and the potential for flareups in other oil hotspots.
The strengthening dollar is in large part a reflection of a weakening of the Euro, the UK pound and the Yen. That reflects sluggish economic prospects for the economies of the EC, the UK and Japan and the growing liklihood of their eventual easing moves. That does not create bright prospects for the continued bouyancy of US exports and companies that depend on exports for sales and profits.
The Fed is maintaining its current Federal funds rate target because the US economy is weakening further, rather than rebounding as the Fed had mistakenly hoped, the financial and housing crisis persists and inflation concerns are moderating with the decline in commodity prices.
Though the US Treasury and Fed are committed to ameliorating the Financial crisis, there is no reason to believe the financial crisis is even close to running its course. With $300 billion in new capital raised, only a fraction of the perhaps $1 trillion to $2 trillion in aggregate losses, there is likely to be more financial pain ahead. MBIA's reported quarterly profit, after three quarters of losses, does not offset the report of a further major loss at Fannie Mae, with more mortgage-related and other losses to come throughout the financial coomunity.
The welcome buybacks of some auction rate money market instruments by some financial institutions from their customers merely moves the troubled assets to a different balance sheet. It does not solve the instruments illiquidity problem.
Initial claims for unemployment benefits increased to 455,000 in the latest week, up from 448,000 the week before. The four-week moving average reached the 400,000traditional recession threshold. Some improvement in home sales does not negate the continuing downward pressure on home prices from near record inventories of unsold homes, many vacant and/or in foreclosure. That is a sure precription for deepening declines in home prices and continuing housing distress.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@Gmail.com
Also, even with the sharp equity price increases last week, the stock market indices are still well within a longer-term downtrend that is virtually certain to persist. For example, the Friday close in the Dow at 11,732, up 3.6% for the week, remains under its 12,450 200-day moving average. Similarly the Nasdaq, at 2,414 at the Friday close, up 4.5% for the week, remains below its 200-day moving average level of 2,450. The S&P 500 index is similarly below its 200-day moving average. This year's previous bear market rally, in April and May, failed as the various equity indices touched or pierced their respective 200-day moving average levels. Whether that likely pattern actually repeats itself is of course unknown. But those 200-day moving average levels remain important resistance levels.
From the equity markets misplaced point of view, it sees some market positives reinforcing the current rally. Oil and other commodity prices are declining. The dollar is not only stabilizing, it appears to be strengthening. The Fed, as I suggested some time back, is retreating from its threatened firming. We are moving toward the Presidential campaign season, which has tended to be favorable for equities. The Administration and the Fed appear to be committed to solving the nations housing and related financial problems. There are some buybacks of the frozen auction rate securities. And some recent housing data provide at least a semblence of support for the wrongheaded notion that the housing recession is bottoming out. These developments do not adequately justify, nor will they be able to sustain the rally amidst a still deteriorating economy, rising unemployment, a credit crunch, an actually worsening housing picture, the financially stressed consumer and the beginnings of a global recession.
First, the so called market positives are not as equity-market favorable as equity market particpants believe they are. The decline in oil and other commodity prices is partly or largely a reflection of weakening demand amidst a devloping US and
global recession. That does not bode well for corporate profits here or abroad. And as corporate profit projections go, so goes equity market price expectations. The outlook for oil is also muddied by the military conflict between Russia and Georgia and the potential for flareups in other oil hotspots.
The strengthening dollar is in large part a reflection of a weakening of the Euro, the UK pound and the Yen. That reflects sluggish economic prospects for the economies of the EC, the UK and Japan and the growing liklihood of their eventual easing moves. That does not create bright prospects for the continued bouyancy of US exports and companies that depend on exports for sales and profits.
The Fed is maintaining its current Federal funds rate target because the US economy is weakening further, rather than rebounding as the Fed had mistakenly hoped, the financial and housing crisis persists and inflation concerns are moderating with the decline in commodity prices.
Though the US Treasury and Fed are committed to ameliorating the Financial crisis, there is no reason to believe the financial crisis is even close to running its course. With $300 billion in new capital raised, only a fraction of the perhaps $1 trillion to $2 trillion in aggregate losses, there is likely to be more financial pain ahead. MBIA's reported quarterly profit, after three quarters of losses, does not offset the report of a further major loss at Fannie Mae, with more mortgage-related and other losses to come throughout the financial coomunity.
The welcome buybacks of some auction rate money market instruments by some financial institutions from their customers merely moves the troubled assets to a different balance sheet. It does not solve the instruments illiquidity problem.
Initial claims for unemployment benefits increased to 455,000 in the latest week, up from 448,000 the week before. The four-week moving average reached the 400,000traditional recession threshold. Some improvement in home sales does not negate the continuing downward pressure on home prices from near record inventories of unsold homes, many vacant and/or in foreclosure. That is a sure precription for deepening declines in home prices and continuing housing distress.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@Gmail.com
Saturday, August 2, 2008
Employment, the economy and financial institutions are in far worse shape than widely recognized
The US is almost certainly already in recession, with little prospect of coming out of it any time soon. Indeed, there is every reason to expect the recession to deepen sufficiently over coming quarters to erase every shred of the lingering widespread doubt that continues to persist over the recession's existence or even its ultimate probability. Moreover, in my view, the recession seems likely to persist until at least mid-year next year. That would make this recession unusually long. At this point you might well be asking what I am talking about, especially given last Thusday's report of a 1.9% increase in real GDP in the second quarter, up from a 0.9% increase in the first quarter and a 0.2% decline in the fourth quarter last year. To some analysts that progressive improvement is mistakenly interpreted as indicating that the rough patch in the economy is already over. Nothing could be further from realty.
While recent headline data reports seem to portray a very weak economy, admittedly the reports do not necessarily as yet unambiguously provide the convincing evidence that many demand to actually conclude we are in recession. But that is taking the data at face value. Friday's report of a 51,000 July drop in nonfarm payrolls(the seventh consecutive monthly decline)and a jump to 5.7% in the unemployment rate from 5.5% the month before is perceived as weakness but certainly not convincing evidence of recession. Unfortunately, the problem lies with the data itself because of the ways they unintentionally obscure realty, especially at cyclical turning points.
The reported data in many economic series contain a significant element of estimation that unfortunately have the unintended impact of obscuring both recession and recovery cyclical turning points. The employment report is no exception to this pervasive problem. Because new and many small business are not officially recognized as in existence, they cannot be surveyed or sampled. Thus,the Bureau of Labor statistics makes an estimate of the monthly growth of employment based on its estimate of new businesses. The estimates are derived from old surveys, not current reports. The estimates are not intended to be current or to capture cyclical turning points. Needless to say, they do not. This would not be significant if the numbers of the phantom employment gains involved were not so large as to swamp the real changes that occur in the remainder of the data reflecting the real economy. For example over the past year there was a net official decline of 535,000 in nonfarm payrolls. But this was only after an almost certain fictional estimated increase of 853,000 in unsampled and only estimated new and small businesses, many of which do not exist. Merely assuming that the employment gains of the new businesses did not occur (rather than the more likely prospect that their employment in realty declined) would indicate that the economy's actual job loss over the past year was almost certainly at least 1,388,000. Though the household survey that is used to determine the unemployment rate is different from the nonfarm payroll survey, the actual unemployment rate is undoubtedly also higher than the official data implies.
The reported 1.9% second quarter real GDP rise was also grossly overstated as well as artificially boosted by the temporary economic stimulus. Without these special factors second quarter GDP would probably have declined. Consumer spending would have been substantially weaker without the tax rebates. Also, US exports based on the strength of foreign demand temporarily boosted US real GDP. As US demand weakens further, especially in the absence of tax rebates, foreign demand will also weaken. There is already ample evidence of the beginning of that foreign economic slowdown.
There was one likely miscalculation that by itself could have accounted for all the 1.9% second quarter real GDP growth reported. This was too small a GDP inflation deflater to subtract inflation from nominal GDP. Because the rapid increase in import prices is deducted from domestic prices to calculate the GDP deflater, there was an excessive reduction in the domestic deflater to a 1.1% rise, versus a 2.6% rise in the prior quarter and well under the actual 4.9% consumer price inflation rate the past year. Without these special factors, real GDP would have been negative in the second quarter and will probably show a series of actual declines over coming quarters.
Behind the US recession, driving it to further weakness, is the continuing drop in home prices. The Standard & Poors/Case shiller Home Price Index is down 18% from its July 2006 peak. And with 2.1 million vacant homes available for sale, some 800,000 more more than normal, there is bound to be further declines in home prices. That prospect is further reinforced by the continuing rise in foreclosures, the credit crunch, and the unrealized losses still to be faced by banks, investment banks, credit card issuers insurance companies and other elements of the financial sector. The decline in home prices is already encompassing lenders of conventional mortgages, not just sub-prime and Alt-A loans. Expect more financial institution bankruptcies. In concert, these various strands to the recession make a significant worsening inevitable. Investor caution remains warranted.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@gmail.com
While recent headline data reports seem to portray a very weak economy, admittedly the reports do not necessarily as yet unambiguously provide the convincing evidence that many demand to actually conclude we are in recession. But that is taking the data at face value. Friday's report of a 51,000 July drop in nonfarm payrolls(the seventh consecutive monthly decline)and a jump to 5.7% in the unemployment rate from 5.5% the month before is perceived as weakness but certainly not convincing evidence of recession. Unfortunately, the problem lies with the data itself because of the ways they unintentionally obscure realty, especially at cyclical turning points.
The reported data in many economic series contain a significant element of estimation that unfortunately have the unintended impact of obscuring both recession and recovery cyclical turning points. The employment report is no exception to this pervasive problem. Because new and many small business are not officially recognized as in existence, they cannot be surveyed or sampled. Thus,the Bureau of Labor statistics makes an estimate of the monthly growth of employment based on its estimate of new businesses. The estimates are derived from old surveys, not current reports. The estimates are not intended to be current or to capture cyclical turning points. Needless to say, they do not. This would not be significant if the numbers of the phantom employment gains involved were not so large as to swamp the real changes that occur in the remainder of the data reflecting the real economy. For example over the past year there was a net official decline of 535,000 in nonfarm payrolls. But this was only after an almost certain fictional estimated increase of 853,000 in unsampled and only estimated new and small businesses, many of which do not exist. Merely assuming that the employment gains of the new businesses did not occur (rather than the more likely prospect that their employment in realty declined) would indicate that the economy's actual job loss over the past year was almost certainly at least 1,388,000. Though the household survey that is used to determine the unemployment rate is different from the nonfarm payroll survey, the actual unemployment rate is undoubtedly also higher than the official data implies.
The reported 1.9% second quarter real GDP rise was also grossly overstated as well as artificially boosted by the temporary economic stimulus. Without these special factors second quarter GDP would probably have declined. Consumer spending would have been substantially weaker without the tax rebates. Also, US exports based on the strength of foreign demand temporarily boosted US real GDP. As US demand weakens further, especially in the absence of tax rebates, foreign demand will also weaken. There is already ample evidence of the beginning of that foreign economic slowdown.
There was one likely miscalculation that by itself could have accounted for all the 1.9% second quarter real GDP growth reported. This was too small a GDP inflation deflater to subtract inflation from nominal GDP. Because the rapid increase in import prices is deducted from domestic prices to calculate the GDP deflater, there was an excessive reduction in the domestic deflater to a 1.1% rise, versus a 2.6% rise in the prior quarter and well under the actual 4.9% consumer price inflation rate the past year. Without these special factors, real GDP would have been negative in the second quarter and will probably show a series of actual declines over coming quarters.
Behind the US recession, driving it to further weakness, is the continuing drop in home prices. The Standard & Poors/Case shiller Home Price Index is down 18% from its July 2006 peak. And with 2.1 million vacant homes available for sale, some 800,000 more more than normal, there is bound to be further declines in home prices. That prospect is further reinforced by the continuing rise in foreclosures, the credit crunch, and the unrealized losses still to be faced by banks, investment banks, credit card issuers insurance companies and other elements of the financial sector. The decline in home prices is already encompassing lenders of conventional mortgages, not just sub-prime and Alt-A loans. Expect more financial institution bankruptcies. In concert, these various strands to the recession make a significant worsening inevitable. Investor caution remains warranted.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@gmail.com
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