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