Recession may already be here

Economists shift from wondering if there will be a recession to asking if the U.S. economy has already shifted into reverse.

By Chris Isidore, CNNMoney.com senior writer

January 10 2008: 4:57 AM EST

NEW YORK (CNNMoney.com) -- The question for many economists is not if the U.S. economy will fall into a recession. It's whether it already has.

The formal recognition of a start of a recession probably wouldn't come for at least six months if not more than a year, as official judges from the National Bureau of Economic Research (NBER) pour through various economic readings.

But top economists from two of the major Wall Street firms - Merrill Lynch and Goldman Sachs - say recession is likely already here.

The tipping point for both economists was the report released last Friday that showed a sharp jump in the unemployment rate in December, coupled with little growth.

"Friday's employment report strongly suggests that an official recession has arrived," wrote David Rosenberg, North American economist for Merrill, in a note this week entitled "Recession a reality."

He wrote that history points to a recession when the average length of the work week fell in back-to-back quarters, as it did in the third and fourth quarters of 2007. And he said at no time in the past 60 years has there been a half-percentage point climb in the unemployment rate from the low point without a recession following. The latest unemployment reading stands at 5.0 percent, up from 4.4 percent in March.

In case of emergency, slash rates

The traditional sign of a recession is two or more quarters when economic activity declines rather than grows. That hasn't happened - the final reading of growth in the third quarter came in at a healthy 4.9 percent.

The NBER's calculation of when a recession starts and when it ends is far more refined than the two-quarters-of-economic-decline test. It looks at a number of factors, such as employment, real personal income and manufacturing, and comes up with a date pegged to a specific month, rather than a quarter. For example, it judged that the most recent recession ran from March 2001 to November 2001.

There's wide agreement among economists that growth in the fourth quarter fell sharply from third quarter levels, although most still forecast slim growth in the period. But many are forecasting a better-than-even chance that some quarters in 2008 will show declines.

Goldman's senior U.S. economist Jan Hatzius is one of those saying a 2008 recession is likely, with roughly a two-in-three chance. Hatzius is worried about the three-month average for unemployment, which has jumped more than one-third of a percentage point from its low.

"Whenever you've tripped the one-third-percentage point barrier, it's an [recession] indicator that's ten out of ten," he said.

Hatzius is expecting the recession will be fairly mild, lasting only 6 months, with the economy declining by no more than 1 percent in any quarter.

Recession cures - plans to goose growth

But that is based on his assumption that the Federal Reserve cuts rates deeply and quickly, to 2.5 percent from its current 4.25 percent. He also believes that given election-year pressures, there's likely to be some form of tax cut or rebate to try stimulate the economy.

"If the data is every bit as bad as we're expecting and the Fed for some reason refuses to respond, you could see a more severe recession," Hatzius said.

Hatzius also said he believes that the downturn in housing is nowhere near being played out. Hatzius is forecasting that home prices end up plunging 20 to 25 percent below peak levels. And he said that a further sharp decline in housing prices will hit both consumer spending and credit markets, which are two more reasons he's forecasting a recession.

Cautious optimism

Of course, there are still economists who believe that the economy is more likely to avoid a recession than sink into one. But even they admit to being more concerned than they were a few weeks ago.

"Our own recession-warning model currently indicates that the odds of a recession occurring in the next six months are slightly greater than 50 percent," said the monthly economic outlook from Wachovia. "That said, we still believe the economy will avoid an outright downturn, as a good part of December's weakness appears to be tied to special factors." It cited severe winter storms in much of the country as one of the issues distorting the latest readings.

Even some other economists who believe a recession is likely, such as Harvard University's Martin Feldstein, the president of the NBER, don't believe the economy has already started to shrink.

Bush tax cut guru: Recession now likely

"Of course these numbers can be revised, but as long as we have positive numbers for employment growth - very weak but still positive - and for industrial production, when the business-cycle dating committee looks at the evidence, they wouldn't say we're currently in a recession," he said.

Feldstein, one of the fathers of the Bush administration tax cuts passed early in his tenure, is advocating tax cuts and further Fed cuts to respond to the current weakness, even if the economy doesn't slip into recession.

Economist Bob Brusca said that while he thinks there is now a better than even chance that there will be a recession, that doesn't mean the Fed can start slashing rates because of the continued threat of inflation.

"A lot has yet to happen if recession is to kick in," Brusca said. "It may yet happen. But for policy that is not the issue. Policy needs to react to circumstances and that refers to both the inflation and growth profiles."

Other economists point out it's almost irrelevant as to whether the economy fell into a recession in December, or does so a few months from now.

Bernard Baumohl, executive director of the Economic Outlook Group, said that even if the economy avoids a recession, it will do so with very slow growth in 2008. He said it's almost immaterial from that perspective if there is a recession or not.

"It'll have the same painful effect on businesses and households," Baumohl said.

In case of emergency, slash rates: Some are calling for the Fed to cut interest rates sooner rather than later to fight off recession.

Recession S.O.S. - goosing growth: Lawmakers are considering a host of options to stimulate the economy, and some may mean more for your bottom line.

Bush tax cut guru: Recession now likely: Martin Feldstein argues tax cuts and more Fed rate cuts necessary to address looming recession.

Big slowdown in spending could bring recession, economists say

Whether the economy goes into a recession depends on people like Bernadette and James Scutti. The Arlington couple is trying to pay off a home-equity loan they took out to finance an addition on their modest Cape-style house and pay down thousands in credit-card debt.

So the Scuttis, who have three children, are cutting back on eating out, replacing recessed lighting with energy-efficient bulbs, and driving their Subaru to save on gas, leaving the Honda sport utility vehicle in their new garage.

"We are putting a lot more thought into every penny we spend," Bernadette Scutti said.

Consumer spending, which accounts for about 70 percent of US economic activity, is critical to the overall health of the economy. For years, robust spending on everything from homes to clothes kept the economy afloat. But Americans are paying heavily for their habits, saddled with record amounts of debt. Coupled with increasing concerns about rising gasoline prices, growing unemployment, and a prolonged housing slump, that may cause consumers to finally stop shopping this year. That, some economists say, would likely push the nation into a recession.

The forecasts are certainly bleak. Economists at Goldman Sachs yesterday joined those at Merrill Lynch and Morgan Stanley in predicting a recession this year. And growth in consumer spending is expected to drop to 1.9 percent from 2.9 percent in 2007, according to Nigel Gault, an economist at Global Insight in Lexington. The last time spending slowed that much was in 2001, and the only time spending growth was lower than 1.9 percent was in 1991. In both years, the country was in the middle of a recession, typically defined as two quarters of economic contraction.

"The consumer is really on the ropes," Gault said.

One of the first signs of a major slowdown in consumer spending was in stores across the country. Merchants, used to comfortable profits for the holiday season, slogged through this last one with aggressive promotions.

But that did not salvage the season for many retailers. Just days after Christmas, department store chain Macy's disclosed plans to shutter nine stores and said it expected December sales to be down by 4 to 7 percent at locations that have been open at least a year. Struggling electronics merchant CompUSA said last month it would close the entire 100-store chain. Classic clothier Talbots Inc. last week unveiled plans to eliminate 78 stores and cut its workforce by 5 percent.

Now, with merchants set to release their latest monthly sales figures in the coming days, economists and retail analysts are bracing for the worst. Although one market-research firm, ShopperTrak, yesterday reported 4.5 percent growth in holiday sales, most analysts expect more tepid results. Sales at chain stores for the week ended Dec. 29 rose just 2.3 percent from a year earlier, according to the International Council of Shopping Centers, reflecting what could be the weakest holiday season in five years. Retail stocks have taken a beating on Wall Street since the new year, with the Retail Index, which tracks the shares of the nation's largest retailers, this week reaching its lowest mark in three years.

Already, retailers are responding to the slowdown, holding back on ordering and inventory from manufacturers. Typically, retailers have purchased 85 percent of merchandise for the year by now, and many have only made commitments for 75 percent, said Marshal Cohen, chief retail analyst for NPD Group, a market research firm in Port Washington, N.Y.

"The retailers are looking to cut back on inventory and trying to manage expectations," Cohen said. "2008 is going to be a tough retail climate. Consumers are not rushing to spend on products. They're being very selective."

Meanwhile, even people without much debt and comfortable mortgages, like Jacquie Valatka, are getting anxious about the economy, cutting shopping budgets and using discretionary income for savings or slush funds in case things get worse.

As Valatka watched prices rise for everything from a gallon of gas to a gallon of milk, the Salem mother of two has reined in on the family's spending. For the holidays, she cut her gift budget 25 percent to $300 and used free items from website Freecycle.org to help make gift baskets for friends and family.

Now, she's borrowing movies from the library rather than renting them at the video store or going to movie theaters. Valatka plots the most fuel-efficient routes for running errands and looks for free activities for her children at the Peabody Essex Museum.

When she does shop, Valatka combs through weekly circulars for coupons and looks for the sale signs at stores.

Valakta, who works as a financial analyst, is nervous about the job market and works holidays and increased hours at her second job at a community pool to save for a slush fund in case of unemployment.

"With oil prices uncertain, the turmoil and war in the world, and the precariousness of the job market, I just want do what little I can to be as prepared as I can be," Valatka said.

Jenn Abelson can be reached at abelson@globe.com.

© Copyright 2008 Globe Newspaper Company.

Profits at U.S. Companies May Drop on Subprime Losses

Jan. 10 (Bloomberg) -- Profits at U.S. companies probably fell in back-to-back quarters for the first time in almost six years as financial firms led by Citigroup Inc. and Merrill Lynch & Co. lost billions of dollars and retailers suffered what may have been the worst holiday shopping season since 2002.

Fourth-quarter earnings of Standard & Poor's 500 Index members may have dropped an average of 8.1 percent from a year earlier, according to data compiled by Bloomberg. Profits fell 2.5 percent in the third quarter.

Rising defaults forced financial institutions to announce about $100 billion in subprime mortgage losses last year, while the worst housing slump in 27 years and $3-a-gallon gasoline curtailed consumer buying during the Christmas shopping season. Retail sales growth in November and December may have been the slowest in five years.

``People are concerned about the economy,'' said Charles Rotblut, senior market analyst at Zacks Investment Research in Chicago. ``They're seeing a lot of foreclosures, rising oil prices, and they themselves are overly stretched.''

The last consecutive quarterly profit decline occurred in the six months ended in March 2002, as the U.S. was emerging from an eight-month recession that ended in November 2001. The drop in fourth-quarter earnings would be the first year-over- year decline for that period since 2001.

The S&P 500 dropped 58.39 points, or 3.8 percent, in the fourth quarter. For the year, the index gained 50 points to close at 1,468.36, a 3.5 percent gain from a year earlier. It has fallen 4 percent this year before today.

Financial Companies

Financial companies, the largest group in the S&P 500, probably will report a 50 percent decline in fourth-quarter earnings, Alec Young, an international-equity strategist at S&P in New York, said in an interview.

Because of the subprime-lending crisis, ``there's an unwillingness of financial firms to lend money, and that's bringing the entire economy down,'' Rotblut said. ``We'll reach bottom in terms of writedowns in the second half of this year.''

Citigroup may be forced to cut the value of $16 billion in assets and post a larger fourth-quarter loss than previously estimated, Guy Moszkowski, a Merrill Lynch analyst in New York, wrote in a note to clients Jan. 8. Citigroup will release its earnings Jan. 15.

Merrill Lynch, the world's largest brokerage, may write down as much as $11.5 billion from the value of its subprime assets when it releases fourth-quarter figures Jan. 17, William Tanona, an analyst at Goldman, Sachs & Co. in New York, said in an interview on Jan. 7.

Economic Slowdown

A slowdown in economic growth, coupled with higher inflation and unemployment and loans to people who have bad credit, will continue to plague companies this year, said Edgar Peters, who oversees $25 billion as chief investment officer of Boston-based PanAgora Asset Management.

``There's all this uncertainty out there,'' Peters told Bloomberg Radio yesterday. ``The issue isn't just subprime.''

U.S. retailers may have experienced the smallest gain in holiday sales since 2002, according to the National Retail Federation, based in Washington.

Target, the second-largest U.S. discount chain, said Dec. 24 that sales at stores open at least a year may have dropped for the month, and J.C. Penney Co. slashed its fourth-quarter profit forecast by almost a third on Nov. 15 because of slowing sales.

Consumer Sector `Decimated'

``The consumer discretionary sector has been decimated,'' said Tim Ghriskey, who manages $1 billion as chief investment officer at Solaris Asset Management in Bedford Hills, New York. ``I don't think the earnings will be particularly pretty.''

The odds of a recession developing within the next year are 40 percent, according to the median estimate of 47 economists surveyed by Bloomberg from Jan. 3 to Jan. 8.

Economists at Goldman Sachs, Merrill Lynch and Morgan Stanley predict a recession.

Earnings estimates for the five biggest U.S. department stores have declined during the past four weeks, led by Sears Holdings Corp., according to data compiled by Bloomberg. Christopher Graja, an analyst with Argus Research in New York, lowered his annual projection for Sears on Nov. 29 to $6.45 a share from $8.39.

Companies seeing high export demand, in part because of the dollar's decline against major currencies, may have done well in the fourth quarter, Rotblut said.

Boeing, Caterpillar

Boeing Co., the world's second-largest maker of commercial planes, delivered the most airliners last month since 2001. It's benefiting from a jump in sales to Asia, where growing economies are spurring demand from first-time air travelers.

Profits at Caterpillar Inc., the world's largest maker of earthmoving equipment, and farm-machinery maker Agco Corp. also may have benefited from exports. Caterpillar derives 52 percent of its sales from outside of the U.S., and Agco has been helped by increased demand from Brazil and Eastern Europe.

International sales will prevent a potential U.S. recession, Ghriskey said. ``The pessimism in the markets is well-known,'' he said. ``We're already focused on improvement and coming out of this economic slowdown.''

By Kelly Riddell

To contact the reporter on this story: Kelly Riddell in Washington at Kriddell1@bloomberg.net .

Consumer Confidence Falls to All Time Low

Consumer confidence fell to an all-time low as worries about jobs, energy bills and home foreclosures darkened people's feelings about the country's economic health and their own financial well-being.

According to the RBC Cash Index, confidence tumbled to a mark of 56.3 in early January. That compares with a reading of 65.9 in December -- and a benchmark of 100 -- and was the worst since the index began in 2002.

"People are anxious because everything sounds pretty awful these days," said Bill Cheney, chief economist at John Hancock Financial Services Group.

Economists cited several factors for consumers' gloomy outlook:

--Hiring practically stalled in December, pushing the unemployment rate to 5 percent, a two-year high, the government reported last week.

--The meltdown in the housing market has dragged down home values and made people feel less wealthy.

--Harder-to-get credit has made it difficult for some to make big-ticket purchases.

--High energy prices are squeezing wallets and pocketbooks.

--There has been much hand-wringing on Wall Street and Main Street as to whether all these problems will plunge the country into recession.

"Consumers are gloomy. The confidence reading suggests that people believe bad times are upon us," said Richard Yamarone, economist at Argus Research.

Over the past year, consumer confidence has eroded sharply as housing and credit woes took their toll. Last January, confidence stood at a solid 95.3. The index is based on the results of the international polling firm Ipsos.

The White House is exploring a rescue plan, possibly including a tax cut, to aid the ailing economy. Federal Reserve Chairman Ben Bernanke, criticized for not doing enough, pledged on Thursday to keep lowering interest rates. They are expected to drop by as much as one-half of a percentage point when central bank policymakers meet later this month.

The public is giving President Bush low marks for his economic stewardship. His approval rating on the economy dipped slightly to 33 percent in January, from 36 percent in December, according to a separate Associated Press-Ipsos poll. His overall job-approval rating was 34 percent, compared with 36 percent last month.

Individuals' sentiments about the economy and their own financial fortunes over the next six months actually fell into negative territory in early January. This gauge came in at a negative 8.2 percent. That was the weakest showing since right after the Gulf Coast hurricanes in August 2005.

Another measure looking at current economic conditions dropped to 78.9 in January. That was the lowest reading since early March 2003, when U.S. troops invaded Iraq.

Oil prices recently surged past $100 a barrel, though the price has moderated somewhat. Gasoline has topped $3 a gallon. Those high energy costs for fueling cars and heating homes are leaving people with less money to spend elsewhere, analysts say. In turn, prices for some other goods and services have risen.

Economists keep close tabs on confidence barometers for clues about people's willingness to spend.

A gauge of attitudes about investing, including comfort in making major purchases, dipped to 76.3 in January. That was the lowest since May 2005.

The housing slump, weaker home values, harder-to-get credit and high energy prices all "seem likely to weigh on consumer spending as we move into 2008," Bernanke said Thursday.

Many economists believe upcoming reports will show the economy grew at a feeble pace of just 1.5 percent or less in the final three months of last year and will be weak in the first three months of this year. Major retailers reported weak sales for December.

Another index tracking consumers' feelings about employment conditions fell to 106.9 in January, a two-year low.

Government and private employers last month added the fewest new jobs to their payrolls in more than four years. In fact, employment at private companies alone actually declined. The jobless rate climbed to 5 percent in December, from 4.7 percent. The Labor Department's report, issued last week, stoked fears about a recession.

The RBC consumer confidence index was based on responses from 1,027 adults surveyed Monday through Wednesday about their attitudes on personal finance and the economy. The survey was taken after the employment report but before Bernanke's comments Thursday signaling additional rate cuts. Results of the survey had a margin of sampling error of plus or minus 3 percentage points.

The overall confidence index is benchmarked to a reading of 100 in January 2002, when Ipsos started the survey.

AP
Consumer Confidence Sinks to Record Low
Friday January 11, 6:38 am ET
By Jeannine Aversa, AP Economics Writer