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October 20, 2006


Bottoming Out?

The view under The Street Light is that things may be headed south for the U.S. economy, and at Econbrowser Jim Hamilton is spot on regarding the equivocal picture being drawn by the incoming data. Still, I'm feeling oddly optimistic.  I guess I'm not alone.  From The Wall Street Journal (page A10 in the print edition):

Leading economic indicators pointed to slower U.S. economic growth in September.

Separate reports showed that factory activity in the Philadelphia region was flat in a mid-October reading even as manufacturers remain optimistic, and that weekly U.S. jobless claims hit a four-month low.

The Conference Board reported Thursday its index of leading indicators edged up just 0.1% to 137.7 in September, but noted that consumer expectations have improved. The index fell by a revised 0.2% in August. Economists had expected a more robust 0.3% advance last month.

"The economy has slowed but the evidence to date doesn't suggest it will stall or go into a recession," said Ken Goldstein, an economist with the private research group. "To the contrary, the economy retains considerable strength," given the rise in stock prices and drop in energy prices, he said. Mr. Goldstein also noted that employment remains robust and inflation relatively low.

It's not that we are lacking negatives, of course:

The group noted that the leading index has fallen in five of the last eight months, and from March to September, the index is down by 0.9%, a 1.7% annual rate decline.

The Federal Reserve Bank of Philadelphia reported that a gauge of manufacturing activity in its region slipped to -0.7 in a mid-October reading from -0.4% in September... Negative readings indicate a contraction in activity.

But we know that the third quarter was bad, and this is relevant too:

The findings of [September Philadelphia report], however, weren't borne out in other regional manufacturing surveys, or in the Institute for Supply Management's national report...

Expectations for future manufacturing growth improved after last month's sharp decline. Indicators for future orders, shipments and employment were all higher.

And that's the thing that keeps sticking in mind.  In my line of business I have the opportunity to hear from a lot of people who are, as they say, close to the ground -- folks actually making stuff, hiring people, extending loans, putting together deals.  My thoroughly unscientific sense is that the distribution of beliefs out there suggests things are more likely to get better than get worse.

That does not apply to the housing market, of course.  But, for reasons I'll detail in a later post, I'm beginning to wonder about the reach of developments in that sector. I'm not quite ready to take the anti-Roubini bet with the degree of confidence that Nouriel himself puts on his recession call.  But I'm getting there.

October 20, 2006 in Data Releases , This, That, and the Other | Permalink

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I agree, "things are more likely to get better than get worse". Our economy is ALL about MONEY SUPPLY, its FLOW, and the AVAILABILITY OF CREDIT, including that to hedge funds. The FED's approach to the double digit growth money supply we've seen for years was to stop counting it. It's response to the astronomical credit growth we've seen is to reaffirm its asymetric policy. (If it's wrong & the bubble pops, there's no need for us to worry - the FED will drop money from helicopters to provide needed liquidity. The message is loud & clear: forget our grandkids, let the good times roll.
So, let's get back to the important stuff: What are FF futures suggesting the Fed will do in '07Q1? If the odds are right, I'd love to releverage my bet & borrow the down for that TRANSPAC boat I NEED. (I'd wait for year-end financial sector bonuses (remember, last year's totaled $22 billion), but the filing deadline's in June & that's not much time to get ready.) On second thought, I've already releveraged 4 times, I think I'll wait for more early xmas sales - Responsibilities, you know. I'll just use the two new credit card offers I got in the mail yesterday (0% into '08) to cover the down. Man, is this economy great, or what?

Posted by: bailey | October 20, 2006 at 12:20 PM

I'm with bailey and Roubini. I've been bearish since the mid-ninties.I believe we've (Madison Avenue, Wall Street, and the US gov) dealt our economy and our middle class a near lethal blow with offers of ever-entending credit.

I could not believe it when Greenspan decided to cheerlead the blowing up of the housing bubble and ARMs in the wake of the Nasdaq bubble crash. I await your "anti-Roubini bet" post.

I'm particularly interested in better understanding how we are going to avoid liquidity traps if we try to inflate our way forward beyond what may have been the untimate bubble play (i.e. the housing bubble).

Finally, what is your take on hedge funds and risk concentration, and "perfect storm" possibilities. Somebody, somewhere, has to help be understand why we (particularly some big NY banking/finance enterprises -- deemed by many to be "too big to fail" (or be allowed ot fail) hence "we") are not way over extended in that realm. See, e.g. Robert Reich's recent post, here: http://robertreich.blogspot.com/2006/10/of-dems-hedge-funds-and-cheneys-plans.html

Posted by: Dave Iverson | October 20, 2006 at 12:49 PM

Professor, I think housing will get worse, but the hard part is estimating the impact of the housing slowdown on the general economy.

It seems there are multiple transmission mechanisms: lost housing related jobs (something that has barely started), loss of mortgage equity extraction (also just started) and the impact of tightening lending standards (after a period of excessively loose underwriting standards).

We're already seeing some impact on overall job growth and retail (Q3 retail sales were sluggish according to the Census Bureau advanced data).

Right now I'd expect Q4 growth to be worse than Q3 as housing related job losses pick up and equity extraction declines. I look forward to your post.

Best Regards!

Posted by: CalculatedRisk | October 20, 2006 at 01:34 PM

Usually there is a part of the economy to lead us forward in the expansion. What do you see as that part? Healthcare and finance (Wall Street) are doing well, but is that sufficient? Do you see the rest of the world growing sufficiently to become interested in American products or just assets?

Posted by: Lord | October 20, 2006 at 02:08 PM

What is in the American product pipline, now that housing has given us the impression that it, like the Norwegian Blue, needs a rest?
Nanotubes? Picotubes? Femtotubes?
Yes, of course, but will they be made here by American workers earning wages (such Cromagnons!) to buy those products/services representing those financial (not-so-Cromagnonian) items "just assets"?
Consider the new (somewhat fickle) asset class FABS, people -- assets that are increasingly foreign manufactured/originated, foreign distributed/marketed and (asset holders especially are hoping), soon to be foreign consumed products and services.
Just because the American consumer is going to take a breather doesn't mean your assets are. There are billions and billions of others just dying to get their mits on your leave blower and other assets.

Posted by: calmo | October 21, 2006 at 10:31 AM

Dear Calmo & others:

This is it, there is nothing in the "Pipelines". We are going to have a severe economic downward re-adjustment -sort of of England/France in the 50s & 60's with its accompanying social ills.

What greenspan & Co have been trying to do is to extend the good times to see if something came down the "pipelines" & avoided the consequences.

Something could come down the "pipeline" - but it will have to be politically driven & likely have a statis feel to it. And unfortunately, we are overdose with free-market ideology & deepply entreched interests at this time, that will ensure a stasis until the toilet needs to be flushed.

2 Techs that could save the day -> Energy (but you'll have to kill the Oil industry); Transportation (just like the UK -The Railroad tracks are owned & maintaned by an Authority -the trains themselves are private & different networks for Passensger & Freight -with their different track needs & add to this Maglev Tech.; etc..

Posted by: wysiwyg | October 21, 2006 at 05:26 PM

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