Week of June 23, 2008--Has the Recession Ended?

The Federal Reserve came out of its latest Open Market Committee meeting with interest rates unchanged. Its reasoning was convoluted, however, in that it believed the worst of the recession is behind us and that the economy is growing again. We therefore have now to worry about inflation, though it should moderate later this year, due to the current slowdown!

So which is it? We cannot have both. Either the credit and housing crunches—along with soaring energy prices—have seriously hurt consumers, which comprise two-thirds of economic activity. Or, the worst is over and consumers have enough spending power to continue to drive up prices—i.e., inflation.

The latest Q1 Gross Domestic Product revision tells us that consumer spending rose just 1.1 percent, half that of 2007’s last quarter, which means consumers are spending on basic necessities at discount prices, but nothing else. This will not drive inflation higher.

One glimmer of hope on the housing front was the 2 percent increase in existing-home sales, to 4.99 million annualized units. Sales have stabilized around a 5 million average since last August. The median-price is now down 6.3 percent in 12 months.

But Harvard’s 2008 Joint Center for Housing Studies report says that the “corrections” in housing starts, in new, and existing home sales rival the deepest slowdowns since World War II. Historically, housing markets usually recover after an economic recession that drives down interest rates and housing prices. But this recovery may take longer due to the high volume of foreclosures and shrinking of available credit, said the report.

May’s new-home sales seemed to confirm this prognosis, falling 2.5 percent with the median price down 5.7 percent in a year to $231,000. The current annual sales rate is 512,000, which is approximately 50 percent below the 1.05 million sold in 2006.

Another indication of weakening consumer demand was the plunge in the Conference Board’s Confidence Index to 50.4, from 58.1 in May. The Director of its Consumer Research Center said the Index was the fifth lowest ever, while its Expectations Index of future activity had reached a new all-time low. Consumers believe we are still in a recession, in other words.

So how do we know if we are in or out of a recession? Once last sign is the Conference Board’s Leading Economic Index (LEI), which rose 0.1 percent in May but is down -0.7 percent over the last 6 months. Its coincident index tracks the same 4 indicators used to determine a recession. And though those indicators also rose 0.1 percent in May after falling -0.1 percent in April., it was the first increase in seven months. The growth rate of the coincident index stands at -0.4 percent (a -0.7 percent annual rate) in the six-month period though May, down from 0.3 percent (a 0.6 percent annual rate) from July 2007 to January 2008, and the weaknesses among its components have remained widespread in recent months.

The predominance of evidence seems to be that we are still in a recession, with energy and food inflation wiping out most economic growth. But said inflation is driven by growth in the rest of the world—especially Asia, rather than domestic demand. So, paradoxically, we therefore must wait for the rest of the world to slow its growth before U.S. growth can resume, and housing has a chance to recover.

© Harlan Green 2008