Welcome to the 'recession'

It's getting harder and harder to deny that the economy is in recession.

Warren Buffett, the world's most famous investor, proclaimed this weekend that "we are already in a recession."

Former Federal Reserve chairman Alan Greenspan told the Financial Times on Monday that there is a greater than 50% chance of a recession.

But with all due respect to the Oracle of Omaha and the Maestro, they are not telling us anything that the average American consumer didn't already know: this economy stinks.

Whether the economy is technically in recession is missing the point. Consumer confidence is anemic. Home prices continue to fall. The unemployment rate has risen sharply over the past few months. Food and energy prices are soaring.

In fact, gas prices have run up so much that Americans are even starting to give up on their love affair with the automobile: the Federal Highway Transportation reported yesterday that Americans drove 11 billion miles less this March than a year ago.

We may not find out for several months if the National Bureau of Economic Research, the official arbiter of recessions, decides to label this economic rough patch an actual recession. And the economy may not ultimately decline for two consecutive quarters, a shorthand definition.

Gross domestic product eked out a 0.6% gain in the first quarter, according to the first reading of that figure released last month. An update is due out Thursday and economists have a revised forecast of 0.9% growth.

So the most pertinent question now for consumers and investors should not be if we will enter a recession but how long will it last?

Buffett and Greenspan are divided on that question. Buffett, speaking in the German weekly Der Spiegel, said that the recession "will be deeper and longer than what many think" while Greenspan said to the FT that "the probability of a severe recession has come down markedly."

So how can two financial legends have diametrically opposed views on the economic outlook? Well, these are confusing economic times. Even the Federal Reserve seems to be uncertain of what's next.

On the one hand, the credit crunch that paralyzed financial institutions late last year and earlier this year seems to be ebbing.

Wall Street has been responding well to this development: the S&P 500 is up about 7% since mid-March, when investor fears were greatest. That's right around the time that JPMorgan Chase (JPM, Fortune 500) agreed to "rescue" Bear Stearns (BSC, Fortune 500).

And the Fed also seems to think the worst may be over on Wall Street. It has indicated that it probably won't cut further its benchmark federal funds rate, which currently sits at a relatively low 2%.

That should be good news for investors. In a note to clients Tuesday morning, Harris Private Bank chief investment officer Jack Ablin pointed out that since 1984, the S&P 500 has gained, on average, 21.5% in the 12 months following a final Fed rate cut in a cycle. "History suggests that the S&P 500 enjoys strong gains once the Fed puts their interest rate ax away," Ablin wrote.

A sustained upswing in stocks could go a long way toward lifting consumer sentiment, especially since many consumers have seen the value of another key asset, housing, fall in the past few months.

But the central bank is also growing increasingly worried about inflation in food and energy dragging down the economy. The Fed's series of rate cuts have weakened the dollar and some economists suggest that the greenback's sluggishness is the main culprit behind the spike in commodity prices.

Even one of the Fed's policymakers shares that view.

According to the minutes of the Fed's April policy meeting, released last week, Dallas Federal Reserve president Richard Fisher suggested he "was concerned that...lowering the funds rate had been pushing down...the dollar, contributing to higher commodity and import prices, cutting real spending by businesses and households, and therefore ultimately impairing economic activity."

The Fed also updated its economic forecasts for 2008 last week and the picture isn't pretty: the central bank reduced its growth target for the year while also boosting its forecast for both inflation and unemployment.

So which is it? Is the downturn almost over because banks are recovering their footing? Or is the recession only beginning thanks to runaway price increases at the supermarket and pump?

Personally, I think it's an encouraging sign that, despite many economic problems, consumer spending has held up relatively well during the past few months. In addition, the government reported today that new home sales, while still at a historically weak level, rose unexpectedly in April. Any signs of life in the moribund housing market has to be viewed as a positive

And as I've argued in several recent columns, the fact that many big corporations have ample amounts of cash that they are using on mergers as well as to buyback stock and increase dividends is a good thing. Unlike prior recessions, Corporate America may help to keep the economy afloat even if consumers pull back.

SOURCE:

CNNMoney.com

Story of the assumed Great Depression

In for a penny, in for a pound. And several Big Time pounds may be in for being not just wrong, but massively wrong. Over the last several months, there has been a constant drumbeat announcing the impending doom. It all started out quite innocently. The US current account was under stress, the dollar too high. Then came the sub-prime crisis. From an also ran to the housing crisis, it became the main event. Estimates of banking losses of around $400 billion are now widely accepted. This event started the forecasts of the great US depression. Everybody chimed in and wanted to be the first to claim credit for the forecast, heck reality, of the housing sub-prime inspired US depression. Forecast a no-brainer recession, indeed Depression. The perfect buy, rather sell!
The institutions and individuals who chimed in with their few billions worth would convince anybody. George Soros, Mark Mobius, Jim Faber, the IMF, Goldman Sachs, JP Morgan, Morgan Stanley, Alan Greenspan, all said that a recession was a near reality and a Depression a distinct possibility. If not a Depression, then a prolonged recession; if not a prolonged recession, then sub-par low levels (around 1%) of GDP growth as far as the forecast could be made. These names are legendary and I apologise for missing other BIG names, but the fact is that the names of super distinguished market players forecasting a radical change in US growth patterns would fill this entire page, let alone my column. Merrill Lynch went so far as to write, just a few weeks ago, that damn the data we are already in a recession. A consistent and near lonely exception to this doom today, doomer tomorrow assessments was Macroeconomic Advisers, a firm led by Dr Laurence Meyer, formerly of the US Fed. This firm has consistently maintained that not only will the US avoid a recession, but that the recovery will also be sharp. There are a few other lonely outfits (Oxus!) but really the cupboard is near empty.
Associated with calls for a US depression was the conclusion that those who had argued about globalisation and global decoupling were wild-eyed optimists or ones at some distance from reality. The world really had not changed, and if the US went into a deep slump, everybody was threatened Big Time. But what happened, or has happened to date? The US has grown for two successive quarters at the snail pace (formerly Japanese and European pace) of 0.6 per cent per annum. Japanese industrial production growth has accelerated; this according to the new 2004 base. European growth has continued on its 2% plus pace, though the ECB's obstinate adherence to an outdated monetarist model may force Europe to face a cost of lower than potential growth, and with no offsetting gain on the inflation front.
China's GDP growth has declined marginally from above 11 per cent to "only" 10.5 per cent. Korean growth continued, as has growth in several parts of Latin America and Africa. Indian growth has been hurt much more by a highly contractionary exchange rate and interest rate policy than by the US slowdown. The current 8.3 per cent growth is well below last year's 9 + per cent growth, and considerably below its realisable potential of 10 per cent GDP growth.
If more than a marginal slowdown has not occurred in non-US world growth, then the important question is "Why Not?" And that question will be reinforced if the US avoids a recession, as seems likely. There are two independent explanations for the possibility that the experts have got the future of the US economy horribly wrong. The first explanation is that the US-centric gloomsayers have not appreciated how much the world has changed -- just as their Indian counterparts who believe in karma so how can the world change? Today, India and China alone account for as much world growth as the US economy itself. This simple statistic explains the "stabilisation" possibilities in the modern world, and why the world economy is likely to prevent the US economy from entering into a recession. Just look at US export growth. The Great Depression Redux -- forget it.
There have been other pointers towards a no-US recession. None of the traditional leading indicators are "working" according to history; retail sales, payroll employment, unemployment, industrial production, purchasing managers indices are well above levels associated with entry into a recession. The forecasters may have concentrated on just one variable, housing, which has been the worst since the Depression. Extrapolation from this one, albeit important, statistic may turn out to be fatal (for the forecast).
But why is the world economy so resilient now and different than earlier points in history? This will likely be a popular research subject. But there are pointers, explanations. A strong contender would be the large presence of the newly emerged middle class in the developing world, and especially because of their size, the middle class populations of India and China. The middle class is many virtuous cycles rolled into one middle -- high and increasing consumption of infrastructure and durables, high productivity growth, high incomes and even higher savings and investments. It is the actions of the middle class that provide stabilisation in the world economy, and its growth.
The middle class is a long-run factor. The world financial markets were close to breakdown just a month or so ago. While the rest of the world's central banks missed the big picture, not so the US Fed led by Prof. Ben Bernanke. His timely interventions, and a worldview of what works and what does not, has most likely helped avert a global financial meltdown; if such a meltdown had occurred, it would have affected all of us quite severely. If Bernanke is successful in his policies (and my bet is yes) then a historical place for him next to the world's best ever central banker, Paul Volcker, is assured.

SOURCE:
Rediff.com