The Coming Recession May Not Be Deep, Will Be Long

The Coming Recession May Not Be Deep, Will Be Long

$DIA, $SPY, $QQQ, $VXX

If and when the US enters a recession this year, expect it to painful,  long and not so deep as the Great Recession

The world’s largest economy has a a lot of pluses, from well-capitalized banks to financially-stable households, which should help limit the depth of a downturn should one happen.

Yet with interest rates at Zero+, the Fed’s Chairwoman Janet Yellen and her colleagues are short of tools to lift the economy quickly out of a rut, economists say.

The 2 pre-2007 downturns lasted 8 months (1991 and  2001) and were mild by historical standards. GDP fell by just 0.3 percent peak to trough in 2001. It dropped 1.3 percent on that basis from 1990 to 1991.

By contrast, the Y’s 2007-09 recession was the deepest and longest since the Great Depression. It went on for 18 months and saw output plunge by 4.2%.

With the global economy looking shaky and financial markets unsettled, the chances of a US downturn have risen, according to economists surveyed say, pegged the odds of a recession over the next 12 months at 20%, up from 15% in December, based on their median estimate.

The main reason many economists are betting against a decline in GDP this year is the same one that argues against a deep drop. The US is mostly free of the kinds of economic distortions that could drive output sharply lower.

Growth slowed to 1% in Q-4 of Y 2015 from 2% in Q-3, in part because companies pared stock building.

Housing is far from the levels that prevailed prior to the 2007 downturn.

Residential construction amounted to 3.4% of GDP last year, nearly 50% its 6.5% share in Y 2005.

Mortgage debt is more than $1.1-T lower than its record high in Y 2008. And while housing prices have just recently recouped all the ground lost during that bust.

Consumers are in much better shape financially after spending years working off debts built up during the housing boom. That is Key because personal consumption expenditures totaled more than 68% of GDP in Y 2015.

Delinquencies on credit cards issued by banks are near a 15-year low. The saving rate is much higher than it was at the end of the previous expansion. And workers are just starting to see signs of a pick-up in wage growth more than 6.5 years after the recession ended.

Banks are looking stronger.

The number of financial institutions on the Federal Deposit Insurance Corp.’s  problem list fell below 200 in Q-$ of Y 2015 for the 1st time in more than 7 years. Total industry capital now stands at $1.8-T, 25% higher than at the end of the Great Recession, according to the American Bankers Association in Washington.

There are pockets of weakness

Companies are cutting back on their spending and hiring in response to a squeeze on their earnings.

Profits as measured by the Bureau of Economic Analysis probably fell 7% in Q-4 of Y 2015 from a year earlier.

Perhaps the biggest risk to the economy comes from outside the US.

Economist David Levy argues the country already is heading into a recession, dragged down by an economic breakdown in China and other emerging markets.

A Key danger, according to Professor Levy, is the US Fed’s limited ability to counteract any economic weakness.

In and around the Y 2001 recession, the US central bank cut its target federal funds rate 5.5 percentage points, to 1% in 2003. From Y’s 1990 to 1992, it reduced it 5.25 pts to 3%.

The Fed’s target for the rate that commercial banks charge each other for overnight loans currently stands at just 0.25 to 0.5% after the central bank raised it in December for the 1st time since 2006.

The slump, if and when it happens, is likely to be a drawn-out U, not a sharp V.

The Big Q: Can we believe the numbers coming from the federal government?

Tuesday, the US major stock market indexes finished at: DJIA +248.58 at 16764.33, NAS Comp +131.65 at 4689.54, S&P 500+46.12 at 1978.24

Volume: Trade was heavy with over 1.1-B/shares exchanged on the NYSE

• Russell 2000 -7.3% YTD
• NAS Comp -6.4% YTD
• S&P 500 -3.2% YTD
• DJIA -3.2% YTD

Stay tuned…

Paul Ebeling

HeffX-LTN

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