Tuesday, July 31, 2007

What recession? 

Larry Kudlow is a pretty smart guy, and he's emphasizing profits as the mother's milk of the economy.
The economy has found its legs with a 3.4 percent GDP growth report for the second quarter, a much-needed surge from only 0.6 percent in Q1. Moreover, core inflation came in at a rock bottom 1.4 percent.

Most importantly, second quarter corporate profits are flowing in two to three times better than expected. Much of this reflects the huge global economic boom that Treasury Secretary Henry Paulson describes as the greatest worldwide surge in his professional lifetime. These rising profits inject new value into the stock market.
I read earlier, but was reminded when I looked at the Bloomberg economy page over my mango smoothie lunch. Top line:
Consumer confidence in the U.S. jumped more than forecast this month to the highest level in almost six years, suggesting the June slowdown in spending may be temporary.
So are all the doom-and-gloomers wrong? I think not entirely.

First of all, slide further down the page: Personal spending came in below expected for June. Yes that number's already cooked in the second quarter numbers, but the expectation should have been moved down already too. Home prices down 2.8% in May, and construction spending down 0.3% in June. Think all those effects are already cooked in? No, me neither. And the NAPM Business Conditions Index is down near where recessions begin, and again it's unexpected.

What does it mean? I think, first, that there may be some reaction to the fact that prices in housing are not falling as fast as some might have feared. Calculated Risk notes that housing slumps tend to be long in terms of price declines, so this may be the beginning of a long decline. The increase in GDP in the second quarter came from sources other than consumption, so if personal spending is really going to rebound in July and August, the evidence so far is just an increase in confidence.

I run for St. Cloud a model much like that James Hamilton uses for the US, or perhaps more like Alan Gin's for San Diego -- I'm still writing up the documentation, it will be available next month -- and like San Diego St. Cloud has had a heavy reliance on construction, and the probability reading I had last time had a point estimate of 28.3%. (I've been surprised by the volatility of the number, so I've been looking to see whether I can get this fixed before I release the measure to the public.) I have received no information in the past thirty days since our last report went public to change my mind on that measure.