Monday, November 26, 2007

A recession is when your neighbor's out of work 

You know that old saw: A recession is when your neighbor's out of work, a depression is when you're out of work. (And a recovery is when George Bush is out of work, the Democrats will say, but that's just stealing.)

So what happens when you view it as the Goldilocks Economy? I mean, my GOD, when you can't even get Christmas lights at Costco, how can you think the economy might be in a recession? I mean, don't pay attention to that one-third of respondents to some stupid Zogby poll said they were cutting back on Christmas gift-buying:
The main reasons cited were: lower income this year (28 percent), general economic concerns (25 percent) and increasing energy prices (19 percent). Forty-five percent plan to spend under $500, and only 16 percent plan to spend more than $1,000 on holiday gifts this year.

Even if they choose to purchase an item at a retail store instead of online, 69 percent of shoppers in these cities plan to use the Internet to browse or check prices before heading to the store.

The average spent per person went down; it was just that, with all the stores opening earlier and pushing discounts, more people got through the doors. Kinda like Woodstock. For what it's worth, the online sellers today for Cyber Monday are having network traffic load problems. Not sure how that will translate to sales.

"Oh, King. So negative! Even Ed says you should just look at the data!" Well...

To those concerned: A forecast is just a forecast. And when it comes to recessions, we economists are known to predict them at least eight times in the last five. (It's amazing to me, by the way, why there are so many different ratios of predictions to recessions. I've seen 8-5, 9-5, 8-3, 2-1 in that one link!) There are things we see in the market to which we say "you know, when that's happened before, it was followed by a recession." That doesn't mean one necessarily will follow this time, but it means one had better think about risk.

The Federal Reserve surely is, when it announces that it's willing to make loans that used to be two weeks in length maximum now six weeks. It says it "plans to provide sufficient reserves to resist upward pressures on the federal funds rate above the FOMC�s target rate around year-end." Why would it do that, if not because it fears banks need more money? And why? Perhaps the Fed saw this graph showing that $362 billion in adjustable rate mortgages are going to, um, adjust. Maybe those are converted to fixed rates -- though violating contracts by insisting banks not adjust a contract they paid to adjust by offering a teaser rate seems an odd solution -- and maybe they won't be a problem to pay. But it cannot be good for home prices, and it's not wrong for Larry Summers to point out that when that's happened in the past, recessions usually follow. Not necessarily, of course, but when a rumor runs around Wall Street that Citigroup might be dumping as many as 45,000 workers, shouldn't one pay a little attention?

Not to mention the dollar. If Europe is not going to cut rates as fast as the Fed is, there's little chance that the exchange rate will turn around any time soon, making cheaper oil (in dollar terms) less likely going forward.

All this makes me think that what we're in for is a long, shallow recession. The Fed is hemmed in and unable to provide massive doses of liquidity. Tim Duy argues that the Fed doesn't want to repeat the lessons of Greenspan:
They do not want current policy to breed conditions that foster future instability, such as, for example, an extended period of ultra low interest rates that supports an asset price bubble. In order to keep current policy tethered to the long run anchor, the Fed needs to shift policy before the need is obviously evident. Which means doing something that might be surprising to market participants, such as pausing when inflation trends may still be on the uptrend (sound familiar?). Or, what is likely most challenging, pausing in an easing cycle when the economy remains weak.

Of course, it is the latter situation that the Fed is facing. Policymakers intend to pause at a time that may be somewhat �uncomfortable,� when it is not clear the economy has reverted to its upward trend.
The Fed is signaling a slowing economy that will stabilize shortly because it does not want again to have its hand forced by the market to cut rates, so it instead is having to rely on extraordinary measures like the six-week repo. It remains to be seen if that trick will work, but that it is trying a trick should give Goldilocks enough reason to keep one eye open while she slumbers in Baby Bear's bed, lest she find her neighbor jobless.