Recession? Close Enough for Fed Work

By: Paul Kasriel | Thu, Apr 3, 2008
Print Email

It was only last August that the Fed's principal concern was preventing higher inflation. But, after 300 basis points of reductions in its federal funds rate target, a 75 basis point reduction in its discount rate "penalty," the creation of various alphabet soup new liquidity "facilities" and the hastily-arranged assumption of Bear Stearns by J.P. Morgan, Fed Chairman Bernanke told the Joint Economic Committee of Congress that it "now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly." Sounds a lot like a recession to me, but I will leave the formal call to the hindsighters at the NBER. In the spring, hope is eternal. So, in his next breath, Chairman Bernanke went on to say that the Fed expects "economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009." No disrespect intended, sir, but the Fed's GDP forecasts have about as much credibility as ADP/Macroeconomic Advisers nonfarm payroll forecasts. The bottom line: Another funds rate cut at the end of this month, probably 25 basis points.

Mark It as You Choose, but Is Enough Cash Coming In?

The world abounds with seemingly costless solutions to our current economic/financial market problems. One of these solutions is to allow financial institutions to mark their assets at historical cost rather than to current market value. You can value your assets at any price you want, but the acid test is whether these assets are generating enough cold-cash income to keep current on interest and dividend payments. Chances are that if the market value of these assets is less than the historical cost, you will flunk the acid test.

Worst Quarter for Motor Vehicle Sales since Katrina

Total light-weight motor vehicle sales slowed to an annualized pace of 15.1 million units in March - down 1.7% from February and the slowest sales pace since the 14.8 million units in October 2005, in the aftermath of Hurricane Katrina. As the chart below shows, for the first quarter as a whole, annualized sales contracted by 20.0%. With the exception of the Katrina-depressed fourth quarter of 2005, this is the largest quarterly contraction in sales since the fourth quarter of 2002. Remember when all of the talking heads were saying that what happens in housing stays in housing?

China's Misery Index

The Chinese Shanghai stock market index fell 34% (not annualized) in the first quarter vs. the previous quarter (see chart below). Couple this with the "official" consumer inflation rate of 8.7% and you have the makings of some potentially surly Olympic hosts if things don't improve by August. You also have the makings of much slower Chinese GDP growth. So, like the housing "containment" hypothesis, the "decoupling" hypothesis is another beautiful theory likely to be spoiled by some ugly facts.



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

Copyright © 2005-2012 The Northern Trust Company

All Images, XHTML Renderings, and Source Code Copyright ©