All of the data coming in lately appears to show that the U.S. and worldwide government rescue of the financial industry has come too late to avoid a severe recession. I am not arguing that government intervention, and especially government investment, in banks should not have been undertaken. For if it had not, we would be discussing an impending global economic depression. Instead, it simply took to long to recognize the damage that had been done to the credit markets, and then too long to react. As a result the entire world economy is being punished, and no sector seems to be spared.
So here we are, the future shrouded in uncertainty. Stock markets continue to fall as traders lower the values of companies on increasingly lowered earnings expectations, and also because hedge funds keep blowing up, requiring them to liquidate their holdings in order to return investors’ money. The term “challenging” appears most often when corporations describe the future business environment. Even Apple, Inc., used the word in its earnings release.
Economic information and insight gathered by RGE Monitor tells a sad tale of what we may expect in the next six to nine months:
- Since the U.S. economy is already in recession, intensification of financial crisis (and impact of credit tightening on households and firms) might deepen and lengthen (longer than the avg 12 months in past decades) the downturn leading to a U-shaped recession
- Bernanke: Marked slowdown in consumption, investment, labor market; economy might be weak for several quarters with risk of a protracted slowdown; time of recovery will depend on pace of improvement in credit and financial markets
- Roubini: U.S. will suffer worst recession in 40 yrs lasting 18-24 months with unemployment rate rising up to 9%, credit losses hitting close to $3 trillion and home prices falling another 15%
- Fed’s Yellen: Economy might contract from Q3-09 to Q1-09 as financial shock hits every sector of the economy and housing is still far from bottoming out
- Merrill Lynch (not online): Growth will be flat in Q3, negative in Q4-08/Q1-09, 2008: 1.6%; 2009: -0.3% with a recovery by mid-2009 at the earliest; ‘saucer-shaped’ recovery–>longer duration of recovery a bigger risk than magnitude of decline in growth
- Morgan Stanley: Economy might contract by 1% or more in the year ending in Q2-09; UBS: growth in contract in Q3/Q4 2008 and Q1-09 growing 1.4% in 2008; 0.3% in 2009
- JPMorgan: Growth will be flat in Q3-08 (0%), contract -0.5% in Q4-08/Q1-09; 2008: 1.6%, 2009; 0.6%; Deutsche: GDP will contract in Q3/Q4 growing at 1.4% in 2008, 0.0% in 2009
- Goldman Sachs (not online): credit tightening unlikely to ease soon, will impact economic activity causing severe and longer recession, 8% unemp rate by end of 2008 and Fed rate cut of 1% or lower; consumer spending will contract during 3Q08-1Q09 recovering only in 2H09; GDP growth will contract in 4Q08/1Q09 and remain flat in 3Q08/2Q09; GDI (a better indicator) is showing more weakness than GDP
- NABE: Credit-market deterioration will push the US economy into recession (-1.1% in Q4-08, -0.5% in Q1-09); without the $700bn bailout plan, growth in 2009 would be 0.75% lower, unemployment rate would be 0.5% higher by 2009-end
- After stronger than expected growth in Q2-08 boosted by rebate induced consumer spending and export growth, domestic demand and GDP growth will weaken significantly during H2-08/H1-09 as consumption will contract starting Q3 (first time in 17 yrs on rising job losses, falling real wage/asset income, high debt, tight credit), capex will decline in H2-08 and contract through 2009 since residential and even non-residential construction spending are in negative territory (on high borrowing cost, weak corporate earnings, elevated production costs); large inventory liquidation; non-manufacturing ISM stagnating; export orders at 2-yr low, contribution of exports to GDP will soften ahead (on slowing G-7, EM growth, stabilizing USD); correction in home price till 2010 will keep putting pressure on consumers and banks
The numbers may vary somewhat from one analysis to another (for instance, different shapes are suggested for the look of the recession), but it is undeniable that the next six to nine months for most, if not all, of us looks…well…challenging.
In a recent post, I promised to write an article discussing inflation and deflation. I will get to that soon, but I also want to explore in more detail some investment strategies outside of the stock market, as well as some possible indicators to look for in advance of an end to the recession. So I have a lot of work ahead of me.
In the meantime, I have some required reading for my dear readers. Please take the time to review this article from the Economist about bear markets. There are at least two important takeaways from the article: (1) we have been in a bear market since 2000 (yes, the 2003-2007 bull run was a classic bear market rally!); and (2) two of the best years in U.S. stock market history occurred during the Great Depression (excellent example as to why buying on major dips and selling into the rallys during bear markets works, and simply holding stocks does not). Enjoy the article!
Gregg D. Killoren
victoria1014
