So, Is This a U.S. Recession?
written with RGE’s Mikka Pineda
Update July 31 2008: as expected U.S. real GDP growth was revised down for both Q4 2007 and Q1 2008, with Q4 2007 marking a quarter of negative growth at -0.2% (quite a sharp drop from the 4.8% of Q2 and Q3 2007).
In Q2 2008 the economy expanded at a pace of 1.9%. Still below the 2.3% consensus forecast. Residential investments contracted 15.6%, this is an improvement with respect of an average of about -24% in the previous three quarters. Overall gross private domestic investment grew at the slowest pace since Q2 2006: -14.8% (compared with -5.8% in Q1 2008). Gross private domestic investment contributed a -2.28% of GDP in this quarter.
The negative contribution to GDP of investments is offset by the strong positive contribution of exports: +2.42%. Exports grew 9.2% and imports registered the sharpest decline since 2001.
Real personal consumption increased 1.5% in Q2 2008 compared with 0.9% in Q1. In Q4 2007 personal consumption contracted 0.2%. Disposable personal income increased $393.4bn (15.9%) in the Q2, compared with an increase of $88.5bn (3.5%) in Q1. Real disposable personal income increased 11.3%, in contrast to a decrease of 0.1%. Current-dollar personal income increased $214.5bn (7.4%) in the Q2, compared with an increase of $109.1bn (3.7%) in Q1. The acceleration primarily reflected an acceleration in personal current transfer receipts due to the effects of the rebates to individuals who pay no income taxes (or for whom the rebate exceeded the amount of taxes they pay)from the Economic Stimulus Act of 2008.
The tax rebates (and refunds) definitely brought a temporary boost to spending that, however, does not imply a change in the structure of the economy. The revision of the past GDP estimates suggest that a recession might have started in Q4 2007.
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Not only we are in the middle of earnings season, but this week is very rich in terms of data releases for the troubled U.S. economy. Starting with home prices and consumer confidence yesterday, the week will close with data on real GDP growth and with the employment report.
On the U.S. housing sector front, stabilization is not yet in sight. In its update to the April global financial stability report, the IMF stated that “a bottom for the housing market is not visible.” Inventories and vacancies are still at a record high and continue to put downward pressure on prices. Yesterday the S&P Case-Shiller index showed acceleration in the pace at which home prices are falling. The 10-City Composite posted a new record low of -16.9%, and the 20-City Composite recorded a record low of -15.8%, translating into trillions of real wealth losses for the engine of the economy: the U.S. consumer. Will the controversial housing bill, recently passed in Congress, be effective in containing the housing downturn and its effects?
It is no surprise that consumer confidence indexes are at the lowest level in almost two decades. Consumer spending most likely got a boost as a result of the tax rebates – and a break from $140+ oil and $4 gasoline is a welcome development. But is oil at the breakpoint? Should the U.S. consumer really cheer oil at $120? Wait for those winter heating bills! And is there need for more fiscal stimulus?
The financial crisis is far from over and it is rapidly moving from subprime borrowers to prime borrowers prompting banks to tighten credit across the board to both consumer and businesses. Clamping down on consumer credit will pose further strains on the U.S. consumer. Moreover, while probably only a small fraction of the credit related losses has been disclosed, new surprises could be in the pipeline including for institutions that are less exposed to subprime paper. So far this year seven banks have failed – more than in the past four years combined and ninety banks are currently on the FDIC’s undisclosed problem bank list.
Despite rallies on falling oil prices, U.S. stocks extended their decline on earnings disappointments and fresh reminders of an ailing U.S. economy and financial system. The breath of optimism that blew into markets after the Bear Stearns rescue grew stale in June, which posted the worst monthly performance (-9.4%) since the Great Depression and plunged the DJIA into bear market territory. A few days into Q3, S&P 500 followed. No surprise, the Financials sector led the share price losses for Q2 (-44.2% y/y) and Consumer Discretionary ran second (-27.9% y/y) while Energy (23.1%) led the gains – a pattern that has been in place since the beginning of the subprime crisis last summer – but lower energy prices might mean lower profits and share values. Only Financials posted negative earnings growth – but the drop was so huge (Q2 EPS growth of -94.8% y/y) it dragged the whole S&P 500 down to -24.3% y/y Q2 EPS growth. Other sectors posted positive but disappointing earnings growth.
Source: Bespoke Investment Group
Earnings season is only halfway through and, with financial troubles and the housing correction unlikely to let up soon, future earnings and share prices look likely to fall further. The average bear market posts a 28-30% decline from peak to trough. So far, DJIA and S&P 500 were down 21.8% from their October 12, 2007 peak to their one-year low on July 15, 2008. Nasdaq was down 22.38% from its November 2, 2007 peak to its one-year low on March 10, 2008. Russell 2000 was down 24.7% from its Jul 13, 2007 peak to its one-year low on March 10, 2008.
Source: msn money
On the employment front, the non-farm payroll report coming out on Friday will likely be disappointing. Some labor market indicators, such as initial jobless claims (at 406K in the week ending July 19), are lingering dangerously towards recessionary levels. Aug
ust will likely be the eighth month of negative payroll growth, -75K according to consensus; the unemployment rate is expected to increase from 5.5% to 5.6%.
Real GDP growth is expected to come in at around 2%. So will this be a recession without negative real GDP growth? Most likely not. Revision to GDP growth might reveal that the anemic – and well below potential – positive growth rates that we have witnessed in Q4 2007 (0.6%) and in Q1 2008 (1%) were actually negative. Moreover, we might be in for a bad surprise when the effect of the stimulus checks wanes in the second half of the year, as a temporary stimulus does not change the structure of the economy. Also, let’s not forget that GDP growth is not the only parameter to assess whether the economy is in recession or not. NBER has shifted its criteria from successive quarters of negative GDP growth to four measures of monthly economic activity: personal income less transfer payments in real terms, employment, industrial production, and the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. It will take some time for the NBER to officially call recession, if we are in one. However, the fact that we could be in a recession cannot be ruled out on the basis of lack of negative growth. In the meantime, are we witnessing a temporary growth recovery before we fall back into slump?
from BNP Paribas
from BNP Paribas
If this were to be labeled a recession, it would be the first one without the presence of negative growth. But stay tuned tomorrow not only for the Q2 2008 GDP release, but for the usual summer revisions that will also include revisions of the last two quarters. There might be some surprise there…
One last chart, some more food for thought:
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