50-50 Chance of Recession

E

eagle488

US close to 50-50 chance of recession
Kevin Andrusiak
December 07, 2006
RENOWNED US economist Stephen Roach believes the US economy will slow to a near "stall speed" next year and stands a 40 to 45 per cent chance of tipping into recession because of its weakening housing market as Chinese regulators look to curtail economic growth.
The Morgan Stanley chief economist and director of global economic analysis also had some dire news for subscribers to the resources boom, saying commodity prices were "overdone".

"Bleak is not the way I would describe the rest of the world, except for the US," Mr Roach said in Sydney yesterday.

The gloomy outlook came on a day when more economic indicators showed Australian economic growth was moving at a snail's pace. Yesterday, economic growth came in at 0.3 per cent for the September quarter, less than analysts were expecting and giving an annual growth rate of 2.2 per cent.

Treasurer Peter Costello is tipping growth to "remain modest" as the effects of the drought filter through to the economy.

"The first thing you hear when you land in the US is the air coming out of the housing market," Mr Roach said. "If China and the US slow, don't expect the rest of the world to fill the void."

He said the cooling market would then flow through to other sectors in the US economy and slash between 2 per cent and 2.5 per cent from economic growth in 2007, which currently stood at around 3 per cent.

"It's not quite a recession, but what we call a growth recession," Mr Roach said. "It is dangerously close to what we call stall speed. The odds of the US economy tipping into recession are about 40 to 45 per cent."

The two economies of the US and China have collectively accounted for about two-thirds of global gross domestic product in recent times. Weaker retail figures in the US and a downturn in leading confidence measures point to a slump for the US economy heading into 2007.

And US economists were not believing the rhetoric coming from the US Federal Reserve.

Mr Roach said the US Fed might have to start dropping interest rates by March, especially if the economy looked like tipping into a recession.

"(Federal Reserve chairman) Ben Bernanke talks about resilience in capital spending and he is wrong," Mr Roach said.

Mr Roach predicted the Chinese economy, the fourth-largest in the world, would also slow from its double-digit growth because of a slowdown in government spending and weaker export sales to the US as it aimed for more "quality" in economic growth rather than quantity. "There is a trade off between the quantity and the quality dimensions of the Chinese growth experience," Mr Roach said. "As a 10 per cent growth machine, that's a luxury China can well afford and seems willing to accept."

However, Mr Roach was bullish on the economies of India, Japan and Germany.
 
I listened to the speech and he was far from being objective. He completely ignore the liquidity situation and the fact that the slowdown is only in housing and autos. For instance he said "we had terrible data recently" - well show them to me say I. He completely ignored elevated inflation, good employment and 80% of economy (services).
On top of that he was as usual quite arrogant. I never really liked him (despite being long MS for quite some time). He is an old school guy with not much appreciation of the new economy.
 
There are quite a few indicators which are telling me that there might be a recession. The most telling to me is the new car sales indicator. While the Fed formula has only been accurate some of the time, the new car sales rate has been accurate a 100% of the time.

If there is no recession next year, then there will be something that will be seemingly close in nature. It certainly wont be like the last 2-3 years and the way people are bidding up the stocks is worrying me.

I have converted my entire retirement portfolio over to funds managed by the Wellington Corporation which has a long history of success in recession era environments. Windsor Fund, Wellington Fund, Dividend Growth, Equity Income.

Im also going to use a tactic next year of keeping the cash I had intended on placing in at the start of the year off to the side until the summer when the market will most probably be in a major selloff.


August 19, 2006, New York Times
Off The Charts
A Car-Sales Indicator Suggests a Recession Is Near or Already Here
By FLOYD NORRIS
IF things are miserable for America’s new-car dealers, can a recession be averted? History says it cannot and suggests a downturn may have already begun.

The accompanying chart shows the rate of change in sales by new-car dealers, comparing the most recent 12 months with the 12 months before that; it is adjusted for inflation. The rule — unveiled here for the first time — is that if the figure is down 2 percent or more, a recession is either under way or set to begin within a few months. The figure fell to a negative 2.4 percent when June sales figures were released last week by the Census Bureau.

The available data go back to 1968, a period in which the American economy has recorded six recessions. The “dealer doldrums indicator,” as we will call it, called five of them, missing the 1981-82 recession only because it was not persuaded that the 1980 downturn had ever ended. It has never warned of a recession that did not occur.

The risk of using 12-month figures is that by the time bad news is clear from new-car sales, it can be overwhelmingly obvious from other economic indicators. But such long periods avoid the possibility of false readings because of the volatility of new-car sales.

The chart measures all sales by new-car dealers, which is how the retail sales statistics report the data. So it includes their revenue from used-car sales, parts and service. But it does not include sales by dealers who sell only used cars or repair garages that are not also car dealers.

New-car dealers, according to Census Bureau officials who compile the data, typically generate about half their revenue from selling new cars, a quarter from selling used cars and the rest from sales of parts and from repair and service. So we constructed a new-car-dealer inflation index based on the consumer price indexes for those categories and used it to make the figures comparable, since inflation varied widely over the period.

The accompanying table shows that the indicator sounded two months before the 1980 recession began, but otherwise went off after downturns had started but before they had ended. In some cases, a recession was indicated before it was officially recognized by the National Bureau of Economic Research.

No indicator is perfect, of course, and this one was developed knowing when the earlier recessions had occurred. But it makes sense, in part because there are often cheaper alternatives to new-car dealers, whether for service or for buying used cars that may be older or have more miles than the preowned vehicles that new-car dealers feature on their used-car lots. So such dealers are likely to lose market share when times turn bad.

If a recession is under way, this economic recovery will have been the least beneficial one ever for the new-car dealers. The best inflation-adjusted year-over-year increase in their revenue during the recovery was 6.9 percent, far below the peaks of other recoveries.

There is, of course, no mystery now as to what the problems are for car dealers. They are pinched by the slumping real estate market because people can take less money out of home equity to buy cars. And soaring gasoline prices have made driving much more expensive and new-car payments more burdensome. In July, sales at gasoline stations accounted for 10 percent of all retail sales, the highest figure in decades.

Dealers are hurting. The rest of us may soon share their pain
 
Eagle - I find the auto sales correlation to the overall economy, and car sales (or lack thereof) as a leading indicator of recession, fascinating.

From what I understand, it has never failed to predict a recession - even besting the inverted yield curve's predictive value.
 
if you consider that us automakers have been stuffing their channels (overshipping inventory as sales are booked the moment the car rolls out the door) to inflate sales - it is even more scary...also consider that gm led the dow higher this year - up 60+% - that is even scarier

what to do ? buy equities!!!
 
The consumer's health can be translated from the new car sales. If they are buying new cars, then the consumer is healthy. If they are putting off the new car purchase or opting for a used car, then someone is hurting.

If the consumer is opting not to buy new cars, then what else are they are not opting to buy. Then the question is why. Are they not doing well enough? Are they tapped out? Do they see negativity some time in the future?

People dont realize that there is a recession until they are right in the middle of one. The reason why is that they ignore the warning signs ahead. Right now the stock market appears on a tear and everyone has a job. This is a false sense of security.



Quote from ByLoSellHi:

Eagle - I find the auto sales correlation to the overall economy, and car sales (or lack thereof) as a leading indicator of recession, fascinating.

From what I understand, it has never failed to predict a recession - even besting the inverted yield curve's predictive value.
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