This is going to be a fairly short diary, mostly just to explain that the most updated data on economic growth for the 2nd Quarter of 2007 should be taken with a grain of salt——a very large grain of salt. Thursday's data also show that jobless claims jumped to their highest levels since April and continues a 5-week ascent. These are two signs of the consequences of the mortgage crisis, one that has metastasized at a breakneck pace over the past few weeks. More on this on the next page...
GDP Data
The economy grew 4.0% in the 2nd Quarter of 2007, compared to a torpid 0.6% in the 1st Quarter. But this does not at all suggest a so-called "soft landing" has been reached. Indeed, as has been seen in previous recessions, there usually is a substantial upward jolt in the GDP before a sharp slowdown takes hold, but people usually speak too soon, and just assume that because there was a rebound from a slow quarter, the situation will simply move on to better days from there on forward. But this is a word of caution about hastily concluding an economy is sound after rising sharply.
"The economy has successfully navigated the narrow straits between recession and inflation in 1989, achieving the desired 'soft landing.'
Higher rates reduced the demand for interest-sensitive products such as housing and autos, while capital spending and exports sustained overall business output and employment. Inflation, after running at a heady pace in the opening months of the year due to higher energy and agricultural prices, seems under control." ~Economist Richard Mount, Nov. 13 1989
Richard Mount wasn't the only one who thought this. Such thoughts are quite common now, tying into a very anti-inflation approach. To his credit, he suggested the economy would still grow slowly in 1990, but did not say it would be so slow as to hit a recession (and it did.) As it so happened, signs of a recession emerged in 1989 as jobless claims began to rise steadily and job growth slowed considerably. In the instance of 2007, economist Diana Swonk, for example, pronounced the economy succeeded in reaching a soft landing in early January. Many others over the months have said similar things, which now seems very pre-mature.
Here are some graphs that show the GDP soaring just before slowing sharply, just some food for thought.
The congruency of these graphs is pretty chilling, wouldn't you say? Especially look at 1990 and 2000, how the GDP rises almost exponentially before receding in short time.
Beneath the dizzying 4.0% headline number, the 2nd Quarter of 2007 GDP reveals a disturbing trend. Consumer spending, roughly 3/4 of the economy, has grown at a sharply lower pace (only 1.3% annually.) Also note that this was before the credit crunch even took hold, so it is disconcerting thinking about the months ahead. It is possible that consumer spending could be flat or even grow slowly as to effectively plant a dirty recession in the United States, so it doesn't have to necessarily decline right away. But this basically demonstrates how dangerously close we are to a recession, all things considered.
Employment
We'll be seeing employment data for August next week, which will be one of the most important months of the year since the credit crunch began in late July.
Writes David Rosenberg of Merrill Lynch:
"The one reliable statistic of whether the economy has entered into a recession is that lagging indicator otherwise known as the unemployment rate. There has never been a time when it has risen 0.5 percentage point from the cycle low – this is true whether or not the starting point was 2% or 8% – and the economy failed to land into a recession.
Fast forward to today and the unemployment rate stands, as we said above, at 4.65% and this compares to the 4.4% level posted in March, so it is already up 0.25ppt from the low. Basically – we are already halfway there. And if, say, the unemployment rate rises to 4.9%, we will be prepared to make a more definitive call. We certainly will not wait around for the NBER announcement! As an aside, our forecast has the jobless rate hitting 4.9% by early 2008 and peaking at 5.7% by the end of next year."
You can this read this yourself, as it is full of very interesting, though disturbing, details.
From what I could gather from Rosenberg's analysis, who reported in February that a recession seemed likely by around this time, among the other things he listed were the low consumer sentiment ratings (lowest than in July 1990 and March 2001 when those respective recessions began), the sharp drop (down 10% from 2006) automobile sales usually being followed by a recession, and negative employment ratings.
Now take a look at monthly unemployment numbers (again, I'm not debating the methodology of those figures so much as using them for consistency.) As you can see, unemployment numbers rise exponentially just before a recession hits. Notice how unemployment NEVER rises sharply without a recession taking place as well. As the number of unemployed has risen for a few months in a row now, you can make out that it, too, is beginning a dramatic ascent. This should become very clear should unemployment rise again in August (based on the continuous rise in jobless claims over the weeks, this seems very likely.)
Instead of these "aberrant" jumps seen in previous weeks, these past five weeks have demonstrated consistency. The number of new claims really wouldn't have to jump that much more sharply for them to be considered rising at a dangerous pace.