Recession Blues: Is it already here, or is it coming?
Some analysts say the U.S. economy already is in a recession, others say the economy is sliding toward a recession, still others won’t call it either way, saying, like Edward McKelvey, senior U.S. economist at Goldman Sachs Group Inc., Wall Street’s biggest investment bank, that the country either is in a recession now or will dip into one very soon.
Talk of recession is heating up as key indicator numbers go from bad to worse.
Consumer spending, the main driver of the U.S. economy, has finally buckled, evidenced by lackluster spending during the recent holiday season among lower- and middle-income and affluent shoppers alike. Consumer spending, which accounts for more than two-thirds of the nation’s economic activity, all along had been propping up the economy. Fueling shoppers’ jitters, however, are higher energy and food bills, slumping home values and worries about foreclosures, a deteriorating jobs market and a squeeze on borrowing as banks take a beating from overexposure in the now collapsed subprime mortgage-lending market.
Gloomy sales figures continue to pour in from such household names as Sears Holdings Corp., owner of Sears and Kmart stores, two of the world’s largest retailers; Zales Inc., the jewelry chain and its upscale counterpart Tiffany & Co.; and Saks Inc., operator of luxury retailer Saks Fifth Avenue.
In an anxiously awaited report, the U.S. Department of Commerce said retail sales (excluding automobiles, gas stations and restaurants) fell by 0.4 percent in December from the previous month, a dismal end to the weakest sales year since 2002. The drop marked the worst showing since June, when merchant sales declined by 0.8 percent. While retail sales rose by 4.2 percent for 2007 overall, that figure was well below the 5.9 percent increase in 2006 and marked the smallest rise since 2002, when sales rose by just 2.4 percent. The National Retail Federation predicts retail sales in 2008 will grow at the weakest pace in six years.
On other fronts
The roiling in the financial sector continues, with Citigroup Inc., the country’s largest bank, reporting a bigger-than-expected fourth-quarter loss of $9.83 billion. The roiling is taking a toll on credit-card companies as well. An article in the Wall Street Journal, Jan. 14, cites growing signs that even well-to-do consumers are having a hard time paying their bills.
“The luster on all those silver, gold and platinum credit cards is getting tarnished,” the article says. And indeed, its affluent customer base notwithstanding, American Express Co. announced that it expects slower spending and more missed payments on credit card bills to hurt its profit throughout 2008.
On the jobs front, the U.S. Labor Department reports that the unemployment rate jumped to 5 percent in December from November’s 4.7 percent, the biggest one-month gain since October 2001, when the Sept. 11 attacks spawned massive layoffs in the travel industry.
The Conference Board reports that CEOs, too, are worried about the economy. The group’s measure of CEO confidence, which had declined to 44 in the third quarter of 2007, fell to 39 in the final quarter of 2007. A reading of more than 50 points reflects more positive than negative responses. “CEOs’ confidence in the state of the U.S. economy continues to wither and is now at a seven-year low,” says Lynn Franco, director of The Conference Board Consumer Research Center.
“Given continued trouble in the housing and credit markets, persistent volatility in financial markets and increases in energy prices, it’s not surprising that confidence has eroded,” Franco says. “Looking ahead, the majority of business leaders expect these lackluster economic conditions to prevail throughout the first half of 2008.”
Meanwhile, two of President Bush’s point men on the subject are shying away from the word “recession” altogether. In a speech to the New York Society of Security Analysts on Jan. 7, Treasury Secretary Henry Paulson, the country’s finance minister, acknowledged only that further signs of “slower growth” will emerge in the weeks and months ahead before the economy shakes off the effects of the housing crisis. About the same time, Federal Reserve Chairman Ben S. Bernanke, the nation’s central banker, commented, “The Federal Reserve is not currently forecasting a recession. We are forecasting slow growth.”
Bernanke has pledged to lower interest rates as needed in order to stimulate the economy.
Student loan fallout
Credit-market tremors are beginning to show up in the $85 billion student-loan market. An AP report quotes analysts as saying that rising defaults, coupled with a new law that cuts federal subsidies to student lenders, are beginning to strain the industry. The rising defaults have surfaced amid falling home prices and rising foreclosures, trends that touched off the crisis in global credit markets as investors faced the prospect of not being repaid on mortgage-backed securities.
“In some cases, families whose home loans are resetting at dramatically higher rates may be having a harder time keeping current on payments on student loans or auto loans, which recently have been posting their highest default rates in several years,” AP said. A general tightening of credit is also likely making it more difficult to borrow from other sources to meet these payments, analysts say, and soaring oil prices are eating into budgets.
Following a crackdown by New York Attorney General Andrew Cuomo, student lenders have been forced to alter the way they do business. For example, they are no longer allowed to offer gifts or share revenue with financial-aid officers. Meanwhile, reduced federal subsidies and anticipated lower profits have led a number of banks and other student lenders to scale back discounts to borrowers, such as reduced interest rates for having payments automatically debited from bank accounts. The company most affected by the reduced subsidies is Sallie Mae, the nation’s biggest student lender.
The dollar to the rescue?
There is some hope that the weak U.S. dollar will fuel exports and boost earnings for multinationals and smaller exporters alike—enough to buoy the economy. The value of the dollar has dropped roughly 8 percent in the past 15 months or so against major currencies like the euro, Japanese yen and British pound. That makes the cost of American goods cheaper for buyers who purchase goods with those currencies. And, indeed, U.S. merchandise exports grew more than twice as fast as imports in the first half of 2007.
“The weak dollar is the only leg left standing. This will hopefully support U.S. exports, which is a lagging economic indicator,” says an investment adviser, who asked to remain anonymous.
According to the Commerce Depart-ment, the U.S. trade deficit with the rest of the world dipped to $56.5 billion in September from $56.8 billion in August, a 1.1 percent decline. At the same time, imports rose 0.6 percent to $196.6 billion. Analysts had expected the September deficit, the smallest since May 2005, to grow because of oil imports.
“The low buck will have a long tail. Even if the dollar were to start rebounding at this point, the lag effect of its six-year swoon would fuel exports for a few years,” one blogger says.
What is to come?
Still, no one is painting a rosy picture for the year ahead. “We expect 2008 to be a challenging year for the U.S. consumer, as reduced levels of liquidity available from home equity, tighter underwriting standards imposed by lenders and rising unemployment levels are likely to negatively affect consumer spending and credit,” Michael Taiano, an analyst at Sandler O'Neill & Partners L.P., a New York investment bank, said during a comment on American Express stock.
Many expect President Bush and the Democrat-controlled Congress to come up with rescue measures, including possible tax rebates, to boost consumers spending and stave off a recession. “Historical data show that in post-World War II America, the U.S. economy has not experienced a recession during a presidential election year,” the investment adviser notes. This time, however, “we’ll see,” she adds.