Wednesday, March 26, 2008

Recession Looms as GDP falls and Housing Slows

Sorry for the delay today. Lots of information to digest. Well all eyes were on the Feb. GDP number today and the number came in at a MUCH weaker then expected 1.7% drop versus the expected .7 % positive growth expected by economists. This is the second consecutive monthly drop following January's negative 4.7% print. This all but asssures that the first quarter will show negative GDP which puts us half way to an official recession which as you know is two consecutive quarters of negative GDP growth. Some analysts are conceding that we are in the middle of one:

``We're right in the teeth of the recession,'' John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Radio interview. ``The recession's going to be characterized as the first half of 2008, and waiting for recovery in the second half.''

The new spin coming out of Wall St. is they are conceding that we will have a recession butthey predict it will be mild and we will snap back in the second half as John Silvia says above. IMO I see no reason why we will be coming out of it in the second half. I predict this recession will last at least through 2008. The most alarming news from the GDP number was that it showed companies are pulling back on their spending. This was the main catalyst for the last recession and the bulls have been touting the strong balance sheets of companies as one of the big reasons why we will not have a recession. Ooops bad assumption.

So why will this recession be a long one? I see no catalyst going forward. The financials are a mess and 2 of the investment banks have been put on negative watch by S&P as they are starting to worry about how these financials will make money going forward. Bank earnings should continue to fall as M&A activity slows and their biggest cash cow which was securatizing housing debt is now non-existant. Some of these financials won't make it through this downturn. Financials represent 26% of the S&P 500. Without the financials it will be hard to show growth in the economy.

Another reason this will be prolonged is the housing downturn. Bloomberg reported today:

"Economists had forecast new-home sales would decline to an annual pace of 578,000, according to the median of 71 forecasts in a Bloomberg News survey. Estimates ranged from 560,000 to 600,000. Purchases in January were revised up to 601,000 from a previously estimated 588,000 pace.
Purchases declined in two of four regions, led by a 40 percent plunge in the Northeast, the biggest drop since 1996. Sales improved in the South and West.
The report did contain one bit of positive news. The number of new homes for sale at the end of February dropped to 471,000, the fewest since July 2005, indicating builders are making headway in clearing out the inventory glut.

Still, the decline in sales kept supply at 9.8 months, the same as in January and the highest since 1981."

The fact that builders slowed their building to its lowest levels since 2005 will be another recessionary pressure as this will cost the economy jobs. Notice inventories stayed the same which will continue to slow down building activity.

Housing also has a huge ripple effect into other areas of our economy including retail, finance, and technology. This also will slow consumer spending. Think about the effects of a contracting housing market on places like Home Depot and Lowe's, furniture stores, cable companies etc. Growing our economy without housing will be extremely difficult. To expect this contraction to be done in 6 months is virtually impossible.

So consumer spending is shrinking due to high debt loads from housing and credit cards. The financial's business models are now broken other then their brokerage houses. They are contracting and hoarding cash. Some are inslovent due to horrific lending standards and sitting on billions of dollars in bad debt. Housing is in a flat out depression.

So where is this second half recovery going to come from? I just don't see it. some think the $150 billion dollar rebates that the government is throwing from the helicopters will increase GDP growth. I think most of this will go towards paying down debt rather then put into the economy. My prediction is 2008 will be a long prolonged recession that might spread into 2009. More tonight on things coming out of DC.

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