Who says we're not headed for a recession?
By Dr. Irwin Kellner, MarketWatch
May 22, 2007
HEMPSTEAD, N.Y. (MarketWatch) -- If it walks like a duck and quacks like a duck, it must be a duck. Same goes for the economy. The gross domestic product may be rising, but from all appearances, the economy seems to be in a funk.
Both anecdotal and statistical evidence suggest that the slowdown that's been in evidence for more than a year (see last week's column) could get worse before it gets better.
People living in the "real" world think things just don't seem to be right. While the University of Michigan's index of consumer sentiment rose to 88.7 in early May from 87.1 in April, it's still well below readings in the 90s posted every month from last October through this February.
Blame it on four factors that affect everyone's lives: food, energy, health care and housing.
I wrote back on April 17 that while the pundits may be fond of removing food and energy from the price indexes to uncover what they believe is the "core," or underlying, rate of inflation, consumers, as the headline said: "...feel all inflation, not just the core number." And as anyone who has purchased gasoline or food lately will tell you, prices keep going up, up and away while their incomes remain stagnant.
Health care is another issue.
Employers seem to have gotten their arms around these costs. See May 8 column here.
But it's been largely at the expense of their employees, who have to shoulder more of their health care costs, either through reduced insurance coverage, higher premiums or both.
And while the popping of the housing bubble seems to have affected mainly those on the low, or sub prime, end of the market, it has actually hit many more families, since people can no longer count on rising home values to add to their wealth -- not to mention to their buying power.
Don't forget, the national savings rate's been negative for two years, now, the longest skein since the Great Depression.
All this real world angst is showing up in some rather reliable economic indicators.
For one thing, the yield curve's been negative for almost a year. In the past, when short-term rates have been above long-term rates for this long a period of time -- and by as much as they have been -- the economy soon dived into a recession. See April 3 column here.
Then there are the leading indicators. When the 12-month percentage change in the Conference Board's index is negative, it means a recession is nigh -- at least that's what happened before every one of the six previous recessions.
Guess what, the 12-month change in this index has been negative all this year.
You say you want more evidence that bad times lie ahead? How about the age of this expansion: it's now in its 66th month -- nine above the postwar average. As you know, trees don't grow to the sky and people don't live forever.
The economists who participate in the monthly Blue Chip survey think there's only a 25% chance of a recession starting in the next 12 months.
If this doesn't scare you, wait until some magazine runs a cover story proclaiming that a recession is nowhere in sight.
Dr. Irwin Kellner is chief economist for MarketWatch. He also is the Weller professor of economics at Hofstra University and chief economist for North Fork Bank.
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