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All good things come to an end, and our surveys and analysis of the latest U.S. employment numbers over the last five days bring us to unambiguous conclusions:
- The U.S. economy is stalled.
- Without another historic move by the Fed and the U.S. government like the one we saw in 2001-2002 (with cuts in taxes and short-term rates), odds are significantly in favor of a recession this year or a virtual recession with less than 1% GDP growth.
- The downside risks to many growth stocks versus upside opportunity have reversed to the downside.
Frankly, the half-percentage-point federal funds rate cut that is certain to arrive Jan. 30 -- and the even bigger ones that will have to follow -- will likely be too little/too late to stave of negative GDP growth or such slow growth that, for all intents and purposes, the economic expansion would be the equivalent of stalled.
Ben Bernanke's testimony that there is "considerable additional downside risk to the outlook for growth" and that the labor markets represented a "second consequential risk to growth" are his first acknowledgements that we are in deep trouble. Remember, this is the same guy who told us "subprime problems look contained to around $50 billion in damage" and after the rate cuts in September said that "no more monetary action looks needed."
The deterioration of the U.S. economy over the last 30-45 days has been nothing short of dramatic.
We come to this conclusion of recession inevitability in a very sober and methodical way. Our case for a substantial risk of a recession comes down to a few key issues and a dozen subissues:
- The rapid deterioration of our Alliance Super Spender outlook for the first 90 days of 2008."Super spender" households represent about 80% of the discretionary buying power in the U.S. -- thus $1 of spending retraction is the equivalent of $8.
- Our analysis of the latest labor statistics. Thesenow show the actual unemployment rate of U.S. workers to be at least 5.5% versus the advertised 5% rate -- and the possibility of 6.5% unemployment by late 2008 or early 2009. The advertised unemployment rate has risen more than a third of a percentage point on a three-month average basis from the bottom, which has historically been associated with a recession (this indicator is 10 out of 10).
- The continuation of the credit and housing bubble burst into 2009. Expectdouble the 2008 estimated credit market write-offs for banks, mortgage lenders, builders and related entities.
- The likely spiraling negative impact of home prices dropping 10% or more and equities valuations from the recession on super-spender spending. Tony Crescenzi of Miller Tabak notes that, in general, for every $1 drop in stock prices, consumer spending falls by about 4 cents. "With share prices down over 10% over the past three months, this not only means that consumer spending could be cut by $80 billion over the next 12-18 months, it also means that retail sales in the winter months could be quite weak, especially when the drop in share prices is combined with the many other strains consumers are facing," he writes. "Who owns most stocks, mutual funds and big homes?" Who are the super spenders? We are now talking about the really rich here -- for them, recessions don't count. This is the top 2%-10% of the earners. That's where the most risk of budget tightening resides in the economy.
- The "too little/too late to the party." Fed and federal government stimuli work with a six- to 12-month lag, after the damage is already done.
- The historic low default rates of speculative grade bonds. The rate is at 1% today, versus the double-digit rates seen in recent recession. They have nowhere to go but up.
- The profit recession in financial services. This triple whammy pares payrolls, cuts capital spending in information technology and makes for stingy lending. And financial stocks still represent 20% of the S&P 500 ($INX).
- 71% of ALL stocks are in a bear market already. That's a 20% or more decline from their most recent highs, and it has a gravitational pull on other equities. The 50-day moving average of the S&P 500 blasting through the 200-day moving average is very telling.
- The key Institute for Supply Management index has contracted to 47.7%. That marks the firstcontraction of manufacturing since 2002.
- The reversion of all leading indicators of the economy into recession levels. All four key barometers used by the National Bureau of Economic Research -- employment, real personal income, industrial production and real sales activity in retail and manufacturing -- have gone negative.
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