Posted on 05/02/2012 9:06:22 PM PDT by blam
3 Likely Triggers Of The Next Recession
Written by Lance Roberts
Wednesday, May 2, 2012
Recently I was watching my kids break in our family pool for the first time this year. All four of them stood motionlessly, side by side, staring at the clear blue water with their toes just over the edge of the coping. Knowing that the water is still cold from the winter months the anticipation and trepidation of the "cold shock" kept all four of them glued to the edge. "Who is going first?" I asked. The oldest began to lean over. Knees bent, hands on his knees to maintain stability and an intense concentration to prepare himself for the plunge. It was just at that moment that my younger son screamed "Kowabunga" and shoved him in.
That is where we are in today's economy. The conjecture about the next recession has raged ever since the end of the last one. Will it be in 2012 or 2013 or, if you believe the many mainstream economists' estimates, never? Historically speaking recessions have occurred on average of about every 6-8 years regardless of monetary or fiscal policies, the strength of the economy or global peace - they occurred nonetheless.
There is really no argument whether there will be a recession in our future — the only question is the timing and cause of it. The latter point is the most important. Recessions do not just happen — they need a push. In 2011 the economy was just a breath away from a recession due to the dual impact of the Japanese earthquake and tsunami and the European debt crisis. Had it not been for the combined efforts of the Fed through "Operation Twist" and the Long Term Refinancing Operations via the ECB, a drop in oil prices and a plunge in utility costs due to the warmest winter in 65 years, it is entirely likely that that we may have already been discussing a "recession." The ECRI launched a debate that was literally heard around the world with their recessionary call in 2011. The weight of evidence as shown by our composite economic output indicator index shows that the ECRI call was most likely correct. However, the restart of manufacturing, primarily automotive, after the crisis in Japan combined with an effective $90 billion tax credit due to lower oil and utility costs, turned the previously slowing growth rate of the economy around over the last couple of quarters. Sustainability is becoming the question now as weather patterns return to a more normal cycle and the effects of the lower energy costs began to dissipate.
In a more normal post recessionary recovery the third year should be closer to a 6-8% economic growth rate versus 2%. While 2% growth is much better than zero — the current sub-par pace of growth leaves the economy standing on the edge of the pool with very little stability to offset any unexpected "push" into the cold waters of recession. The problem is identifying what that "push" could likely be.
Export Shock
With the Eurozone slipping into recession, combined with the economic contraction in China, the most likely event will be an export related slowdown for the U.S. The recent plunge in durable goods, factory orders, and many of the regional manufacturing reports point to early signs of a slowdown. The Eurozone accounts for about 20% of U.S. exports and profits and any slowing of consumption due their economic ills will wash ashore in the U.S.
The chart shows the year-over-year deterioration in exports relative to GDP. The slowdown in exports would shave a significant chunk off the calculation of GDP by itself, however, it is the ancillary effects that would push the already weak economy into recession. As exports slow the profit margins of U.S. corporations are reduced and they react by ceasing hiring, cutting back temporary labor and increase productivity to suppress wages and maintain profits. Those actions, and outlook, by corporations are reflected not only by the stock market but also by declining consumer confidence. The pullback in consumption causes corporations to get more defensive. This virtual spiral further slows economic growth pushing the economy into recession.
Liquidity Crisis
Secondly, a resurgence of the Eurozone crisis that leads to a "liquidity shock" would likely stall the economy. While the ECB has currently committed funds to provide liquidity to the Eurozone the problem of a single large potential default issue from either Italy or Spain, or even a combination of events through the entire region, could quickly create a liquidity crisis.
We have written in the past the European Financial Stability Fund (EFSF) and the subsequent European Stability Mechanism (ESM) was not large enough to adequately deal with the European financial crisis. While current actions by the ECB through the Long Term Refinancing Operations (LTRO's) have temporarily calmed financial markets around the world — however, it is a temporary solution that will ultimately fade.
The ECB has already stated that they have done enough in this regard and are unlikely to provide further liquidity in the future. This is a potential problem given the difficulty in trying to get European leaders, particularly Germany and France, to cooperate quickly and efficiently. The delays, arguments and political gamesmanship in the future may well lead to an inability to act quickly enough to avoid another financial crisis.
"Black Swan" Event
When considering the many possibilities that could occur from the information that we have readily available we must not discount the possibility of an event that is completely off the radar. It is these seemingly random events that occur without warning such as the Japanese earthquake in 2011, the "Asian Contagion", Long Term Capital Management or 9/11 that can push the economy off the ledge and into the cold waters of recession.
It is interesting that these "once in a hundred years" events occur with such regularity and yet these are the very things that are dismissed in current analysis. Current growth expectations for the economy are stronger growth by the end of 2012 and increasing economic growth rates in 2013 and beyond. These assumptions are based upon expectations of a continued organic economic recovery even though the recent post recessionary recovery cycle, driven by trillions of dollars of varied stimulus and financial support programs, has been anything but. Each financial injection to support the economy has had a diminishing rate of return and each time these programs have ended the economy has quickly begun to weaken back towards recession. This is not an economy that can grow without massive fiscal support so assuming growth projections well into the future may be a bit shortsighted.
The "Fiscal Cliff"
The impending "fiscal cliff" coming at the end of 2012 where a plethora of tax cuts, credits and incentives, many left over from the Bush era and extended by the Obama administration, will collectively expire. This is no small matter. The simultaneous expirations of these tax benefits will create approximately a 2% hit to GDP which, given the associated fallout across the economy, will be more than sufficient to create a recession.
However, I do not expect that this will happen even though it has lately been a topic of great debate. Regardless of winner of the next Presidential election the economic impact of the "fiscal cliff" is well known. Therefore, it is extremely likely, since no one in Washington wants to take the responsibility of taking away the "government cheese" that another round of extensions for most of the tax benefits will be approved.
The simple fact is that the U.S. is now caught in the "trap" of the debt cycle where cuts in deficit spending, budget reductions, increases in taxes or interest rates cannot be accomplished because the economy is simply too weak to offset the negative impacts. However, at the same time the increase to the debt burden continues to deteriorate the economic prosperity of the U.S. This is the problem that the Eurozone faces today. It is impossible to implement "austerity programs" when the economy is already on the brink of recession. Austerity, as a measure, must be done when economies are growing strongly with a high employment level which offsets the cuts to government spending and support. Today that is not the case either in the Eurozone or the U.S.
A Recession Is Coming
With these ideas in mind it is easy to understand that a recession is coming - recessions are part of the overall economic cycle and despite wishes, hopes and prayers, they will occur with a surprising level of regularity. During economic boom times they are spaced further apart due to stronger economic growth. During debt deleveraging cycles, such as we are experiencing now, they occur much more frequently.
Furthermore, recessions are not a bad thing - they are simply the pause that refreshes the economy. As the economy, or the stock market, grows it creates excesses. These excesses must be reset from time to time through a contraction, or recessionary, phase. What is important to understand is the impact that recessions have on your life and your finances.
The recessions in 2001-2002 and 2007-2008 were very avoidable and we warned in our writings well in advance of their occurrence - just as we are now. The problem for most individuals is that they did nothing to prepare of the event until it was far too late. Preparation such as taking an umbrella with you when you suspect that it will rain can save you from negative consequences. Understanding that a recession will occur and preparing accordingly will save you as well.
The push will come. In what form - I really have very little clue. What I am confident of is that no one will be yelling "Kowabunga" just prior to the shove.
/johnny
The next recession? I didn’t know that we were out of the current one.
I could be wrong, but didn’t Bernake testify recently that Jan ‘13 we will be going ‘over a cliff’ due to obamacare taxes?
If he didn’t, I will. The final nail in the coffin will be 0 care in Jan 2013.
I am not convinced that entitlement programs 'drive' the economy. We all share the sum total of what we all produce. Taking from the producer to give to the non-producer may be construed by some to be an act of charity, but it certainly does not increase the GDP or aid the economy. Rather the converse is true, leaving the money in the productive sector will preserve industry which is faltering, and cause growth in industry which was merely surviving.
Take away the government spending, and the housing bubble, we’ve probably had little or no real growth since the ‘.com’ crash. All the while we were off-shoring productive jobs like mad. Now the rot is being exposed.
Good post.
One California economist used to warn that all of the economic activity in this State after the year 2000 was equal to the amount of mortgage equity withdrawal. One the house-as-ATM fantasy exploded the rot underneath was exposed. The housing bubble masked the longer term damage that off-shoring was doing to job prospects.
Around here it is fuel prices taking the discretionary dollars out of everyone’s pocket. You have to drive to work, but now we brown bag it to absorb the daily deal..
That hurts restaurants, coffee shops, etc.
Used tire market is strong..
HUGH HENDRY: A Profound Market Moment Is Coming In The Next Few Years
Simone Foxman
May 2, 2012, 4:37 PM
Milken Institute/YouTube
Hugh Hendry, CIO and co-founder of Eclectica Asset Management, waxed deeply bearish about the state of the global economy in a panel at the Milken 2012 Global Conference yesterday.
While acknowledging the fundamental strengths of the U.S. economy, he told attendees that the markets are about to reach a disastrous moment. "I think we are single-digit years away from the most profound market clearing moment," he said, "A 1932 or a 1982, where you don't need smart guys or girls, you just need to be there."
Hendry elaborated on how this might happen:
To create the market clearing process that I fear is within reach I would tantalize or fear [sic] you with the nation that that we could see a hard landing in Asia, coinciding and indeed being encouraged by the problems in Europe. And if you get those two events colliding, and given the lack of protection in such a scenario in Asia, then you would have another profound dislocation, and that's the point where you reach the bottom, and you don't need wise guys, you just need courage.
You’re right; when you look at dying “post-industrial” states that have lost their tax bases to other more business-friendly states, you can draw a parallel to what is happening on a national level (with other less-regulated nations). When viewed in that light, you understand how bad off this country is (and don’t bother looking for signs of the coming recession - we’re still in one).
Those who are fortunate enough to still be working are having their salaries “adjusted down” to the new normal through currency devaluation. Take any product in a supermarket (I would use gasoline as an example, but the left has a whole slew of excuses for those price increases), and think of how many of them you could buy with one paycheck five years ago - and now think about how many of them you can buy today. The whole mantra that there is no inflation is probably just used because one thing is actually falling in price - our homes.
“Around here it is fuel prices taking the discretionary dollars out of everyone’s pocket.”
Our tolls doubled here in NJ within the last year or two; now they are squeezing less people (since so many aren’t working anyway) for more money. It is frightening; I especially wonder how the high school seniors getting their first cars are even able to put gas in them.
The fuel prices also have the effect of causing retailers to jack up their prices because of the shipping costs they are seeing increase due to those prices; it is a vicious cycle.
Yeah it kills a small town, except for those in walking distance.
If you are fortunate enough to have a paying gig, you gotta get there. Other stuff comes after that.
Nor has Bernanke, Krugman or any central planning acolyte shown that we will ever grow our way out of this, especially in this globalized economy.
thanks for posting this interesting article. my observations is that the average american has no reserves. However many no longer have house payments and their new rent payments are lower than their previous mortgage payments.
Check my tagline.
Next recession? WTH, does anyone actually believe we have recovered from the present one?
It is always amazing how bland and mundane can be the appearance of evil.
Didn’t you here gas prices went down a whole 5 cents last week and to hear the top of the hour news tell it gas prices are not a problem for people it’s the new norm.
I am paying $4.29 a gallon
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