How bad is a recession actually?

[Nus24]

Recession in US economy?

 

Caroline Baum

Thu, Nov 29, 2007

The Straits Times

 

 

 

EVERYWHERE you turn in the US today, recession is staring you in the face.

The Sunday New York Times featured a story on the prospects for recession. The following day, the Wall Street Journal ran a recession article on page one. Newspapers in Europe and Asia are commenting on comments on a US recession.

 

Economists are scurrying to pencil in another reduction in the US Federal Reserve's benchmark rate on Dec 11 and to pare their expected target for next year, comments by policymakers notwithstanding.

 

Recently, Fed Governor Randall Kroszner was surprisingly blunt when he told a conference that 'the current stance of monetary policy should help the economy get through the rough patch during the next year'.

 

 

 

 

Data consistent with the slow growth he foresees won't suggest monetary policy is 'inappropriate,' he said.

The message was about as clear as it gets when it comes to central bankers: No rate cut in December. Unfortunately, the market's outlook isn't aligned with the US Fed's forecast.

 

The Fed funds futures market is placing the odds of a 25-basis-point cut on Dec 11 at 98 per cent. Economists had initially put their faith in the Fed's words. But now they're siding with the market's action.

 

So is all this recession talk overblown, a good story to explain teetering world stock markets? What hard evidence is there that the United States economy is rolling over?

 

'The thing that makes it most compelling is that the consensus of economists is still looking for growth,' says Mr Paul Kasriel, director of economic research at Northern Trust in Chicago.

 

For those putting their faith in markets, one glance at the US Treasury yield curve tells you something is amiss. The yield on every issue, from bill out to bond, is below the Fed's target rate. It makes it harder for banks to turn a profit, which is one of the reasons US financial stocks have been the biggest losers this year.

 

The spread between the funds rate and 10-year Treasury yield, which is one of 10 components in the Index of Leading Economic Indicators (LEI), has been inverted since July last year on a monthly average basis. Given that the US economy was still expanding in the third quarter, the spread's lead time looks to be long.

 

All the talk about why long rates have been low - US-dollar-related buying by the People's Bank of China, the global savings glut and now a panicked flight to quality - is beside the point. The message of the yield curve is that the Fed is keeping the overnight rate too high relative to market-determined long-term rates.

 

There are other troublesome signals emanating from the market. The spread between high- yield bonds and gilt-edged government securities has more than doubled since June to about 500 basis points.

 

'Credit spreads are usually a coincident to lagging indicator,' Mr Kasriel says. 'The fact that they've widened may suggest we're already in recession'.

 

Three-month interbank lending rates are rising, and central banks in both the US and Europe are acting to ease anticipated year-end funding pressures.

 

The Fed announced earlier this week that it plans to conduct 'term repurchase agreements', which are collateralised loans to primary dealers, that will extend into the new year. Ever since credit concerns arose in August, the effective Fed funds rate has been wide of the Fed's target.

 

What else is sending a worrying sign? The LEI has been going sideways for an unprecedented two years. That suggests the US economy doesn't have 'significant upward momentum going forward', said economist Ataman Ozyildirim of the Conference Board's business cycle indicators group. 'It highlights the risk in the economy.'

 

It is not, in his view, sending a recession signal. Of the two measures whose readings presage a slump - the six-month annualised change in the LEI and the six-month diffusion index - only one is in danger territory.

 

The six-month diffusion index was at the threshold of 50 in September and October, indicating that half of the 10 components were rising in the last half-year.

 

That index stood at 40 for the entire first half of 2007, seemingly without any untoward effects.

 

The six-month change in the LEI has been hovering near zero for a year and a half, well shy of the 4 per cent to 4.5 per cent fall Mr Ozyildirim says meets the threshold for a recession signal.

 

The recent trend in the LEI is not encouraging: The index posted steep declines in two of the last three months. Falling home prices, rising default rates, sagging consumer confidence and tighter lending standards may prove to be the proverbial straw that broke the economy's back.

 

'Banks are buying old credit, not making new loans,' Mr Kasriel points out.

 

'You could say there's a re-intermediation going on. Banks are buying the assets no one wants.'

 

That's not the making of a healthy economy.

 

The writer is a Bloomberg News columnist. The opinions expressed are her own.

 

Copyright: Bloomberg News

 

 

 

--------------------------------------------------------------------------------

 

 

IT'S ARRIVED

 

'Credit spreads are usually a coincident to lagging indicator. The fact that they've widened may suggest we're already in recession.'

 

WORRYING SIGN

 

'Banks are buying old credit, not making new loans. You could say there's a re-intermediation going on. Banks are buying the assets no one wants.'

MR PAUL KASRIEL, director of economic research at Northern Trust

[Yuan]

Read the Great Depression 1933.

[Nus24]

I admit I do not own a house or in debt for housing/car/education/renovation/etc loans.

Dam it I don't even have a job yet.

 

So seeking the old birds who went thru prior recessions before.

 

What is really 'so fearful' about recession?

Lost job?

Pay cut?

Unable to support the loans?

[Nus24]

The great depression 1933...that will be so long ago.

Can I say the economics then and now is totally different?

Those olden days don't have much luxury and wants.

 

Nowadays what one has or spend our time and monies on are mostly wants, so theoretically one can surely cut down on the unncessary wants and survive OK on the basic needs during recessions?

[Ahyoo2002]

What you said every alternate day is always diff one.

 

I thought one or two day ago you just said economic is RED HOT and said everything will up up up.

 

Now you said recession?

[Panda88]

this is not a full list:-

1. accepting a job that you don't like

2. feeling the pinch every month end when it's time to pay bill

3. start cutting away your credit cards, and decide to eat at home rather than outside.

4. sell away your cars

5. downgrade to smaller flats

6. start to curse and swear when someone claimed economy is good and excellent

7. start to curse and swear when someone get payrise

8. Continue from no 1, realized that more applicants to a particular job. supply more than demand

9. not always in gd mood and start wondering how to make quick bucks

10. when tot of no 9, you will start to join the toto/4d queue.

 

and much more....

 

So now...remember your parents told you "money is hard to earn"? This is what they mean.

Edited November 29, 2007 by Panda88

[Yuan]

Agreed. The days of 1933 and 2007 are different. However, I believe the lifestyle of 2007 is more sophisticated than the days of 1933. I am just using this as an illustration.

 

We do not need a recession to know how hard we are hit. In my opinion, the world just needs another few crazy fellas to do a 9-11 on any of big oil fields in Middle East and/or any of the big economic and financial centres in the world.

 

I clearly remembered the times after 11th September 2001. I got a job which I do not like and yet there are so many applicants.... Too many people...Too few jobs....A lot of bankruptcies.. ..And I took a S$1000 pay cut then.....

[Nus24]

I only cut-n-paste the newsreport that lead me to believe what the economy is actually feeling now.

 

I neither work nor in debt(not yet), so most of the 'feelings' of whether the economy is healthy or not is not directly felt by me.

 

If in future I can be economist, then maybe you can take my words for it lah!!

Now....I am just blabbering what I read from the press!

Sorry if I confused you!

[Nus24]

Surely point(5) downgrade to smaller flats is not what logical people do during recession?

I mean you will lose much more and may not have a roof over your head if you time it wrongly.

[Panda88]

then good luck to u my fren. economy may not be as good as published ..hopefully i am wrong in my judgement this time.

[Porker]

Your judgement is correct

[Ahyoo2002]

No problem

[Nus24]

[Panda88]

My fren, i think those people who has financial problem dun have logic liao. plug the hole in wallet and move on. If your current installment is $1000 a month and by switching can save you a couple of hundreds. why not? survival is the key to beat recession!

[Gearoil]

  Quote

I admit I do not own a house or in debt for housing/car/education/renovation/etc loans.

Dam it I don't even have a job yet.

 

So seeking the old birds who went thru prior recessions before.

 

What is really 'so fearful' about recession?

Lost job?

Pay cut?

Unable to support the loans?

 

But you are living off on your Papa and mama right?....can get free things from your bf right?...so what is there to worry for you?

 

Look at it this way...if you can live off your papa and mama forever and change bf when you get tired of the old bf again and again...RECESSIONS won't even have any effect on you!

 

I know of quite a few 'new generation' brats nowadays are doing exactly that!

 

Quite ironic that this subject of RECESSION with such a content is started by you for someone you will never experience what RECESSION is afterall?

 

Just my 2 cents.

[RadX]

OUCH!!!

[Nkps]

  Quote

What you said every alternate day is always diff one.

 

I thought one or two day ago you just said economic is RED HOT and said everything will up up up.

 

Now you said recession?

 

two days ago she got menses lah... that's Y is RED, HOT and HORNY

 

[Porker]

Woooooooooooooooooooooo beri touchy!!!