Merrill Lynch: US Recession Has Arrived
Filed under: Economy, Feature, Lead Story, United States — Michael van der Galien, Editor-in-Chief on January 8, 2008 @ 7:43 pm CET
The Telegraph reports that investment bank Merrill Lynch has said that the US “has entered its first full-blown economic recession in 16 years.”
The Telegraph reports that investment bank Merrill Lynch has said that the US “has entered its first full-blown economic recession in 16 years.
Merrill is a big investment bank and also “one of Wall Street’s biggest casualties of the sub-prime crisis.” It’s the first “major bank to declare that a recession in the world’s biggest economy is now underway.”
David Rosenberg - who is Merrill’s chief North American economist - argues that “a weakening employment picture and declining retail sales signal the economy has tipped into its first month of recession.”
“According to our analysis, this [recession] isn’t even a forecast any more but is a present day reality,” he said.
The main question is of course whether Rosenberg is right: obviously, I lack the economical knowledge to say whether he is or not at this point in time. People like me can conclude that there’s a recession at the moment that it’s clear to everyone, not just to experts. What’s clear is that we’ve got to take this very seriously and that it’s likely that the downward trend will continue. How far the US economy will fall, no one knows, but hard times have arrived and there here to stay for quite a while.
Rosenberg noted that “although the NEBR will be the final arbiter of any recession, such confirmation may be two years away as it typically waits for conclusive evidence including benchmark revisions.” He used “a whole batch of negative data to support his analysis, including the four key barometers used by the National Bureau of Economic Research (NEBR) - employment, real personal income, industrial production, and real sales activity in retail and manufacturing.” All of them indicate, according to him at least, that he’s right.
To make matters even worse, Rosenberg and Merrill aren’t the only ones saying this. Cernig points out that “Morgan Stanley are leaning towards the same conclusion.”
Yesterday I wrote that the next president may very well come into office at a time of recession; we can now be quite sure about that. In fact, we can even say that, according to some experts, the recession has already arrived. How will the presidential candidates deal with this development? What action - or non-action - do they propose?
As it is, they won’t be forced to answer these questions because, again as Cernig writes, the realization that the recession may already have arrived in the US “doesn’t seem to have broken through into the mainstream yet, especially not in political reporting.”
I’ll keep an eye on the stock markets to see how they’ll react. As it is, the Dutch stock market is slightly down, but nothing overly wrong at this moment.
1 Tully
January 8, 2008 @ 4:13 pm CETSixteen years? How about six?
I am suspicious of any pronouncement of “recession” that ignores the recession of 2001 as if it never occured. While there certainly is a large and ongoing correction in the credit markets due to the housing bubble collapse and the aftershocks of the bankruptcy “reforms” on the consumer credit markets, claiming “recession” at this point has a large element of tea-leaf reading.
A recession is defined as two or more consecutive quarters of decline in real GDP. Annualized GDP growth for 2007q3 was 6% in nominal terms and 4.9% inflation-adjusted. So to declare we are in a recession NOW would require not only that 2007q4 exhibit decline, but that 2008q1 be assumed to exhibit further decline. And to state the obvious, 2008q1 just started, and forecasting is a tricky business. (EX: Paul Krugman is famously reported as having predicted nine out of the last four recessions…)
IOW, it’s certainly possible, but it sounds to me like speculation. Informed speculation to be sure, but speculation nonetheless.
(Irony note: captcha words for this comment are “think raise”.)
2 Steve
January 8, 2008 @ 4:27 pm CETI’ve got to agree with Tully here. The term ‘recession’ has a definition, and we haven’t met it. Were some stupid decisions, like ordering lenders to make questionalble loans with insufficient documentation, made. Absolutely. Are we still in a period of economic growth and extremely low unemployment? Sure looks that way to me. Is this article trying to reprise "it’s the economy, stupid" in an election year? Looks that way.
3 Interested
January 8, 2008 @ 4:45 pm CETTrue,and if one were to have believed the hacks, we’ve been in a recession since Bush took office.
4 Tully
January 8, 2008 @ 4:57 pm CETDon’t get me wrong, we’re certainly headed for a slowdown. But a slowdown is not necessarily even remotely a recession. Big diff between flat growth and negative growth.
That “sixteen years” thing certainly sets off my media bias and agendized pronouncement warning detectors, in trying to hook the “last” recession to the post-Gulf War slump, that brought Ross Perot out of the woodwork and took Clinton into office. Um, no. We were IN the last recession when planes slammed into the WTC and Pentagon, and even with that massive shock to the economy we got through it.
5 newscaper
January 8, 2008 @ 4:58 pm CETAnd I’m sick of the parroted meme that "unemployment reached a 2 year high at 5%!" when that is lower than most of the years under Bill Clinton and the Euros would love to have that "problem".
Not to mention economists generally consider 5% to represent "full employment", that percentage serving as natural ’slack’ in employment that comes from people’s situations changing in a dynamic economy while avoiding too much inflationary pressure from labor costs.
6 ChrisWWW
January 8, 2008 @ 5:41 pm CETNewscape,
Euros also measure unemployment differently. So while ours may still be lower, it’s probably not as dramatically different as it seems. You also have to take into account our insanely large prison population and other stuff that only happens in America ™
7 Interested
January 8, 2008 @ 6:43 pm CETAnd negate that whole - rioting thing - in France Newscape.
8 Tully
January 8, 2008 @ 6:57 pm CETEuros also measure unemployment differently.
Do explain.
9 Tully
January 8, 2008 @ 7:06 pm CETYeah, newscaper, I remember well the “Carter hangover” unemployment rate of 10% or so. I took some seriously tough and nasty jobs for minimum wage or close to it just to keep eating at the time.
10 norm
January 8, 2008 @ 7:28 pm CETnothing a few more trillion in deficit spending won’t cure.
11 Philadelphia Steve
January 8, 2008 @ 7:29 pm CETWith the US already borrowing in excess of $100 billion a year from the Chinese Central Bank to fund its governmental operations, when the recession explodes further, should the Chinese not pony up the additonal loans, this recession could be disasterous.
Pundits worry about theChinese military threat to the US. All they have to do to collapse the US government is NOT show up to a Treasury Bill auction.
12 Tully
January 8, 2008 @ 7:43 pm CETWhich would destroy the Chinese economy quite thoroughly and completely, Philly Steve. They wouldn’t be much of a threat to us after that, although their neighbors would get nervous.
13 norm
January 8, 2008 @ 8:21 pm CETthouroughly and completely? they have over a trillion in us$ in reserve. we have none and owe them trillions. i prefer we never have to find out what would happen, but on the face of it china is in a much better position to weather the storm.
in the meantime…let’s cut more taxes for the upper 1%…it’s not trickling down fast enough.
14 Tully
January 8, 2008 @ 10:34 pm CETbut on the face of it china is in a much better position to weather the storm.
What are they going to do with it, norm? Eat the bank statements? Who they gonna sell to if we’re not buying? They’ve pegged their currency to ours–what happens to theirs if they crash the dollar? When countries become tied economically their incentives to screw each other economically diminish. China imports almost half their consumption, the US about 15%. China exports for 28% of their GDP, the US about 11%. Their real GDP is less than half of ours, and their currency reserves are good for about a month worth of import purchases–at today’s exchange rates. Who gets hurt more in a currency war? Which country can weather one better? Hint: We’d have a recession–but they’d make North Korea look prosperous by comparison. We’d change politicians the next election. They’d be eating theirs.
No, I don’t think China is gonna go for it. But it is fun to listen to people rant.
15 Jason Steck
January 8, 2008 @ 10:40 pm CETIf you owe the bank a million dollars, the bank owns you. If you owe the bank a billion dollars, you own the bank. And we owe China half a TRILLION dollars.
So Tully is right, China can’t take us down financially without doing far worse to themselves. But there is an important caveat — while they can’t take us down, their ownership of our debt does give them important leverage that could be used in a crisis situation (i.e. over Taiwan) to inhibit the United States by threatening to dump U.S. Treasury securities or at least stop buying them.
So while I don’t buy the most catastrophic scenarios of a Chinese financial war against the United States, I cannot share in just blowing off the significance of the problem.
16 Tully
January 9, 2008 @ 12:42 am CETOh my yes, Jason, it’s a mutual thing. They do gain some leverage out of it–as do we. That’s the whole point of economic interdependence strategies. They’d come out relatively the worse from any such hostile exchange, of course, but they can still use the leverage as a threat, even use it to hurt us. It’s just not nearly the leverage some seem to think it is, and actually using it for real would hurt them more than us.
However the idea that China could simply fail to show for a Treasury auction and collapse our economy is utter nonsense. To begin with, just because you’ve been paid in dollars doesn’t mean your only use for them is to give them back by purchasing debt. Nor is China even remotely the only holder of US external public debt. If China failed to show up, interest rates would rise some, but they’re not the only nation that buys US debt either–most US Treasury debt is sold domestically.
Likewise with attempting to use currency reserves. They’re ultimately only good for buying US goods and services. Get too hostile rowdy, trade restrictions come down, and the money has to go through third parties to do you any good, but you have to split the take with the third parties. IOW, you end up not getting remotely near your money’s worth.
To drive a point home, the doom-criers of debt invariably do NOT present national debt in context. “National debt” has two major components, and only one of them is involved here. The first component is intra-governmental holdings, money owed by the government TO the government, such as the SS/Medicare “trust funds.” That’s almost entirely driven by (and composed of) political promises regarding future benefits. The other portion–debt held by the public–is what really counts, and that’s actually declining as a percentage of GDP right now, because the economy has grown faster than the public debt. But the doom-criers of debt ALWAYS present debt as an absolute number AND as the total of the two, not as a percentage of income or assets, and not separated into external discretionary versus intrnal program debt.
What has shifted is that a larger portion is being held externally, foreign rather than domestic. That’s an inevitable result of globalization, and brings its own set of problems and benefits, but it’s not inherently bad.
Not to mention that US Gov’t debt held by the public is actually a bit on the low side in comparison to other nations. Most of Europe would be thrilled to have public debt at our %-of-GDP levels. Not that it would be a bad thing for us to owe less outside of our borders, or less overall, but little Timmy hasn’t exactly fallen down the well.
And of course it’s more complicated than that, but government-debt paranoia isn’t real good on complicated. You must panic. You must panic now! Do not think about it, just panic….
17 John Ryan
January 10, 2008 @ 5:56 am CETadmin: off-topic BDS spam deleted
18 ShortWoman» Blog Archive » No, Really, Everything is Fine… PANIC!!!!
January 11, 2008 @ 12:29 am CET[…] Merrill Lynch said we entered a recession last quarter. Then Goldman Sachs said we aren’t there yet, but recession is coming. They […]