Monday, July 9, 2012

Feelings, Really Bad, Feelings

Feelings, nothing more than feelings,
trying to forget my feelings of love

Last October I detailed the giant “economic smack down” between Warren Buffet and the Economic Cycle Research Institute (ECRI).  ECRI was forecasting a recession and Buffet said emphatically there would be no recession.

Here are the GDP results since then:

Q3 = 1.8%
Q4 = 3.0%
Q1 = 1.9%
Q2 = 1.8% (expert panel estimate).
So the winner is Buffet in a rout.  In the same post I tried to split the difference between the two behemoths and forecasted a very mild recession with GDP near 0% during the time period.  And I was wrong.  I based this forecast on the belief that the best economic cycle model (ECRI) could be that wrong.

And neither could ECRI.  The Chief Operating Officer of ECRI will not admit they made a wrong call.  He instead claims that the forecast is still correct and that the recession just hasn’t happened yet.  I think a better explanation is that the economy is moving so slowly that it can’t even get to a recession.

The reason that ECRI has not backed off its recession prediction is that even though the economy continues to grow, the ECRI model never has stopped “flashing red” and it is flashing even brighter than it was nine months ago.  Say you have a warehouse of flammable material.  You install the best, state-of-the-art, smoke alarm system you can buy.  One day the smoke alarm sounds.  Firefighters rush to the warehouse, inspect the entire facility, but find nothing unusual.   So you have the system thoroughly inspected and tested and determine that it is functioning fine.  You then reactivate it and immediately the alarm sounds again.

Something is definitely wrong.  Last year there were logical reasons the economy sputtered after a hopeful start.  This year the economy is slowing for no apparent reason. (Unless you count Obamacare) I would be tempted to label this the “Molasses” recovery because it is moving so slowly.  But I won’t because molasses is sweet and this economy is anything but sweet to the millions of unemployed.   The latest employment report was sickening.  Forget 8.2%, the Wall Street Journal calculates the “real” jobless rate at 14.9%. 

Patti Domm (CNBC) has labeled this the “Zombie Economy”.  I said early this year the economy was wearing ankle weights, now it seems more like a ball and chain.  Last year I said it was the “Grocery Cart” recovery.  The wheels of this cart are now locking up.

So where are we?  We are slowing down from around an estimated 1.8% growth rate in Q2.  I think that number is high because the recent statistics for Q2 are weaker than Q1, so I’ll go with 1.5%.  Unfortunately, the question must be asked again: Are we now headed for recession?

Recessions are extremely difficult to predict, and very few economists are forecasting one now, even after the horrible jobs report.  Recessions are like diseases, they begin long before you realize something is wrong. The best model we have, the ECRI, was unreliable last year. The ECRI still says recession.  Buffet said in early June that the possibility of recession was low (not as positive as last October).

In December of 2007 I called my colleague Economist Pat because I thought the economy was getting worse.  I told him that it “feels” like we are entering a recession and he agreed.  I remember this conversation because the last recession ended up starting that month.

And I have a similar feeling now.   It feels like the economy started to recede in late June or early July.  I say feel, not think or even believe.  For the record, Economist Pat does not think a recession is imminent this time.

I do think this recession be extremely mild.  It could be a six-month period of just under 0% growth.  This is basically the same forecast I gave last October which was in fact “wrong”.  This recession will not be that traumatic because the economic was not growing that fast.  There won’t be massive layoffs because companies cut drastically during the previous recession and have been very careful in adding workers.  So expect very weak hiring, sort of like the June jobs report (get it?).  The stock market will retreat, but not that much.  So stay on guard and please let me know what you think.

And now we can say goodbye to the hopes of a strong economic recovery in 2012:

Teardrops falling down on my facew we can say goodbye to trying to forget my feelings of hope (love)

Feelings wo-o-o, feelings ....

Follow Up: I posted this on July 9.  On July 10, Lakshman Achuthan, ECRI COO, said in an interview on Bloomberg Televison he believes the economy is already in recession.



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