Thursday, September 27, 2007

Can Housing Go into a Recession Without the Economy Falling Too?



New home sales plunged 8.3 percent in August while the average price fell 7.5 percent. New home sales are 21.2 percent below last year. With home building down 19.1 percent from last year, this will only make a bad situation worse.

Will Housing Cause a Recession?


We can have a recession without housing starts plummeting: the recession of 2001 proved that. But can we have a large decline in housing starts without going into a recession?

The chart above is courtesy of the Federal Reserve Bank of St. Louis. Every time we have had a comparable decline in housing starts, the economy has gone into a recession. The lone apparent exception is 1966. And that exception is more apparent than real. The NBER's failure to call the cyclical episode in 1966 a "recession" was extraordinarily controversial and in my opinion a bad call. In 1966, industrial production fell sharply for five months, private domestic spending fell two consecutive quarters, the stock and bond markets took a bloodbath. Housing starts fell by a half.


In the current cyclical environment, housing starts are 41.9 percent below their cyclical peak. That puts the housing sector's current misery right up there with the typical postwar recession.

The odds against our avoiding a recession have shortened dramatically!

Monday, September 10, 2007

Which Way Do the Indicators Blow?

Federal Reserve Bank of San Francisco President Janet Yellen, speaks during the National Association for Business Economics (NABE) Washington Economic Policy Conference in Arlington, Virginia, March 13, 2006. Photographer: Stephen Voss/Bloomberg News


Members of the Federal Open Market Committee which sets U.S. monetary policy are singing from different hymnals. Their discordant tunes indicate that the future course of policy is uncertain.

Bloomberg's By Scott Lanman and Vivien Lou Chen report that: "Janet Yellen, head of the San Francisco Fed, today cited 'significant downward pressure' on growth because of housing and financial-market turmoil. Dallas Fed President Richard Fisher said he's `'generally encouraged' about the economy, while Atlanta's Dennis Lockhart backed off remarks he made four days ago that the housing slump was having a limited impact.

The scope of remarks may reflect a debate inside the central bank over whether to lower the benchmark rate on Sept. 18 by a quarter-percentage point, or a half-point as some investors expect, Fed watchers said.

The R-Word?

Meanwhile, Eoin Callan in the Financial Times reports that there is more use of the word "recession" as economic observers digest last Friday's payroll employment shock. Read his "The R-word surfaces on Wall Street."



Monday, September 03, 2007

True Blue Growth: The Australia's Economy is Up 4.3% Over a Year Ago

Bloomberg reports that Australia's GDP is grew .9 percent over the first quarter and is up 4.3% from a year ago. The Aussies do not annualize the quarterly growth rates as does the U.S. Commerce Department. I suspect they have it right down under: the gyrations in the seasonally adjusted annual rates we report on GDP growth confuses more than it enlightens.

Australia's expansion is in its sixteenth year. They have been doing well ever since I first arrived in 1991 and continued after I left. (Post hoc, ergo propter hoc?)

Investment spending and exports are leading the parade. The commodity boom and particularly China's insatiable appetite for raw materials is driving growth. The U.S. is no longer the lone leader of the world economy:

Bloomberg reports "The Australian dollar climbed to 82.45 U.S. cents at 1:36 p.m. in Sydney from 82.07 cents immediately before the report."