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!

Strong Business Jet Growth On Into the Future Brightens the Wichita Business Outlook

Molly McMillin reports in today's Wichita Eagle that "Buoyed by strong international sales and new models, the business jet industry is expected to continue to soar...

"Business jetmakers are expected to ship more than 1,300 jets next year and 14,000 new planes in the 11-year period from 2007 to 2017, according to Honeywell Aerospace's forecast. A record delivery pace is expected to continue into 2009, it said."

Wichita manufactures thirty six (36%) of the world's general aviation aircraft. The aerospace sector accounts for one in six of Wichita's jobs directly and many more indirectly.

What's a Minsky Moment?

The Wall Street Journal's Justin Lahart reports that the "Minsky moment has become a fashionable catch phrase on Wall Street. It refers to the time when over-indebted investors are forced to sell even their solid investments to make good on their loans, sparking sharp declines in financial markets and demand for cash that can force central bankers to lend a hand."

Personally, I find John R. Hicks' explanation in A Market Theory of Money far more comprehensive and plausible for what we are now undergoing.

Entering China and India

Professor Anil K. Gupta, Professor of Strategy at the Smith School (The University of Maryland), explains to the Wall Street Journal how to enter the markets of China and India:

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."

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."

Use Pricing to Get the Traffic Moving in Manhattan!

Ken Livingstone argues in "Clear Up the Congestion-Pricing Gridlock" (New York Times , July 2, 2007) that New York City could learn from London. Pricing entry into the city would reduce congestion sufficiently to more than make up for the burden of the tax.

He tells us that four years ago, "London’s business district was undergoing rapid growth, but it was at capacity in terms of traffic. Efforts to channel more cars into the city center simply led to ever lower traffic speeds, which in turn led to business losses and a decrease in quality of life. Simultaneously, carbon emissions were mounting because of the inefficiency of engine use.

In 2003, London put in place a £5 (about $9) a day congestion charge for all cars that entered the center city (the charge is now £8). This led to an immediate drop of 70,000 cars a day in the affected zone. Traffic congestion fell by almost 20 percent. Emissions of the greenhouse gas carbon dioxide were cut by more than 15 percent.

The negative side effects predicted by opponents never materialized. The retail sector in the zone has seen increases in sales that have significantly exceeded the national average. London’s theater district, which largely falls within the zone, has been enjoying record audiences. People are still flocking to London — they’re simply doing so in more efficient and less polluting ways."

Attack of the worms

In the developing world simple things have enormous impact. Worms (the kind you get inside you) reduce productivitiy whether we are talking about manufacturing or learning in school. Nicholas D. Kristof writes in the International Herald Tribune that "Here in Congo, one study found that 82 percent of children have worms, and partly as a consequence 70 percent are anemic."

The whole editorial is well worth reading.

Bloomberg: Dollar Falls on Reduced Concern Housing Will Slow Global Growth by Bo Nielsen

Dollar Falls on Reduced Concern Housing Will Slow Global Growth
By Bo Nielsen

Aug. 25 (Bloomberg) -- The dollar fell the most against the euro since March on diminished concern that U.S. housing weakness will slow global growth.

The yen posted its biggest weekly decline versus the euro since 2003 as investors returned to carry trades in which they borrow in Japan to invest in higher-yielding assets elsewhere. Global stocks rose and volatility fell as traders increased bets the Federal Reserve will cut rates in September.

``Things are calming down sufficiently enough for the market to go back to the trades that dominated prior to the shake-out: buying other currencies against the yen and selling the dollar,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, with about $250 million in funds under management.

The dollar dropped 1.5 percent this week to $1.3675 per euro, for the biggest weekly decline since mid-March. The dollar rose 1.8 percent to 116.44 yen. The yen plummeted 3.4 percent to 159.26 per euro, for the biggest loss since September 2003.