All is fine!

"The question is, does a recession seem a
plausible scenario in the current circumstances … with inflation near
post-World War II lows, corporate profit margins at record highs, an
unprecedented global awakening underway, financial signals [credit
spreads] still at good-time lows? Please!"

-JPMorgan economist Jim Glassman


The complacent Goldilocks crowd is hoping that if they just keep repeating their mantra "All is well" enough times, people might actually believe it.

That approach has turned out to be less effective than it was in days gone by, thanks to the interconnected nature of global markets — a slowdown in the US economy impacts most other markets, especially those whose economies rely on exporting their goods to us

In other words, mere happy talk here can no longer stave off sellers halfway around the world. With Japan, China and the rest of  Asia getting whacked again, and Europe following suit, the open here is likely to see some bloodshed.

What are the hopeful pleas of the soft landing  proponents? Consider this short list, and our counters:

1) Corporate America remains healthy

The good news is that corporate balance sheets are the best they have been in years. The bad news is that this matters a lot less than you would think. The lift under major corporate strength has been earnings — which have been decelerating for quite some time now, and are likely to get worse, not better in the near future.

The strength there is somewhat deceptive. A vastly disproportionate amount of S&P500 earnings have come from Oil & Material companies. As the economy slows, that will slip.  We also see alot of M&A/Private Equity driving the Financial sector. A shift in Psychology is underway, and that is likely to look different if this selloff accelerates. Third, a lot of financial engineering has occurred. Share buybacks are responsible for about a third of earnings gains. Bottom line: S&P500 earnings remain a lot more vulnerable than most people realize.

Then there’s the profits at a cyclical peak:  Earnings cannot grow faster than GDP + inflation indefinitely. As we have pointed out before, this profit cycle has been driven by cheap labor, cheap money, and tax breaks — not organic demand. 

2) The GDP report wasn’t all bad.

That’s true:  2.2% isn’t zero.

However, it is not 3.5%, either. And, its trending lower. Even more importantly, it does not reflect the thesis that helped the markets power higher from December thru February: That growth was reaccelerating, that the soft patch was behind us, that a soft landing might not even be necessary due to the robust economic environment.

That turned out to be dead wrong: Housing is already in a recession, as is Autos and most Manufacturing that are not cheap-dollar-export-dependent. Durable goods have been weakening along with Housing, and Business Investment — which despite the Bulls forecasting a rebound for 3 years — is now near a 3 year low, with more weakness likely on tap. 

The "contained sub-prime debacle" and the "not dependent on housing consumer" turned out to be Fairy Tales — like Goldilocks herself.

3) Jobs remain key.

Its stunning that this keeps getting trotted out, but let me repeat it in CAPS for those who have have somehow missed it: THIS HAS BEEN THE WORST JOBS RECOVERY IN POST WAR HISTORY.

We’ve mentioned this repeatedly over the past 3 years, most recently here and here.
(Its simply too tiresome to expound on this any further yet again)

4) Federal taxes keep pouring in.

Temporarily true, primarily due to a number of factors and one time events.

But if you want to get closer to where "the rubber meets the road," have a look at State and Local tax reciepts. They are  in near crisis mode in many places, as Income gains, Hiring and Consumer Spending are all off of where they should be at this point in the cycle. Productivity gains are clearly a double edged sword this cycle also.

For The Liscio Report’s prior take on State Tax reciepts plummeting, see #3 here


Of course, whether you should be even listening to the sunshine crowd in the first place is an entirely different story. Consider this last detail, via the Sunday NYT:

"The Economist reported that in March 2001 — the month the last
recession began — 95 percent of American economists believed that there
wouldn’t be a recession. In February 2001, the 35 professional
forecasters surveyed by the Federal Reserve Bank of Philadelphia
collectively predicted growth at an annual rate of 2.2 percent for the
second quarter of 2001 and 3.3 percent for the third quarter. It’s as
if meteorologists stood outside as the storm clouds approached and
informed television viewers that endless sunshine was ahead."

Bottom line: A recession remains a much higher possibility than most economists acknowledge. Watch their ongoing denial for signs of acknowledgement — and then go the other way.


Don’t Use the Market to Predict a Recession
James Pethokoukis
US  News & World Report, February 28, 2007

The Forecast for the Forecasters Is Dismal
NYT, March 4, 2007

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