Consensus: Recession Has Arrived

Today I'll go over the economic news. In my next post I'll offer an analysis and propose some solutions. The bottom line for today is that the consensus of the financial community now agrees the U.S. economy has entered a recession. The textbook definition of a recession, two consecutive quarters of negative GDP growth, will take some time to become official. In the meantime, the investment community needs to understand what is happening now, not after the fact. The straw that broke the camel's back came with employment figures. The job numbers were released at 8:30A. M. on Friday and within one minute the last holdouts, J.P. Morgan and Lehman Brothers, joined the rest of the business economists in declaring the dreaded "R" word. The facts and figures below will tell you why.

Net job loss for the month was 63,000. The private sector job loss was 100,000. Job losses for the last two months average 47,000. Paul Ashworth, economist at Capital Economics, explains that such a decline has been followed by a recession every time in the last fifty years. The historical record shows that unemployment starts to rise after a recession starts and keeps climbing even after a recovery begins. In every recession recovery did not take place until after job losses peaked at 200,000 per month.

Remarkably, in the face of such job losses the official unemployment figure dropped from 4.9 to 4.8% last month. How is this possible? This is because the figures have been gamed by the administration to hide the full effect. CNN reports that 600,000 people have given up and stopped officially looking for work, and according to the new rules they are no longer counted as unemployed. The actual unemployment rate calculated by the old reporting rules is 7.4%. Average wages fell the last two months and are $105 per month below those of a year ago.

The Mortgage Bankers Association reports that 6% of all mortgages, 900,000 in total, are in foreclosure and another 1.9% are past due. These are all-time records. For the first time since World War II homeowners have less equity than debt on their mortgages. The equity percentage has fallen from 53% in 2003 to 48% today. Giants Carlyle Capital and Thornburg Mortgage have joined their competitors in requiring large mortgage surcharges to extend loans, even those backed by Fannie Mae and Freddie Mac. Under heavy assault from the subprime meltdown, lenders are freezing even blue-chip customers. They are afraid, and credit is drying up. 1,400 banks are on the FDIC watch list.

Bankruptcies jumped to 4,000 a day in January, an 18% increase over December and a 28% increase over January of 2007. Overdraft penalties are up 11% over last year. Gasoline consumption is down 1% from last year. 91% of consumers rate the economy as negative or poor. The dollar stands at $1.54 to the euro, down from 2.00.

There were outflows of $40 billion from equities in both January and February, continuing a trend that has seen 10 consecutive months of negative investment. Investors, in other words, are pulling their money out of the stock market. Where is it going? Savings, formerly negative, are up by 2.3%. Certificates of Deposit are up 3% and money market funds by 18%. Why? Everyone is fleeing from risk. Equity is tapped, loans have been choked off, and not only individuals but huge institutions are playing things as safe as they can. The feeling is that this is no time to take chances and bet on the economy.

The Federal Reserve has cut its overnight discount rate five times since August, from 5.25% to 3%. The speculation is that another cut of one-half to three-quarters of a percent will be announced at the next meeting. It is reported that the Fed will also shortly make $200 billion available to the banking system at extremely low interest rates. The question is whether such measures can have any effect. Who wants to take on more debt, even at favorable rates, to expand operations and hire more employees when the economy is contracting?