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Did Secretary Paulson Mislead President Bush On The Bailout?

Along with Fed Chairman Ben Bernanke, U.S. Treasury Secretary Henry Paulson has quickly become a household name in recent days. As one of President Bush’s top economic advisers, Paulson has helped spearhead the movement to rescue Wall Street and the financial system on behalf of Main Street and the U.S. economy. His efforts to date have resulted in the $700 billion bailout legislation that was signed into law by President Bush over the weekend. The bailout authorizes the Treasury Department to buy bad mortgages and other troubled securities associated with them from banks and other financial institutions. It is hoped that these purchases will allow credit to flow more freely throughout the financial system.

Earlier today, Dean Baker, an economist and co-director of the Washington, D.C.- based Center for Economic and Policy Research, questioned whether or not Secretary Paulson presented all the available options to the White House. He wrote in the Huffington Post:

According to the Washington Post, after the initial defeat of the bailout package in the House last Monday, Treasury Secretary Henry Paulson went to see President Bush in the White House. The Post reports that President Bush asked Paulson about “Plan B.” According to the Washington Post, Paulson told Bush “there is no Plan B.”

Of course this was not true. Paulson could have easily designed a bailout plan that was centered on the direct infusion of capital in the banking system, as was suggested by George Soros in a Financial Time column later in the week. Virtually every economist who has written on the bailout argued that a direct infusion of capital is a far more effective approach to dealing with the financial crisis than the approach outlined by Paulson.

Clearly Paulson had not invested a great deal of time in crafting the initial proposal he submitted to Congress since it was just three pages and few of the details of the plan had yet been decided. This means that Paulson easily could have switched gears and developed a plan along the lines advocated by economists.

Baker, who has been warning of an economic crisis for years now, added:

If the Post accurately described the meeting between Paulson and Bush (there is no source given for this account), then Secretary Paulson badly misled President Bush on the most important economic decision of his presidency.

Do you think it’s possible Hank Paulson may have had an ulterior motive when he allegedly told President Bush there was no other option available?

“If there is anything that a public servant hates to do it’s something for the public”

-Kin Hubbard (American humorist/writer. 1868-1930)

Source:

“Post Claims Paulson Misled Bush on Bailout”
Dean Baker
Huffington Post, October 6, 2008

Jim Cramer Expects Housing To Bottom By Third Quarter Of 2009

For CNBC’s Jim Cramer, things are looking up these days.

First, stocks reached a bottom (or so he claims)…

Back on July 29, 2008, I noted that CNBC television personality, former hedge fund manager, and best-selling author Jim Cramer declared that the bear market in stocks was officially over. Cramer said that stocks would not revisit their lows of July 15, when the Dow Jones Industrial Average ended the day at 10,962.54, and the S&P 500 at 1,214.91.

Soon, it will be housing’s turn (or so he claims)…

From the CNBC website this past Tuesday:

The economy will never recover if housing doesn’t find its footing first. But when will that happen? Cramer said he expects a bottom by the third quarter of 2009.

There is, of course, the usual Mad Money rigor behind this prediction. Cramer pointed first to the stock charts of Pulte Homes, Toll Brothers, DR Horton, KB Homes, Lennar, Centex and MDC. All of them show a peak exactly one year before housing did in July 2006. Well, guess what? Now these charts are showing that housing stocks bottomed last month. So if the logic worked for housing’s peak, why not for it’s bottom?

On top of this, Cramer added his thesis that stocks usually tell the story of their respective industries for six months out. So in a sense, investors can use stocks to see six months into the future. Part of the reason Cramer’s saying a year this time, though, is because the market is so horrible he’s allowing for setbacks. He doesn’t want to be premature, especially considering the aforementioned stock charts seem to indicate a year is a better timeline.

Who knows? He might be successful at calling the bottom of the housing slump, since his timeframe is extended out quite a while. Recent calls for a floor have proved to be premature. MarketWatch’s Greg Robb wrote Tuesday:

Economists who are calling the housing bottom are like a baseball team that’s close to clinching a playoff berth but keeps losing, and its clubhouse staff has to keep loading and unloading Champagne across the country.

Every month, these economists say the bottom is close, but really some poor souls are putting the Champagne back on the truck for the next month.

Sources:

“Cramer Calls the Housing Bottom”
Tom Brennan
CNBC, August 26, 2008

“Housing hasn’t bottomed yet”
Greg Robb
MarketWatch, August 26, 2008

Homeowners, You Don’t Want To Read This

Last Sunday, Kevin Hall from McClatchy Newspapers (the third largest newspaper company in the United States) talked about the direction of the U.S. housing market. He wrote:

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have suggested over the past year that an end is in sight. But with each prediction, things have grown worse. For many homeowners, the deep housing slump feels like a drop off a skyscraper. Every time another 15 floors have passed, there seems to be more room to fall.

Most of Hall’s piece focused on research by Mark Vitner, a senior economist for Wachovia, and Mark Zandi, chief economist for Moody’s Economy.com. Vitner told Hall:

I don’t think we get strengthening in the housing market until late 2011 or 2012… I think we’re somewhere between halfway and two-thirds of the way through the correction.

The Wachovia economist, who closely studies U.S. home price trends/sales and released a report back on July 14 entitled “How Far Will Housing Prices Fall,” predicts that prices will fall 22% to 29% on average from their peak before a bottoming out occurs. The median home price has lost about 11% since peaking in October 2005.

The housing forecast from Mark Zandi, chief economist for Moody’s Economy.com, is not much better. Zandi said:

My view is that we are two-thirds through the housing downturn, at least as measured by house price declines. The price declines began in late spring 2006 and will more or less come to an end in late spring 2009. The Fannie-Freddie debacle may push this out into the summer or even fall of 2009.

Zandi believes that unless the chaos in the financial sector is resolved, his forecast of a bottom in 2009 “will prove too bright.”

Identifying the bottom is even more trickier when historical trends no longer apply to a housing market that’s experiencing an unprecedented decline. Hall wrote:

Until the current downturn, median home prices had declined more than two months in a row only once, in 1990. But the decline now has lasted 22 straight months.

Don’t hold your breath though. Someone will be waiting in the wings ready to give anyone who’ll listen an unhealthy dose of jawboning about how a housing recovery is just around the corner.

Source:

“Housing prices haven’t hit bottom yet”
Kevin G. Hall
McClatchy Newspapers, July 20, 2008

House Speaker Pelosi Announces Second Stimulus Package

Looks like another stimulus check may soon be on its way to American households. According to Reuters today, House Speaker Nancy Pelosi met with several economists Tuesday and announced afterwards:

We will be proceeding with another stimulus package.

Reuters’ Andrew Taylor wrote:

Pelosi said that recently issued tax rebate payments of $600 to individuals and $1,200 for married couples have helped the economy but that more is necessary to offset the drag of higher gasoline prices and other costs…

The Democratic effort is still in its formative stages, but most of the proposals mentioned by Democrats were rejected by Bush during negotiations that produced the earlier stimulus measure. A new package probably won’t be acted on before Congress returns in September from its annual summer vacation.

According to Taylor, this second stimulus package could consist of additional tax rebates, heating and air conditioning subsidies for the poor, infrastructure projects, higher food stamp payments, and aid to the states.

Speaking of seconds, back on April 29 I talked about humor columnist Dave Barry, who published the following in the Miami Herald on April 13 in response to the first stimulus package:

…this year, filing taxpayers will receive an Economic Stimulus Payment. This is a very exciting new program that I will explain using the Q and A format:

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.
Q. Where will the government get this money?
A. From taxpayers.
Q. So the government is giving me back my own money?
A. Only a smidgen.
Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.
Q. But isn’t that stimulating the economy of China?
A. Shut up.

Source:

“Democrats plan second economic stimulus bill”
Andrew Taylor
Associated Press, July 15, 2008

Merrill Lynch, Morgan Stanley Issue Recession Warnings

At a conference yesterday in Singapore, New York City-based financial services giant Merrill Lynch warned the U.S. economy is in a recession that will become more apparent as the year drags on. According to Channel NewsAsia yesterday:

Merrill Lynch said the world’s largest economy is already in a recession, and it expects to see a prolonged L-shaped recovery. This means the US may take a longer time to emerge from the economic doldrums….

Merrill Lynch said a key indicator of a recession is a slump in the housing market. It added that it expects the housing market in the US will see another 15-20 percent downside.

Staff from the firm said that government efforts to provide stimulus to the economy will only temporarily stem a fall in consumer spending, according to Reuters’ Kevin Lim. Merrill Lynch’s North American economist David Rosenberg told conference attendees yesterday:

I still maintain the business cycle is bigger than the government.

Rosenberg also predicted inflation in the United States would slow as consumer spending weakens, and that the Federal Reserve would cut interest rates to fight the recession. The economist warned:

No asset class security is priced today for a recession scenario.

Adding their two cents, economists from Morgan Stanley are concerned that the recession in the United States could rival the “the big five,” according to David Gaffen from the Wall Street Journal’s Market Beat blog today. Gaffen explained the “big five” were large-scale financial crises that resulted in a long-term underperformance in the respective economies. He wrote:

The long-term declines the firm looks at includes Spain in 1977 and Norway in 1987, and most recently Japan in 1992 – which they define as the worst, resulting in Japan’s so-called lost decade. Whether the current U.S. economic decline matches one of these situations, or looks more like the recent U.S. recessions “holds the key for risky asset prices,” they write.

However, Morgan Stanley economists do not agree with their Merrill Lynch counterparts when it comes to the topic of inflation. From the Market Beat post:

Morgan Stanley economists say that in this instance, inflation may not automatically recede as U.S. growth recedes. They say as a result that bonds may sell off if growth recovers in the U.S. and monetary policy remains loose, fueling price gains… “We believe that the Fed’s focus on keeping the financial crisis from sending the economy down the path of the Big Five will succeed, but lower rates and surging money growth will spill over into inflation. Bond yields are likely to follow inflation higher,” they write.

Sources:

“Merill Lynch says US in recession, but Asia to remain strong on consumer spending”
Channel NewsAsia (Singapore), May 14, 2008

“Tax rebate won’t stem U.S. recession: Merrill”
Kevin Lim
Reuters, May 14, 2008

“Regular Recession, or a Larger Disaster?”
David Gaffen
Wall Street Journal (Market Beat blog), May 15, 2008

Quote For The Week

On Thursday, I read an article by MarketWatch’s Greg Robb that talked about how economists are differing in opinion regarding legislation sponsored by House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, that is intended to make it easier for homeowners to refinance their loans and stay in their homes. The program would substantially relax the Federal Housing Administration’s standards to reach struggling borrowers who otherwise would be considered ineligible for a government-backed mortgage. Homeowners would have to show they could make payments on a refinanced mortgage, and lenders would have to agree to take significant losses on the existing loans. The committee, which claims the program could help 1.5 million homeowners who are having difficulty paying their mortgages, is expected to approve Frank’s bill this week.

In his piece, Robb noted that many economists are arguing this housing “bailout” bill is unfair. In fact, Paul Kasriel, chief economist at Northern Trust Company in Chicago, said:

Once again we are punishing people who followed the rules. There is no such thing as a free bailout. To think that we can continue to simply issue more debt and the rest of the world is gladly going to buy it at attractive rates to us… I kinda doubt it.

WSJ Survey: U.S. Economy In Recession, Further To Fall

The Wall Street Journal’s Phil Izzo talked about the latest Journal forecasting survey of 55 economists. Izzo wrote:

The weakening U.S. economy has further to fall, according to the majority of economists in the latest Wall Street Journal forecasting survey.

By a 3-to-1 margin, respondents said the economy is in a recession, and almost three quarters said the economy hasn’t yet hit bottom.

Highlights from the survey included:

• Fed Chairman Ben Bernanke’s approval rating rose slightly to 78 out of 100 from a 75 in February, which was the last time the question was asked.
• U.S. Treasury Secretary Henry Paulson’s rating fell a point to 73 from 74 in February.
• When asked what the biggest downside risk was to their forecasts, 35% of the economists said it was further deterioration in the credit markets, 25% said it was a sharp drop-off in consumer spending, and 13% said it was continued housing weakness.
• The survey group expects the economy to shed 1,625 jobs a month, on average, over the next year.
• They unemployment rate, now 5.1%, is expected to rise to 5.6% by December.
• Just 21% of economists predict home prices will reach a bottom this year. 67% see the bottom in 2009, and 12% say it won’t be until 2010.
• While most of those polled say the U.S. economy hasn’t hit a bottom yet, they expect gross domestic product to expand, on average, by 0.2% in the first quarter and 0.1% in the second, followed by a 2.1% increase in the third quarter.
• The group expects the Federal Reserve to cut its benchmark federal funds rate by another half-percentage point by June, then keep rates unchanged for the remainder of 2008.

Source:

“Economy Has Further to Fall, According to Economists’ Survey”
Phil Izzo
Wall Street Journal, April 10, 2008

Economists Predict 6% Jobless Rate, 2 Million Lost Jobs

Earlier today I read an interesting article that discussed the U.S. employment outlook and which jobs may or may not be good bets in a deteriorating economy. Martin Crutsinger of the Associated Press wrote:

While the downturn is expected to be short and mild, economists are still forecasting the unemployment rate, which jumped to 5.1 percent in March, will climb much higher before the nation’s job engine sputters back to life.

Economists are forecasting a jobless rate that will peak at around 6 percent, but probably not until early next year, several months after the recession is expected to end. Analysts said as many as 2 million people could lose their jobs in the current downturn.

Mark Zandi, chief economist at Moody’s Economy.com, said:

All the indicators suggest that we will see even larger job declines in coming months. Businesses are getting nervous and pulling back.

“Safe” Jobs:

• Healthcare
• Education
• Farming
• Some manufacturing (airplanes, heavy machinery)
• Government

“Unsafe” Jobs:

• Other manufacturing (automakers, housing-related like appliances, furniture)
• Construction
• Housing-related industries (real estate agents, mortgage brokers)
• Wall Street firms
• Discretionary services (tourism-related)

Source:

“Job winners and losers in hard times”
Martin Crutsinger
Associated Press, April 7, 2008

The Failing Fed

Following through on a recommendation yesterday, I read the post “5 Reasons Why the Federal Reserve is a Failure!” from Bankaholic.com. It’s a great piece (especially the part about the Fed awarding gold stars to those deserving detentions), and I think you’ll enjoy reading it over the Easter weekend. Having obtained permission to re-post it, here is the article in its entirety:

No single quasi-private institution has as much influence on the worldwide economy as the Fed, and as a leader can head this institution for an indefinite term, no one man is as influential on the markets as the Fed Chair.

The Dollar has plummeted in the currency markets and shows few signs of recovery or even stabilization. The new style and policies that accompanied Bernanke into office have made the Forex markets more volatile than ever and even more difficult to predict. An examination of what has gone awry can help Forex traders understand this new era at the Fed.

1. The Fed ignored the signs
The Fed has stated that it will never act as a regulator in any financial market, but it has the duty to use its influence for reform when it sees signs of consumer exploitation. Since as early as 2001, at least two senior officials inside the Fed urged its board to call for tighter regulations in the housing markets, especially in abuses that were clearly evident in the handling subprime mortgages. At the time, the White House was singing the praises of America’s new society of ownership, so the Fed took this cue and did nothing.

These deceptive loans were making possible the dream of home ownership to millions of Americans, even to those who could not come close to affording it. Now these same Americans are living through a nightmare of foreclosure and debt, much in thanks to the Fed’s willingness to ignore long-term repercussions and revel in immediate accomplishments, no matter how hollow and transitory they might be.

2. The Fed did too little too late
Other than advocating for reform, the Fed should have fully committed to a strategy of lowering target interest rates. Instead, Bernanke procrastinated, and when he did finally announce a cut, it was insufficient and ineffectual, at best. On December 11th, the Fed dropped its benchmark rate by a quarter of a percent rather than the half of a percent that had been called for by analysts and investors. Wall Street promptly responded, as the Dow plummeted nearly 300 points in one day.

The Fed might argue that this cut was prudent and that a more drastic cut would have unnecessarily fueled a rise in inflation. However, many view the Fed’s temerity in this matter as merely an extension of its inertial proclivity towards inaction.

3. The Fed kept interest rates too low for too long
Though this may seem to contradict the statements above, one of the reasons that the Fed might have hesitated in cutting rates is that they were already too low to begin with. Greenspan’s long tenure at the Fed was defined by a tendency to aggressively cut interest rates, which he began to do frequently in 1987 after the drastic correction in the stock market.

This initial move helped stave off disaster, but the further rate cuts of the late 1990s eventually led to the dot-com bubble. Rates should have been raised again in the early 2000s; if this had been done, the US might have avoided the furious borrowing that has led to the current credit crunch.

4. The Fed’s view of inflation is flawed
The Fed seems rather befuddled by this important economic indicator. The soaring costs of food and energy are a phenomenon is the US and worldwide, but the Fed does not take these developments into account.

The Fed’s analysis focuses on “core inflation,” which excludes a number of indices that it views as transitory, including energy and food costs. “Headline inflation,” which does take these costs into account, is favored by European economists, who view high energy prices as a long-term trend. By choosing to disregard the rising costs of a barrel of crude oil and a bottle of olive oil, the Fed is ignoring reality.

5. The Fed gives gold stars to those deserving detentions
Fed policy following the recent economic slowdown has done nothing but reward those who helped caused it. The majority of financial stocks have suffered of late, and justifiably so. However, the Fed seems dedicated to bailing out even the worst of the perpetrators with the recent set of economic interventions that it has enacted.

While working to eliminate any downturn in the market might seem feasible for short-term success, it is a purely shortsighted endeavor that will hurt the economy in the long run. In order for a free market to truly exist, bear markets must coexist peacefully with bull markets. Unfortunately, the Fed has its bright orange vest on and is going bear hunting. This is a doomed outing, and one that is going to get us all hurt in the end.

Source:

“5 Reasons Why the Federal Reserve is a Failure!”
Bankaholic.com, March 15, 2008

The Great American Con

In the early days of Boom2Bust.com, the amount of material I encountered on a daily basis which was pertinent to the blog’s focus (educating/warning about a coming U.S. financial crash) was more than manageable. In fact, there were days when a lot of the material that came across my desk was way too Pollyannaish (being absurdly optimistic and good-hearted, believing in a good world where everything works out for the best all the time) instead of being realistic. My how things have changed. Now, I’m backlogged with bad news. And it seems that everywhere I look, Americans are changing their tune on the economy:

• Results from a USA Today/Gallup Poll of 1,025 American adults released today show 76% think we are in a recession.
• Results from a CNN/Opinion Research Corporation poll of 1,000 American adults released Monday show 74% believe the United States is now in a recession.
• A poll of 51 economists published last Thursday by the Wall Street Journal show 71% believe the economy is in recession.

Just this morning, U.S. Treasury Secretary Henry Paulson told NBC’s “Today Show” that:

We know we’re in a sharp downclimb and there’s no doubt that the American people know that the economy has turned down sharply. So to me, much less important is the label that’s placed on it today. Much more important is what we do about it.

It appears the three bears are getting the better of the “Goldilocks” economy. In fact, all this negativity reminds me of that movie “Kelly’s Heroes” and the exchange between the characters Oddball (Donald Sutherland) and Moriarty (Gavin MacLeod):

ODDBALL: Why don’t you knock it off with them negative waves? Why don’t you dig how beautiful it is out here? Why don’t you say something righteous and hopeful for a change?
MORIARTY: Crap!

While many would attribute the “negative waves” to a downturn in the business cycle, I read a brilliant piece this morning by Larry Elliott, economics editor for The Guardian (UK), which offered an alternative explanation for our economic woes. One, which Elliott argued, is rooted in the centuries-old conflict between the “haves” and “have-nots.” Yesterday he wrote:

But if you are at the top of the tree, the years since the last recession in 2001 has been a veritable golden age. Salaries for executives have rocketed and profits have soared, because the productivity gains from a growing economy have been disproportionately skewed towards capital…

For ordinary Americans, though, it has been a different story. Real wages have been growing slowly; at just 1.6% a year on average over the latest upswing, well down on the experience of earlier decades. Business, of course, needs consumers to carry on spending in order to make money, so a way had to be found to persuade households to do their patriotic duty. The method chosen was simple. Whip up a colossal housing bubble, convince consumers that it makes sense to borrow money against the rising value of their homes to supplement their meagre real wage growth and watch the profits roll in.

As they did - for a while. Now it’s payback time and the mood could get very ugly. Americans, to put it bluntly, have been conned. They have been duped by a bunch of serpent-tongued hucksters who packed up the wagon and made it across the county line before a lynch mob could be formed.

“See ya, wouldn’t want to be ya…”

Responding to those in the Pollyanna camp who still believe a recession can be averted, Elliott said:

The debate now is not about whether the US is in recession but how deep and long that recession will be. Super-bears have started to say that this is perhaps “The Big One”, by which they mean the onset of a new Great Depression. The need to rescue Bear Stearns has done little to still those voices.

As the economics team at HSBC recently pointed out, there has been a “catastrophic breakdown” of trust, and when that has happened in the past - the US in the 1930s, Japan in the 1990s - chucking extra money at the banks in the hope that they will start lending again proves ineffective.

Sources:

“Poll finds broad pessimism over economy”
JoAnne Allen
Reuters, March 18, 2008

“Three out of four say it’s a recession – survey”
David Goldman
CNN Money, March 17, 2008

“Paulson: We’re in A Sharp Economic Downturn”
Associated Press, March 18, 2008

“America was conned - who will pay?”
Larry Elliott
The Guardian (UK), March 17, 2008

U.S. Government Report Suggests U.S. May Enter Recession In 2008

According to the Financial Times (UK) today, “A US government report on Tuesday forecasted for the first time that the country’s economy would
enter recession in 2008.” Javier Blas, a Times commodities correspondent, wrote:

The Energy Information Administration, the statistical arm of the Department of Energy, said in its monthly oil report that the “US real gross domestic product is expected to decline slightly in the first half of the year”.

Blas noted that the Washington DC-based EIA did not specifically say that the U.S. economy would go into recession, “but two quarters of negative growth is a common definition of recession among economists,” he wrote. However, the National Bureau of Economic Research (NBER), the nation’s leading nonprofit economic research organization that is tasked with calling a recession, said on its website that:

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

The White House and Federal Reserve have acknowledged that while the U.S. economy is slowing, a recession is unlikely. Yet, as Tom Raum of the Associated Press wrote Saturday:

Many economists say the U.S. economy is already in recession — even though it hasn’t met the classic definition of two back-to-back quarters of declining gross domestic product — and say the White House is trying to sugarcoat the statistics.

Raum quoted Standard and Poor’s chief economist David Wyss, who suggests the economy dipped into recession sometime last month. Wyss said:

They’re certainly trying to put the best face on the situation. They’re spinning it their way. I don’t think they’re falsifying the data. Presidents always play cheerleaders. I don’t think I’ve ever heard a president say that we were in a recession until we were just about out of it.

Sources:

“Government report forecasts US recession”
Javier Blas
Financial Times (UK), March 11, 2008

“Fact Check: Bush Offers Rosy View”
Tom Raum
Associated Press, March 8, 2008

Merrill Lynch, Morgan Stanley Talk Recession

Last night Reuters reported that despite U.S. monetary policy easing, equity and credit markets are suggesting it’s too late to avoid a recession, according to economists at Morgan Stanley. Analysts Luca Bindelli and Stephen Jen said in a research report that those markets suggest:

…it is too late to avoid the inevitable. Indeed, the new senior loan officer survey (from the Federal Reserve) marks a further deterioration in credit conditions, and equity market performance has continued its descent.

Bindelli and Jen warned:

Our preferred model now implies a risk of U.S. recession of 71 percent in the coming 12 months.

The increased recession risk is due to a further decline in equity market performance, a Fed senior loan officer survey suggesting increased tightening of credit conditions in the coming quarter, a “drying up” of the commercial paper outstanding market, and a widening of the credit spread, the Morgan Stanley analysts said. As such, these developments “more than compensated” for the Fed’s interest rate cuts and three-month to 10-year spread.

It should be noted that the last the 50 basis point Fed interest rate cut on January 30 to 3% “is not entirely accounted for” in the model estimates, since the model accounts for financial market developments until the end of January.

Back on December 20, 2007, I wrote that the Toronto-based Globe and Mail said that a Merrill Lynch recession probability indicator, the Cyclical Pulse Index, was pointing to a “painful and pronounced downturn next year” for the U.S. economy. From that post:

According to the Globe, Merrill Lynch uses the U.S. National Bureau of Economic Research’s definition of recession, which is a significant decline in economic activity lasting more than a few months and evident across economic measures including GDP, employment, and retail sales. Their recession probability indicator looks at a combination of the yield curve and corporate spreads, and is now signaling that there is a 100% probability that a U.S. recession will take place within the next 12 months. David Rosenberg, Merrill’s North American economist, warns, “Clients should be taking recession risks very seriously.” The odds have grown since October, when the indicator was at 75%. Only this past summer did the tool show no threat of recession.

Today the Canadian publication wrote that Rosenberg updated his Cyclical Pulse Index yesterday, which now plainly illustrates that the United States is in a recession. According to David Berman of the Globe and Mail:

Since the index uses a proprietary model that remains under wraps, you have to take Mr. Rosenberg’s word for it that the data that go into it make more sense than, say, the Super Bowl indicator.

That said, the index has a good track record: When it dips below the zero line (whatever that is) or falls an average of 0.7 percentage points from peak to trough (whatever those are), you can pretty much count on a recession. Right now, the index has triggered both requirements for a recession.

Yet, there are still quite a few economists who aren’t sold on the idea of a recession. The latest Wall Street Journal forecasting survey of 52 economists put the odds of a U.S. recession, on average, at 49%, up from 40% in the January survey and 23% in June. Something I found interesting, however, was that if a recession does materialize, survey respondents gave 39% odds that it will be worse than the past two recessions. The idea that a coming recession would be more painful than previous ones was echoed by the director of the Reuters/University of Michigan consumer sentiment survey earlier today, according to Reuters. The University’s Richard Curtin said the U.S. economy has entered a recession which will be more painful and drawn out than the usual downturn. Citing data from industry group The Conference Board, Curtin said inflation pressures will linger despite a decline in consumer spending, complicating the task of policymakers. He warned:

This is no ordinary recession. The after effects will last much longer than the typical downturn.

The economist added that the Conference Board’s expectations index, which is a strong predictor of economic contractions, is currently flashing red. Furthermore, with Americans getting hit with everything from a housing downturn to excess borrowing, Curtin implied things will get worse before they get better.

Growing Number Of Economists Say Recession Is Here

Earlier today, MarketWatch reported that Nigel Gault, U.S. chief economist for Global Insight, now believes the U.S. economy is in a recession. Massachusetts-based Global Insight is recognized as the most consistently accurate forecasting company in the world, with over 3,800 clients in industry, finance, and government. In a research note released Thursday, Gault predicted a 0.4% drop in gross domestic product this quarter and a 0.5% decline next quarter. Mr. Gault is part of a growing number of economists who are now saying the United States is in an economic recession.

Caroline Baum of Bloomberg wrote an interesting article yesterday entitled “U.S. Recession Indicators Are All Pointing South.” Baum stated that it now appears the four indicators used by the National Bureau of Economic Research’s Business Cycle Dating Committee (BCDC) to assess turning points in the economy have peaked. She wrote:

Not by very much, mind you. And not for sufficiently long for the BCDC to make a determination that a recession has begun. The committee typically waits anywhere from six to 18 months after a recession has started to make it official.

As it now stands, though, the four indicators are all off their highs, with industrial production and real personal income less transfer payments peaking in September, real manufacturing and trade sales in October, and, most recently, employment in December.

“When all four kind of go south — as well as a fifth, Macroadvisers’ monthly GDP index – it’s a strong signal saying we need to start worrying,” says Maurine Haver, president of Haver Analytics, a provider of databases and software products for economic analysis.

Baum also spoke to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago, who wrote in his latest published forecast that, “Our bet is that the U.S. economy has entered a recession.” Kasriel explained that the recession will be “dominated by weakness in household spending,” as households ran a deficit (spending more than their after-tax income) from 2001 through 2007. The award-winning economist said that from 2003 to 2005, inflation-adjusted money market rates were either low or negative, which created a disincentive to save. Since home prices rose faster than the cost of carrying them (mortgage rates) and mortgages were widely-available, “household borrowing relative to disposable personal income hit a postwar record in 2006,” said Kasriel.

Further evidence of a U.S. recession appeared on Tuesday, when the ISM non-manufacturing index fell to a reading of 41.9% for January, down from 54.4% in December and the lowest level since October 2001. Readings below 50% indicate most firms are contracting. Greg Robb of MarketWatch wrote after the report’s release that, “For economists, the data from the Institute for Supply Management was the clearest signal to date of a recession.” Josh Shapiro, chief U.S. economist at MFR Inc., told the news service, “The reading for the ISM non-manufacturing composite, if sustained, is consistent with recession.”

Also last Tuesday, Chris Isidore of CNN Money wrote:

A growing number of top economists believe that the U.S. economy has now toppled into recession…

Some economists argued that the normally low-profile ISM services reading, coupled with the government’s report Friday showing the first monthly net loss in jobs in more than four years, is proof that recession is now a reality.

Keith Hembre, chief economist of First American Funds, told CNN Money that:

My forecast had been that the recession would begin this quarter, but the hard data wasn’t there yet. But now we’re seeing that. The service sector is a much larger component of the economy [than manufacturing] and this is very much a recession reading.

CNN Money’s senior writer said that economists took the latest report as a sign problems are no longer restricted to just housing and manufacturing. Gus Faucher, director of macroeconomics for Moody’s Economy.com, told CNN Money his firm now believes the economy is in a recession. Faucher said:

We’re definitely seeing conditions spread to more parts of the economy. The big drop in business activity, that’s a huge red flag.

Economist Bob Brusca of FAO Economics said he doubted that the U.S. was in recession a week ago, but now believes there is about a 75% chance that a recession began last month. Brusca explained:

That’s what recessions do. They come upon you all of a sudden. When you look back at history, you’re struck by how even-keel it is until the bottom just falls out.

Signs Of The Time, Part 1

In trying to determine the direction of the U.S. economy, practitioners of the “dismal science” would argue that we should focus primarily on the empirical data at hand. Yet, can we also find clues as to where we are heading from what’s going on around us in our daily lives? Are there things that you’ve seen or heard that just scream “excess!” and lead you to believe that we’re at some tipping point? For example, in the late nineties I remember hearing how employers, forced to compete against one another in a sizzling job market, were trying to lure new college graduates with outrageous salaries, stock plans, gym memberships, VIP parking, the works. I had a pretty good idea this particular situation wouldn’t last. As a matter of fact, only a few years later I was reading about laid-off executives flipping burgers at local fast-food joints.

Consider the following story from the January 28 issue of Time. In “Your Own Personal Paparazzi,” Jeninne Lee-St. John talked about how regular people have been paying up to $1,500 a day for the privilege of having their own “paparazzi” follow them around. Lee-St. John detailed how one couple in Austin, Texas, hired some of these freelancers to follow them around one night. Apparently, the paparazzi were so convincing in their pursuit of the couple that random passerbys started taking photos of the couple with their camera phones and asking who they were. I know… let the sheeple comments begin.

In another instance, a 29-year-old Chicago man and his friends hired a paparazzo to accompany them as they went bar-hopping for the man’s birthday. To their surprise, the guys were able to avoid the lines at some of the clubs. “People thought, these guys are important people,” said the birthday boy.

A number of these personal paparazzi companies are popping up in cities like Los Angeles, San Francisco, and even across the pond in the United Kingdom. Lee-St. John wrote:

The trend is driven by the twin obsessions with chronicling one’s life and experiencing fame. “We live in a culture where if it’s not documented, it doesn’t exist,” says Josh Gamson, a University of San Francisco professor of sociology who studies culture and mass media. “And if you don’t have people asking who you are, you’re nobody.”

I don’t know about you, but it sounds more like an inferiority complex to me…