John Irons's Blog


Economic News, Data and Analysis

Notes on the economic slowdown

  1. Last Friday, the employment report showed that employment fell nation-wide for the first time since 2003. The average expectation was for an increase of 110,000 ( survey) and we got minus 4,000.
  2. This decline appears to be part of a growing trend. The two months prior to august were revised downward and showed that the economy created just 68,000 and 69,000 jobs in those months.

    • This is also consistent with wage data from the last few years that still shows no sign of picking up from weak performance.
    • We also saw a spike last month in manufacturing job losses, down by 46,000, which is the most in at least 2 years.

  3. Even before last Friday’s numbers were released, economists were getting increasingly worried about a slowdown.

    • Mark Zandi of, for example, was predicting a 40% probability of recession some time in the next 12 months.
    • Treasury Sec Paulson said in WSJ that financial market turmoil would likely reduce growth
    • The National Association of Business Economists survey released yesterday puts growth at 2 percent for the year, which would be weakest since 2002.

  1. Now that we have seen these fears manifest in the jobs numbers, private forecasters may again lower their expectations for the year.
  2. What would tip the slowdown into recession? We may not yet have seen the bottom of the housing market crisis.

    • First, the Case/Shiller housing price index shows housing prices fell by 3.5 percent in 20 major markets over the past year. But there may be more to come – Shiller suggested there could be as much as a 50% drop in some markets, and he recently said that he is “…assuming that this cycle is going to continue down for years and years.”
    • Second, we continue to see net job loss in home building and related sectors, and little strength elsewhere (aside from some service sectors).
    • Third, the decline in mortgage equity withdrawals could continue to hit consumption, which has been driving the economy in recent years.
      From Feldstein’s Jackson Hole speech:
      “Mortgage equity withdrawals between 1997 and 2006 totaled more than $9 trillion, an amount equal to more than 90 percent of disposable personal income in 2006. The mortgage refinance index has begun to decline in recent months and the level of revolving home equity loans has been declining since the beginning of the year. The household saving rate has started to rise {increasing from 0.4 percent of disposable income in 2006 to about 0.8 percent in the first half of 2007.} We will have to wait to see the impact of the sharp reduction in available mortgage credit that occurred in recent weeks”

  3. To put the potential slowdown in consumption in context, consider that growth over the past 2 years was largely driven by consumption.

    • In 2006, about 90 percent of the growth in GDP was due to consumption increases, while investment had declined for 3 of 4 quarters.
    • However, last quarter (2007q2), consumption growth only accounted for about 1/4 of GDP growth. Further erosion of consumption due to housing market contagion is very worrisome.

  4. The Fed is widely expected to reduce interest rates at next week’s meeting (Tuesday, Sept 18th); however, Bernanke might try to show that he is “tough” or the fed might wish to avoid the appearance of bailing out investors. (Janet Yellen yesterday warned against taking a rate cut for granted).

    • Martin Feldstein, (one of the most conservative economist you’ll find,) warns there could be a “very serious downturn” and wants a 1 percentage point cut in interest rates (likely in stages, but did not specify).
    • A rate cut does seem reasonable given the risks to the economy.

  5. What can Congress do? One first step might be to hold hearings on whether a jobs package is needed, and if so, what should it look like.
  6. The bottom line is this: we may already be on a path towards recession. But even if we just experience a “slowdown” we can expect rising unemployment, weak or falling wages, and other adverse consequences. Aggressive action (both monetary and fiscal) may be needed to prevent that from happening. In any case we should be preparing now for a response to the slowdown or recession.

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