Tuesday, November 27, 2007

Non-"Recession" Economy Selling at "Recession" Prices

Discounting a significant recession seems way overblown.


One has to really believe that the U.S. consumer is going to not just stop spending more, but actually retrench, in order to get to negative growth for the full year next year.

Plugging in a calculation for an oil-related retrenchment and a continued, harsh, steep fall in residential construction, one gets to flatish growth (including even a significantly negative contribution from inventory investment).

On my figures, one would have to see year-to-year negative growth in (real) consumer spending in excess of 2%. Such numbers didn't occur in the last two slowdowns, even in the early 1991, when things were looking more bleak, in many ways. (PCE, personal consumption expenditures, haven't been negative since 1980, when it dropped just slightly for the whole year...).


Oil is acting like a "financial variable", these days, divorced from supply and demand. Speculation here continues to be a significant downside risk.


Guesses: For financials, it may be when the first quarter prints without "special charges", probably as soon as 1Q08.

For the market as a whole, probably sometime in the same period, as more data comes in that the consumer is not retrenching, fast and furious.

At that time, one might guess that the value of stocks, as measured by the broad S&P500, might move from a "lower" range of, say, 1370-1460 to an "upper" range of 1460-1562 (or higher, depending ...).


David Wyss, who has been tracking this stuff as long as anyone, these days, looks at the "wealth effect" on consumer spending and comes up with numbers not to far from my own:

Overall, we expect real consumer spending to slow to 2.2% in 2008, down from 3.0% in 2007. The saving rate will tick up to 1.5% from this year's 0.8%. Consumers aren't likely to stop, but they will tap the brakes.

We expect a total drop in existing home prices of 11% (they're already down 4.4%).

How much housing wealth translates to consumer spending remains unclear. Even correcting for the direct effect on consumption caused by the imputation of spending and income on owner-occupied housing, estimates range from near-zero to 5% of increases in home prices will be spent each year. At the high end, the impact would be a two-percentage-point rise in the saving rate, and an equivalent slowdown in spending.
On my figures, a sharp 2% rise in the savings rate alongside a sustained oil impact would lead to negative growth ... a gradual rise, not so much.

Interesting Chart from S&P

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