Recession or Recovery

Wall Street Journal – Tuesday, September 21, 2010

Excerpt from FOMC Statement – September 21, 2010

While the National Bureau of Economic Research has declared the end of the 18 month long recession occurred in June of last year, the Federal Open Market Committee is releasing statements to signify the Fed’s governing body feels our “economic recovery” is precarious enough to “warrant exceptionally low levels for the federal funds and other interest rates for an Extended Period of Time.” In visiting the NBER’s website, the Business Cycle Dating Committee’s definition of recession (or expansion) is at best, vague. While it clearly states, “a recession is a period between a peak and a trough,” and that during a recession “a significant decline in economic activity spreads across the economy”, subsequent nomenclature also clearly states, “The Committee does not have a fixed definition of economic activity.” I’m reminded of the AFLAC duck’s expression after its encounter with Yogi Berra in the barber shop.

In reading the actual press release of September 20^th from the Business Cycle Dating Committee, one develops a feel for even more ambiguity. “There is no fixed rule about what weights the committee assigns to the various indicators, or about what other measures contribute information to the process.” In fact, the only reference I could find in the statement release that might dovetail with the FOMC statement was the Business Cycle Committee’s alluding to “the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.” I suppose at this juncture the timeless adage “a picture is worth a thousand words” might be appropriate.

In viewing the detailed graph to the left of our nation’s Gross Domestic Product (Quarter Over Quarter on a Chained 2005 Dollars Basis), we can see the clear reversal from the 2^nd Quarter’s data of 2009 at a negative 0.7 percent contraction to the 3^rd Quarter 2009’s expansion of 1.6%. However, there’s that annoying spike back down on the far right side of the chart. Second Quarter 2010 data reflects reversal of the previous two quarters acceptable growth with reversal to the anemic 1.6% Quarter Over Quarter growth (the third and final revision for 2^nd Quarter 2010 is due September 30^th).

Now let’s take a look at another of the widely recognized benchmarks for the Business Dating Cycle Committee’s assessment of economic activity, personal income.

Note that in August of 2009 is when the personal income numbers eliminated the negative (contractions) percentages of June (-1.0%) and July’s (-0.3%) 2009 data, and began turning positive again, albeit at best anemic (June of 2010 was flat with July 2010 showing a 0.2% growth rate for personal income). Personal consumption has even shown signs of a reversal in June of 2009 with that Quarter’s data reflecting a -1.6% contraction to the 3^rd Quarter 2009’s expansion at 2.0% (most recent data of 2^nd Quarter 2010’s Personal Consumption reflecting a 2.0% increase as well). Personal Consumption Expenditures has actually shown signs of revival as well with July 2010’s data reflecting a 0.4% increase, a real growth spurt when considering the previous three month’s combined expenditure number was flat. That’s the “Good” news.

As the old saying goes, “Sometimes we can’t see the forest for the trees.” The detailed graph at left is looking at the consumer confidence index over the last 30 years. While we can see marked improvement from the low of 25.30 in February of last year (most recent reading for August of this year at 53.50 - September’s estimate at 53.0 with release of data on the 28^th), when stepping back and looking at the consumer’s mindset from the macro level, we still have a long way to go to reach some semblance of the mountaintops. Additionally on an interesting side note, the ABC News US Weekly Consumer Comfort Index which is derived from respondents answers to questions on the economy, personal finances, and buying climate, has been a negative reading since March of 2007 with the most recent number at -46 (average reading from June of 2007 until now is -36). That’s the “Bad”.

And now, for all of you Spaghetti Western fans, here’s the “Ugly”.

The graph to the left details the foreclosure percentage of the total mortgage loans for the last 30 plus years. Note that with a historical average during that period of 1.19%, current percentages are at an alarming 4.57% foreclosure for the 2^nd Quarter of 2010, with an all time high rate of 4.63% in the 1^st Quarter of this year (data excludes OREO). Graphing the mortgage delinquencies over the last 30 years is “ugly” as well. The average percentage of all mortgage loans 30/60/90 days past due (excludes foreclosures) has been 5.14% - we are currently on a national basis at 9.85% of all mortgages delinquent with a peak in the 1^st Quarter of 2010 as well at 10.06%. Count next time you walk your neighborhood. That’s one out of every 10 homes.

Final Picture - Unemployment.

The Good News is that we’ve peaked at 10.1% in October of last year, and have dropped slightly to 9.6% in August (September’s numbers due out October 8^th). Note that the other “peak” in Unemployment of 10.8% in November of 1982 correlated with the end of the 07/1981 -11/1982 Recession. The Bad News is that while unemployment decreased at that Recession’s end (one year later at 8.8%), the current Great Recession’s end has seen no real improvement in the employment sector. Back to that “one out of ten” number.

Common sense would imply with high unemployment and job uncertainty, historically all-time high delinquency rates and foreclosures for America’s dream, low savings rates (although increasing), and high credit card debt averages, only the passage of time and financial fitness will allow America to “de-leverage”.

Just yesterday, the “Sage of Omaha”, Warren Buffett was interviewed and he stated that his definition of recession and the NBER’s was different. He alluded to that loss of American wealth (21%), and on a personal level “recession” is over when you get back to where you were. I think I’ll dust off my old fashioned dictionary and research “double dip recession”.