wow, a two-fer. OK, I’ve been predicting a recession for a couple of years, and been wrong. Well, sorta wrong. For much of the past two years we’ve been very laggard economically – the post-recession surge (normal expectations after the 2001 recession) just didn’t happen, and we’ve been stalling for a couple of years now but not quite seeing the engine quit.
Housing is now in definite decline. Some big housing related industry companies are laying off employees in numbers large enough to have an impact – and consequently exposing one of the reasons we haven’t had our recession. Basically, a HUGE quantity of these de facto unemployed people aren’t unemployed de jure. They’re not getting any income, but they’re not eligible for unemployment benefits (contract, subcontract, self-employed…) The cuts are getting large enough the counted are showing up, however.
Another housing issue that’s finally happening is that the MEW is drying up. People just aren’t able to qualify for the next refi – or if they’re eligible, they’re not applying. Either way, the money this creates and moves isn’t happening. Now, those who NEED are taking up the slack with credit cards – but those are beginning to run into cap-like issues as well.
Now, there are a couple of… I’m tempted to call them spinoffs. They’re not, really, but at least it allows the segue. First there’s commercial real estate, which had the same sort of building glut you saw in housing, though not so directly driven by the bubble. In simple, you build small business platforms for the places people live. The more people spend in that area, the more small businesses (and larger business retail points) can be sustained. Historically, businesses try to hit the spot where there are enough new residents to support them but not so many other companies get there first. This means the CRE chases residential real estate by 6-12 months. It also hides the construction industry problem as when RRE stalls the employees can continue to make money by moving to CRE for a few months. HOWEVER, CRE has definitely peaked – just as RRE did about 9-10 months ago.
Now, declining housing does not guarantee a recession, even though all but one of the last 80 years’ recessions have included falling house prices as a leading indicator. So I’d not be as certain were there not some other indicators, as already hinted. And that’s the way banks are acting, particularly in how they lend to one another. Quite simply, they’re not – or not as easily.
Basically, the LIBOR (London Interbank Offered Rate) has been indicating quiet desperation as borrowing banks are willing to pay higher rates when compared to the ‘official’ interest rates. “So what?”
In a nutshell, this is how a lot of businesses get by on a month to month basis. In simple, a bank borrows so it can then fill short-term loans to customers who need a little end-of-month (or quarter) money — the inventory’s there, the orders ready to fill and the accounts receivable are standing to be paid, it’s just there’s no cold hard cash to pay today’s payroll. What the higher rates are saying is that the lending banks aren’t as sanguine about the money coming back. If they think more defaults are in the works they’ll charge higher rates on what they DO get back to make up the difference.
And to a certain extent this is a self-fulfilling prophecy. Some businesses could borrow and repay at half a percent lower, but as it is… bankruptcy looms. And hits. Which pushes rates higher in turn. Though there is a point of “enough”, the question of where that point might be is… not comfortably answered as long as there’s a difference between LIBOR and ‘norm’.
Add to this… Unemployment claims are brushing 350,000. Now despite population growth, this number has appeared to be a ‘magic number’ for every recession since 1960. As with the housing rates, every recession save one has been preceded by this number.
Now adding to this issue is the fact that food and oil prices are climbing. As people have to dig deeper for necessities, their ability to purchase not-so-necessary products declines — that’s rather obvious. Unfortunately, a LOT of services fall into the not-so-necessary. If nobody’s using the service, there’s no job. Again it’s a bit self-fulfilling prophecy, but it’s the basis of the recessionary unemployment factors.
Bluntly, I expect a recession to “officially” begin in the first quarter of 2008. (Meaning after the fact that’s where the NBER will peg it). Since it’s a housing DRIVEN recession, history tells us it’ll take about 4-5 years to turn around instead of the more normal 2-2.5 years. That’s not good news for anybody.