Recession seems imminent

More troubling economic news this week.

First, the Institute for Supply Management reported that it’s manufacturing survey index showed a contracting industrial sector. Any reading below 50 means contraction. The reading was 47.7 last month. The last time it was this low was in April 2003, coming out of the last recession. Readings below 45 usually indicate a recession is occurring. We’re not there, yet, but we seem to be on the way.

Next, residential construction spending showed a 2.5% decline in November. The housing market is dropping, that’s no surprise. But, it’s impact on the economy as a whole still seems under-acknowledged.

Then, initial jobless claims fell 21,000, but the 4-week moving average, which better indicates labor market trends, was up to 343,750. This number is usually up around 400,000 in a recession, meaning we may not be there, yet. The last time the 4-week moving average was this high was in the summer of 2004, during the slow recovery from the previous recession.

Next, shipments of factory goods excluding petroleum and coal showed its fourth decline in 6 months. This indicates that, other than higher energy costs, shipments of factory goods is in a downward trend.

Today, payroll employment came out at +18,000 jobs. That may sound good, but a large part of that number is based on assumptions about jobs being created by small companies. Large revisions in this number are normal, especially at turning points in the economic cycle.

The payroll employment report was accompanied by a report of the civilian unemployment rate at 5.0%. Unemployment hit a cycle low of 4.4% just last March. When the civilian unemployment rate rises from its cycle low to 0.4% above that rate, a recession is usually imminent. 5.0% is 0.6% above 4.4%.

The stock market finally seems to be noticing with the S&P 500 down over 10% from the recent all-time high it hit last October. Although a 10% drop may not seem bad, recessions frequently cause 40% declines in the stock market.

It’s not all doom and gloom, though. Although the economy may be rolling over into a recession, this is a normal part of the business cycle. As long as our government doesn’t do stupid things to try to “solve” this “problem,” we will soon see an upswing in the market and economy.

Usually, the stock market drops long before the economy does. This time, it seems a little behind schedule. Despite this, the stock market also tends to lead the economy as we come out of a recession. Considering that most recessions don’t last more than a few quarters, this could very well mean the stock market could end up for the year.

That means this year could very well be an excellent year for bargain hunting!

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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If a shoe falls in the woods, and no one is around to hear it, does it make a sound?

In an earlier post, I brought up what could knock down credit markets. One issue was the availability of credit, which has been the subject of much pain and anguish, recently. The other two issues were interest rates and employment.

In the news today, the employment report for the month of August looked dreadful. For the first time in 4 years (when we were stumbling out of the last recession), payrolls tracked by the Labor Department shrank instead of climbing.

Could this be the result of financial service firms laying off workers in an attempt to adapt to current credit conditions? Could these laid off workers then have trouble making their home payments, thus promoting the negative spiral of home price declines, credit defaults, financial market troubles, and more layoffs?

I certainly think so. In fact, I believe this is the beginning of the other shoe dropping. I also believe the Fed will react as it always does, by lowering interest rates in an attempt to “jump-start” the economy.

This will, in time, lead to higher interest rates on longer dated bonds as foreigners demand higher rates to compensate for the dropping dollar. The dollar will drop further as more and more market participants realize the Fed will lower interest rates by printing more dollars (in other words, creating inflation).

How bad will this get? I don’t know, but lower employment and higher interest rates will make current housing problems look tame by comparison.

It’s a good time to avoid companies with lots of debt. It’s a good time to avoid investments related to the housing market or its financing (although a bit late).

More importantly, it’s a good time to be invested in securities that will benefit from this fallout. It’s a good time to have some cash that can be invested as the market goes down.

If inflation is a concern, it’s a good time to consider investing in tangible things (other than real estate) that are hedges against inflation. It’s not a bad time to consider foreign investments that may be hedges against inflation, too.

It’s also a great time to consider those companies that will fair best as we emerge from our credit market problems and into another growth up cycle.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.