If I had to describe the economic reports so far this year in one word, it would be “disappointing.” Not all bad, mind you, but not very good on balance. The question is, are we headed for a recession this year?
On February 28, the government reduced its estimate of 4Q GDP from 3.2% (annual rate) to only 2.4%. Factory orders and industrial production were weaker in January. Durable goods orders were down in January for the second month in a row.
Consumer confidence fell in February and was revised lower for January. Retail sales were down in December and January as well. On the housing front, existing home sales, housing starts and building permits are all down this year.
On Tuesday, the National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index tumbled 2.7 points to 91.4 in February, a reading that historically has been associated with recessions and periods of sub-par growth.
Notice also how long the Index has been below 100, never even close since late 2006. A spokesman for the NFIB had the following comments:
“Uncertainty is a major cause of the Index’s dip. Lacking any progress in Washington and facing continued unknowns with the healthcare law, the EPA, the minimum wage, tax reform and more, it is no surprise that the Small Business Optimism Index fell, reversing a few months of modest gains.
As disturbing as the decline in job creation plans was, the plunge in expectations for improvements in real sales in the coming months and for business conditions 6 months from now, show that we shouldn’t expect blue skies soon.”
Pessimism was most evident in the NFIB’s earnings trends component where 27% of firms reported lower earnings. Also, fewer than half (47%) of small businesses surveyed said they had hired or attempted to hire new workers in the last three months.
Recession or Soft Patch?
In a Bloomberg column on Monday, investment writer Gary Shilling said a recession is “long overdue by historical standards.” He cited such things as the crises in Ukraine, the Middle East, China, emerging-market contagion and global protectionism as developments that might precipitate a recession.
The key word here is might.
In another article in Bloomberg on Tuesday, economics editor Peter Coy argued that the US economy is simply going through a period of slow growth, and that it should improve later this year and more in 2015. He says most economists believe that as well. Of the dozens of economists surveyed by Bloomberg, the median forecast is for GDP growth of 2.9% in 2014 and 3% for 2015.
Coy argues that almost five years after the end of the last recession, there’s still pent-up demand for housing and autos, which are two of the sectors that traditionally power a recovery. He attributes much of the current weakness to severe winter weather and the overhang of large inventories from late last year.
Coy quotes another economist, Michael Englund, chief economist at Action Economics in Boulder, CO. who noted that the 2013 tax increases are behind us now and there’s no longer the threat of the debt ceiling/default issue. He says the only serious threat to the recovery now is geopolitics (Ukraine, Middle East, China, etc.).
Coy and the various forecasters he interviewed were confident that the current slowdown in growth is just a “soft patch” and not the early stages of a recession. I wish I were so sure!
Will Janet Yellen Blink?
The Fed Open Market Committee (FOMC) will meet next Tuesday and Wednesday, and this will be the first policy meeting with Chair Yellen at the helm. We haven’t heard much from her since her confirmation hearings. However, at her swearing-in ceremony on March 5 she said:
“Too many Americans still can’t find a job or are forced to work part time…It is equally clear that the economy continues to operate considerably short of these [Fed] objectives.”
To me, those words don’t tell us a thing about whether she intends to change the current Fed policy in any way. Yet because she referred to the weak economy, there’s a lot of speculation that she may want to slow down the taper of QE. I don’t believe it.
In her confirmation hearings, Ms. Yellen said it would take a “significant change” in the economy to prompt the Fed to slow down the taper of QE. I don’t think the recent weakness in economic reports qualifies as a significant change.
Finally, I must mention President Obama’s controversial interview with an Internet comedian that aired on Tuesday. I thought it was disgusting and undignified! Yet it went viral and the website got over 10 million hits, mostly from young people who apparently thought it was hilarious.
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