Ali Velshi: Could a recession be coming?
Let me give you a sense of how I see the economy right now, looking at the major touch points for Americans.
You all now how the stock market’s been doing. As of today, the S&P 500 is up about 24 percent on the year. The median existing home price is up 12 percent on a national level. A 30-year conforming fixed mortgage can be had for a little more than 4 percent for people with good credit and a down payment. Jobs — and in an economy in which about 68 percent of economic decisions are directed by consumers, this is the big one — have been created every single month for more than three years.
But not enough jobs. Five years after the crisis and four years after the end of the recession, we are still conducting emergency central bank efforts in the form of QE3, to the tune of $85 billion a month, and the Fed is not likely to even begin tapering until, at the earliest, March of 2014 and possibly as late as 2015.
Chart: S&P 500 | fed funds rate
Effective Federal Funds Rate data by YCharts
GDP for Q3 is expected to come in on Thursday at about 2 percent annualized, which is lower than the 2.5 percent annualized rate we’ve been running at, and estimates for Q4, thanks in large part to the shutdown, are running in numbers that start with a 1. This is worrisome.
In about 20 percent of recessions in recent history, stocks, houses or both, have gone up, so standard indicators may not give us a sense of what is really going on. Quantitative easing has had the result of massively inflating the values of risk assets and stimulating very specific parts of the economy, largely those controlled by people and business with easy access to capital. The distribution of the proceeds of this low-interest Fed policy has not been particularly efficient.
Consumer confidence, which had been waning over the summer as mortgage rates crept up, took a nosedive in late September and early October, with more people citing the negative influence of the federal government than at any prior time in the University of Michigan’s consumer sentiment survey. We’ll get a new measure on Friday that was taken at the end of October into the first week of November, but the net effect of a decline in consumer confidence is that, despite continuing increases in housing and the stock market, consumers in this bifurcated, confusing economy are planning to pull back.
It's estimated that Americans will spend 1.6 percent more this holiday season than last year — the smallest increase in five years. Some of that has to do with how late Thanksgiving is this year, providing one less weekend to shop, although things like that confuse me, since no matter how late Thanksgiving falls, Christmas has remained constant since about the fourth century A.D.
All of this suggests there is a real, albeit small, chance that the United States will slip into recession. While most Americans feel disconnected from their federal government, the downturn in consumer sentiment is entirely in line with similar downturns when both the government funding and debt-ceiling debates simmered to a boil in the past.
Somehow, the federal government’s not being able to fulfill its basic mandate has a remarkable effect on our national and consumer psyche, though clearly not on our investor psyche. Which means if the tea party decides to take this budget or debt-ceiling debate to the brink again in January or February, we could tip the scales in favor of recession.
Regardless, at some point, this Federal Reserve donation to the economy will end, and it’s worth giving some thought to what sort of economy we’d have if that were the case right now. What would it look like without an $85 billion monthly cash infusion?
I imagine lending standards would tighten again, slowing business activity and, in particular, hiring. Mortgage rates, I am told by experts, could be expected to revert to their long-term levels under normal circumstances of 6 to 7 percent for a 30-year fixed, which would have a significant dampening effect on home buying and the sell-through of foreclosed homes. And we would generally see lower repricing of risk assets.
If GDP is running at 2 percent annualized or lower, we could reasonably expect that without Fed participation in the economy, it could be running flat or possibly negative. In other words, technically, a recession.
This is a hypothetical “What if the Fed pulled back now?” The reality is, it won’t. And as long Congress continues to be run the way it’s being run, the Fed will continue to be the grown-up in the room, at a cost of $85 billion per month and the resulting devaluation of the dollar and the inflation that could be expected to accompany that.
But this is to say that things may be much worse out there than they look and feel. Only consumer confidence, which has fed spending activity, in concert with the Federal Reserve, seems to have keep this economy afloat for the last several months. Real business activity is lacking, with an increasing proportion of corporate earnings coming from gaining productivity efficiencies and cutting costs rather than increasing revenue.
The economic emperor that is the U.S. economy is scantily clad but is being blocked from view by the Fed.
Error
Sorry, your comment was not saved due to a technical problem. Please try again later or using a different browser.