Around the Street: Yes, It's a Recession

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Michael Englund, Action Economics

The U.S. construction spending report revealed the largely expected 1.2% drop in October, though the decline followed surprisingly firm nonresidential construction figures since July, given big upward revisions, alongside massive upward revisions in prior "home improvement" assumptions for the third quarter that sharply raised the construction trajectory into October.

The silver lining for the day's data was a round of large upward revisions to the prior construction figures for nonresidential construction, and home improvement, that have reintroduced remarkable resilience to the seemingly indestructible nonresidential sector. We continue to assume a decline for real nonresidential construction in the fourth quarter given widespread anecdotal evidence of deterioration, but there is notable risk that the sector will continue to "muscle through" the end of the year before turning south in the first quarter.

Meredith Whitney, Joseph Mack, and Kaimon Chung; Oppenheimer

Lower liquidity will continue to translate into lower home prices. Reduced liquidity has driven housing prices down more than 23% from the peak, and given the current liquidity trends, we expect prices to fall a further 20% from current levels.

Specific to the credit-card industry, we believe that well over $2 trillion of credit lines will be pulled during the next 18 months. This will be the result of risk aversion and funding challenges, but also of regulatory and accounting changes. The severe consequence of this cannot be overstated. While just over 70% of U.S. households have credit cards, more than 90% of those households revolve credit at some point during the year, or in other words use credit-card lines as a cash-management vehicle. Note that about half of credit-card users revolve every month. We view the credit card as the second key source of consumers' liquidity, the first being their jobs. Pulling credit at a time when job losses are increasing by over 50% year on year in most key states is a dangerous and unprecedented combination, in our view.

Lorraine Maikis, Merrill Lynch

We are projecting a [November comparable-store] sales decline of 11.9% for the specialty retail group, compared with a 2.1% decrease last year; and a 13.8% decline for the department stores vs. a 12.1% increase last year. Note that the department store group was helped by the retail calendar shift last year, while most specialty retailers reported composite figures that adjusted out the shift.

We believe consumers remained spooked by market turmoil and refrained from shopping during the month. We are projecting one of the weakest holiday shopping seasons on record. In November, our specialty retail stock index fell 23%, and our department store index fell 26%. The indices are now down 47% and 50% year-to-date and 57% and 68% from their peaks in April 2007. We remain generally cautious on the fundamentals of the group.