Markets & Finance

Around the Street: Yes, It's a Recession


Fresh data point to December 2007 as the start of the pullback, which is alarmingly sharp. The market swallowed this news and swooned

From Standard & Poor's Equity ResearchNow it's official. On Dec. 1, the Business Cycle Dating Committee of the National Bureau of Economic Research—the widely acknowledged arbiters of when the U.S. economy enters and exits economic downturns—pegged the start of the current U.S. pullback to December 2007. And as if to hammer the point home, investors eyed reports on manufacturing and construction released on Dec. 1 that revealed contracting activity in those key sectors of the U.S. economy, including the lowest reading on the Institute for Supply Management's (ISM) manufacturing index since 1982.

Investors clearly didn't like what they saw, and the gloomy data—along with continued uncertainties about U.S. holiday retail spending and a cautionary note on U.S. consumer credit from Oppenheimer analyst Meredith Whitne —helped spark a sharp stock market sell-off (BusinessWeek.com, 12/1/08) on Dec. 1.

BusinessWeek and S&P MarketScope staff on Dec. 1 compiled the following insights from Wall Street economists and analysts:

National Bureau of Economic Research

The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, Nov. 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions. It determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

A recession is a significant decline in economic activity spread across the economy and lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economywide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then.

David Greenlaw and Ted Wieseman, Morgan Stanley

The manufacturing sector is now in the grips of a major recession—and conditions are likely to get a good deal worse before they get any better. ISM data were about as we expected but weaker than consensus. The composite manufacturing ISM index fell a further 2.7 points in November, to 36.2, another new low since 1982. The key orders (27.9, down from 32.2), production (31.5 vs. 34.1), and employment (34.2 vs. 34.6) gauges all extended their recent collapses to fall deeply into recessionary territory. Weakness in orders has been particularly pronounced, with the abyss hit in November exceeded only in two prior months, both in 1980.

The weakness was again broadly based across industry groups. The only industries reporting expansion in November were apparel and paper products. The prices-paid gauge slipped all the way to 25.5—the lowest reading since 1949. As recently as June, the price gauge was at 91.5, the highest since 1979. There has never before been such a massive collapse over such a short period that has come anywhere near what has occurred in this episode. Domestic activity has now deteriorated into a severe contraction, and exports are now starting to show some major softness as the U.S. recession goes global. An inventory overhang is also starting to become more apparent.

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.


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