U.S. Recession Indicators Are All Pointing South: Caroline Baum

Feb. 6 (Bloomberg) -- When it comes to life's certainties, data revisions rank right up there with death and taxes.

With that caveat in mind, it now appears that the four indicators used by the National Bureau of Economic Research's Business Cycle Dating Committee (BCDC) to assess turning points in the economy have peaked.

Not by very much, mind you. And not for sufficiently long for the BCDC to make a determination that a recession has begun. The committee typically waits anywhere from six to 18 months after a recession has started to make it official.

As it now stands, though, the four indicators are all off their highs, with industrial production and real personal income less transfer payments peaking in September, real manufacturing and trade sales in October, and, most recently, employment in December.

``When all four kind of go south -- as well as a fifth, Macroadvisers' monthly GDP index -- it's a strong signal saying we need to start worrying,'' says Maurine Haver, president of Haver Analytics, a provider of databases and software products for economic analysis.

Start worrying? Worrying seems to be in full bloom. The economy has become the numero uno issue for Americans in an election year, according to opinion polls.

Our elected representatives have heard the people's cries. The House of Representatives passed a $146 billion fiscal stimulus bill in what surely must be record time. The Senate Finance Committee has its own version in the works.

Strong Fundamentals?

President George W. Bush and his Treasury secretary, Hank Paulson, are pumping out plans as quickly as aggrieved parties (homeowners, financial institutions, consumers, businesses) can ask for help, even as they tout the economy's fundamentals as ``strong.''

In other words, aside from a house of cards built on a mountain of debt, everything is fine.

Federal Reserve Chairman Ben Bernanke endorsed the idea of fiscal stimulus in congressional testimony last month as long as it was temporary and implemented on a timely basis. Just in case Congress wasn't up to the task, the Fed slashed its benchmark interest rate by 125 basis points in an eight-day period in late January. That followed a 100-basis-point reduction in the last four months of 2007.

To be fair, the recent highs in the four recession indicators are hard to discern on a long-term chart with the naked eye.

F-O-R-E-cast

``They haven't really rolled over significantly,'' Haver says. ``We are looking at values lower than a couple of months ago.''

The same holds true for the monthly gross domestic product index compiled by Macroeconomic Advisers, a St. Louis forecasting firm, from the same underlying monthly source data the Commerce Department uses for its quarterly report. Macroadvisers' GDP Index peaked in September, according to Ben Herzon, a senior economist at the firm. The modest decline from September through November ``is not conclusive,'' he says.

It may not be conclusive, but the prefix on ``forecast'' is there for a reason.

``Our bet is that the U.S. economy has entered a recession,'' writes Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago, in his latest published forecast. It's a recession that will be ``dominated by weakness in household spending,'' defined as the sum of personal consumption and residential investment expenditures, he says.

Using these two measures, households have been running a deficit -- spending more than their after-tax income -- from 2001 through 2007, according to Kasriel. ``Until 1999, there had been only six years in which households ran deficits. Two of them --1932 and 1933 -- aren't hard to explain.''

Stressed Consumers

What about the recent past? From 2003 to 2005, inflation- adjusted money market rates were either low or negative, creating a disincentive to save, he says. House prices were rising faster than the cost of carrying them (mortgage rates). Mortgage loans were available to anyone who asked.

As a result, ``household borrowing relative to disposable personal income hit a postwar record in 2006,'' Kasriel says.

No wonder the percentage of consumers reporting financial distress hit a two-decade high in January, according to the Reuters/University of Michigan Survey of Consumers.

Some economists are adamant that the U.S. economy isn't in or going into recession based on record new orders in December. After all, today's orders are tomorrow's output. Industrial production may yet exceed its September high.

Missing Links

It isn't likely to be sustained, given the tightening of credit standards, pullback in consumer spending and signs of softer demand from overseas. The Fed's January 2008 Senior Loan Officer Survey found that banks tightened lending standards on a ``broad array of loan types'' over the last three months and increased the spread of loan rates over their cost of funds. A record 80 percent of banks tightened standards on commercial real estate loans. Demand for loans weakened for both businesses and households, the Fed said.

This isn't the backdrop of a healthy economy.

When the NBER announced on Nov. 26, 2001, that the expansion had peaked in March of that year, it did so even though personal income was still rising. Revisions revealed a peak.

Current indicators may fall victim to data revisions as well. Those changes may turn peaks into valleys -- or mole hills into mountains.

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net