Ominous Clouds Seen for Economy

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The New York Sun

The Federal Reserve chairman is warning that a slew of economic problems could cause the Dow to slow noticeably in the months ahead.

The Dow plunged more than 200 points after the Fed chief, Ben Bernanke, renewed the recession jitters while speaking in Washington yesterday. It recovered late in the session to a modest 33.73-point decline, to 13,266.29.

“Mr. Bernanke didn’t predict a recession, but his gloomy words scared the hell out of the Street by suggesting it’s coming,” one trader said. “It’s a miracle the Dow didn’t close down at least a couple of hundred points.”

In a recent ominous warning, Merrill Lynch’s chief American economist, David Rosenberg, citing the mortgage crisis, said, “It will be a miracle if the economy avoids a recession.” A former Fed chairman, Alan Greenspan, also says he thinks a recession could be looming, but he gives it less than a 50% chance.

Meanwhile, in a private conversation on Wall Street, where these matters don’t stay private very long, a Fed governor told a Boston fund manager that “anyone who totally rules out a recession next year is off their rocker, it could happen very easily.”

Amid the ongoing economic debate, certain things are clear. Three to six months ago, recession fears, sparked by a continuing collapse in the housing industry and deepening turmoil in the credit markets, were everywhere. More recently, however, the cheery announcement of October’s strong employment report (the creation of 166,000 new jobs) and a surprisingly robust 3.9% rise in the third quarter’s gross domestic product gave some recession forecasters pause for thought. Indicative of this, much of the Wall Street chatter of an impending recession died down to a murmur. So, too, did talk that the economy will tank in 2008.

In fact, some economists, pointing to the Fed’s loosening of credit reins, solid third-quarter gains in consumer spending, and strong global economic growth, altered their lackluster 2008 outlook and projected a much peppier economic showing, positing GDP growth of 3.5% or more next year. Not so Madeline Schnapp, director of economic research at TrimTabs Investment Research, a well-regarded liquidity-tracking firm in Sausalito, Calif. Ms. Schnapp offers the opinion that investors should hold off before buying a sunny economic view, or else be gullible enough to buy the Brooklyn Bridge for $29.

Why such a gloomy Gus? Based on her assessment, Ms. Schnapp says she believes the economy is in an unmistakable slowing phase and that “a recession is a 40% possibility.”

Her reasoning: Beginning in September, the fallout in the construction industry, the severe contraction in mortgage financing, and the significant decline in net equity withdrawal from real estate began to spill over into the broader economy. Further, in the past six weeks, it has begun to have a negative impact on consumer expenditures.

Adding to her economic concerns is her belief that the housing and credit market slowdowns are far from over. Additional worries include rising energy costs, the drop in people refinancing their homes, and next year’s expected peak in the reset of adjustable rate mortgages, which will heighten pressure on the already-pressured mortgage financing industry.

Accordingly, she sees a sharp economic slowdown, with GDP growth in the current quarter running a measly 1.5% to 2%. For all of next year, her outlook calls for GDP growth of just about 2%.

The implications for the stock market, as she sees it, are pretty negative. In brief, “a tough time for equities, creating significant headwinds for investors.”

If indeed the economy is slowing, how does she explain away a rosier employment picture, namely the creation of 166,000 new jobs in October?

Ms. Schnapp ridicules that figure — which came from a survey conducted by the Bureau of Labor Statistics — as misleading and grossly overstated. Based on TrimTabs’ analysis, she argues, the American economy in October actually suffered its first monthly employment loss in four years. She says it didn’t add jobs, but actually shed jobs, a total of 35,000. She views the BLS data as heavily flawed, noting that the agency’s survey is biased toward larger companies and is incomplete.

A BLS spokesman says the agency stands by its reported data, which he describes as “the most accurate available numbers around.”

Maybe so, but there have been glaring inaccuracies in BLS’s data. For example, the agency’s first report on August employment showed a loss of 4,000 jobs, but the data was later revised to show a gain for the month of 97,000 jobs, in effect taking the economy to good from bad. The BLS also blundered in its initial report for all of 2006, first reporting a gain for the year of 1.5 million new jobs. Later, it revised the figure upward to more than 2.5 million new jobs. “The difference between TrimTabs’ estimate of job growth and BLS’s estimate of job growth is the difference between an economy that’s beginning to shrink and one that’s growing rapidly, and this one is definitely beginning to shrink,” Ms. Schnapp says. My strategy for getting a real handle on whether we’re recession-bound: Let’s ask Lieutenant Columbo. Chances are he’ll echo Wall Street: Yes, or maybe no.

dandordan@aol.com


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