Whither Goldilocks?

Every good adventure — be it an advertising campaign, religious evangelism, political battle, or even a war — requires a memorable phrase, repeated over and over again, as part of the broader marketing effort. It can even something as pedestrian as a catchy jingle or theme song.

Market rallies too need their marketing spin, something to give comfort to its adherents in times of stress. For the Bulls who have enjoyed the rally off of the summer lows, that mantra has been "Soft Landing / Goldilocks Economy." 

This despite a plethora of evidence that shows that a soft landing is an exceedingly rare and mythical creature. Consider the 1994 soft landing — the one true soft landing out of 16 Federal Reserve tightening cycles. It is the equivalent of performing successful neurosurgery with a shovel and mallet.

After the 1990 recession ended, we saw an upswing in manufacturing and industrial production. When that softened a few years later, there were numerous other economic sectors to pick up the slack:

– The wireless build-out was accelerating;
– The internet expansion was still very early stages;
– The PC upgrade cycle was in full swing (286/386/486/586);
– Windows 95 was a big economic event;
– Markets were in the middle of an 18 year bull run.

The question at present is simply this: What will step up to replace Housing as the prime economic driver?  So far, there is little on the horizon to act as the wireless/internet/pc build out of the 1990s. 

Recent macro reports confirm what we have been calling the slow motion slow down; Yesterday, we saw the worst Philly Fed report since the 2001 recession:

"The pace of activity in the region’s manufacturing sector slowed in September, according to firms polled for this month’s survey.  Indicators for general activity, new orders, and shipments fell substantially from their readings in August and suggest no growth this month. Overall employment, however, was slightly higher. Firms continued to report a rise in prices for inputs, although these cost increases were less widespread than in previous surveys. The region’s manufacturing executives were significantly less optimistic about future activity, with most indicators dipping to their lowest readings in six years." (emphasis added)

Even the deservedly disparaged re-jiggered Leading Economic Indicators — gamed by its cheerleading creators to be overly bullish — has been down 5 of the past 8 months. Jeez, the folks at the Conference Board have to be wondering what the hell they must do to make these LEIs positive — if you can’t win even by cheating, it should make you at least wonder WTF is up.

Let’s consider specific sector evidence:

• Housing, the prime driver of the lion’s share of economic growth over the past 5 years, is contracting rapidly.

• Sectors directly related to Real Estate are showing stresses; Washington Mutual, the nations largest mortgage writer, said the current environment in the banking industry is "difficult" and is expected to remain "very difficult" on the revenue side for some time. Masco, one of Home Depot’s largest suppliers, cut their outlook for 2006 profitibility due to "the severity and rapidity of the current housing decline;"

• Advertising is the canary in the coal mine. Yahoo, magazines, upfront TV sales, newspapers are all showing signs of sales stress. Niche targeting is gaining versus broad advertising campaigns — a clear sign that advertisers are pulling in their dollars;

• Revolving credit has replaced mortgage/HELOC as the consumer’s last option for spending cash;   

• The hottest market sector recently has been semiconductors; Yet the book to bill ratio has slipped to "parity" — meaning little or no additional growth is expected; Both Japan and Germany semi sales are down on either a month-to-month or year-over-year basis;

• Transports have been notably mixed; For each Fed Ex, there’s been a UPS, for every CSX there has been a Norfolk Southern; A robust economy does not typically see such disappointing numbers or lowered guidance from the Trannies;

Earnings ex-expenses? One final note: I have not been a believer that Labor costs are rising terribly; However, I took notice when Federal Express announced a 20 cent per share hit to their 2007 earnings, which was then dutifully reported ex labor costs; Are we now going to report profits ex-expenses?

The issue isn’t soft landing or not; It is between whether we have a hard landing or a recession — with all that it means for profits, and equity prices . . .


Business Outlook Survey
Federal Reserve Bank of Philadelphia
September 2006

The Conference Board U.S. Business Cycle Indicators

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What's been said:

Discussions found on the web:
  1. Bob_in_ma commented on Sep 22

    It seems to me that things have moved from a possibility of a hard landing, to just about a sure thing. The builders are only just now really slowing construction and the effects of this are only beginning to be felt by the resty of the economy.

    Now the question is, what are the chances for a really hard landing. A while ago, Barry and others spoke of the debt bubble. Each player in the financial markets seem to think they have off-loaded the risks from mortgage defaults onto others.

    Who is holding the first loss positions in all these CDOs/CMOs? I’m sure the mortgage lenders are holding some, but how much? How many pension funds are invested in these?

    There was a story in the WSJ the other day on the use of exotic mortgages that “found that 9% of recent home buyers obtained a payment option mortgage, compared with 4% in a survey conducted last year. ”

    The really interesting figure was the number of people who didn’t know what typew of mortgage they had: 41%

  2. Craig H commented on Sep 22

    Stephen Roach was on Bloomberg TV yesterday (the clip is still available on their site) and he said that he heard anecdotally from people in the biz that commercial construction is also cooling rapidly now.

  3. ticktock commented on Sep 22

    Good points Barry. The only one I would quibble with is that revolving credit is the consumer’s last resort. Not true – when the CC’s get maxed out, it will then be time to cash out those retirement accounts.

  4. S commented on Sep 22

    We’re all smarter than average, right?

    Our intellectual advantage enables us detect precise tops and squeeze out every last basis point of performance.

    In musical chairs, we always get a seat when the music stops. It’s always the other guys who are left standing.

  5. S commented on Sep 22

    BTW, great synopsis.

    Profits ex expenses – too funny!

  6. lurker commented on Sep 22

    Hey I know! Let’s start selling houses to the Chinese! All those empy condos in Vegas and Florida will be just the thing for all those US dollars the Chinese have been piling up by the truckload lately. RE Brokers better learn Mandarin along with Spanish.

  7. Grodge commented on Sep 22

    I’ll play devil’s advocate. What about economic growth in BRIC countries with a build-out of infrastructure not unlike the IT build-out that occurred here in the 1990’s?

  8. me commented on Sep 22

    ” he heard anecdotally from people in the biz that commercial construction is also cooling rapidly now.”

    I never bought that argument. Why would commercial take off when the consumer is faced with a steep slowdown.

    It is the same that business investment will takeover. The “best economic” climate ever, booming economy, and business sat flush with their cash on the sidelines, and now that the consumer is finally maxed they are going to invest and hire? Duh.

  9. diva commented on Sep 22

    lurker – remember, we sold ‘everything’ to the Japanese back in the 80’s. (they lost their shirt)
    I guess that ploy would work again…..

  10. crack commented on Sep 22

    Doesn’t Century 21 already have an ad where the agent learns some chinese dialect?

  11. HT commented on Sep 22

    Been a believer/beneficiary in/of the US housing hard landing for last 18 months.

    What does the panel think of real estate outside of US?–specifically eastern europe? Romania/Bulgaria etc.?

  12. Cherry commented on Sep 22

    4 possilbilities:
    1.Soft Landing: Growth weakens mildly, but doesn’t cause overly big reduction in capacity
    2.Hard Landing: This is what 2001 was. No real contraction in growth, but stagnation for a few quarters leading to reduced capacity and higher unemployment
    3.Recession: Last one was 90-91. Similiar to a hard landing but harder to recover from as quickly and capacity is further reduced.
    4.Crash/Depression: See, 1929…

  13. david foster commented on Sep 22

    Was there supposed to be a link with the FedEx item? Did someone really report “ex labor costs” or are you kidding?

  14. Grodge commented on Sep 22

    Capital is still sloshing around somewhere: so where will it go? Foreign RE seems like a good investment, especially if worlwide infaltion is on the rise.

    But how does an individual investor get into that market?

    I have bought some international RE through the ETF: RWF and the mutual fund: IRFCX, both run by Cohen & Steers. Not much exposure to Eastern Europe, though.

    Any other thoughts?

  15. Grodge commented on Sep 22

    Interesting article my Mish. He seems to contradict himself a bit, but maybe I’m not appreciating the nuance.

    At one point he says that the condo and new home build-out is continuing as well as as the build-out of strip malls, but then he says that this about to stop precipitously. Seems to me that Mish is corroborating the natural economic brake that will be put on a deflationary bias.

    Another thought: can we have relative deflation at home, but see inflation in developing markets, especially foreign real estate?

  16. mh497 commented on Sep 22

    The 1994 soft landing had the benefit of oil prices that had declined since the 1990 recession, which I think was a bigger factor than the Fed managing to walk the tightrope.

    This time we had 3 years of escalating oil prices.

    The rapid drop in oil prices now I think is a result of the rapid cooldown in the US and probably China. I don’t think it’s going to improve the situation in the short term as some people do.

  17. S commented on Sep 22

    Treasurys are begging the FED for a surprise 50bps cut. I don’t see how the FED can accomodate given the language from the last meeting and with Lacker dissenting.

    Pressed my short bet.

  18. HT commented on Sep 22


    Mainly through, unfortunately, illiquid LP arrangements. Goldman does a lot of these [large $ commitment] but so does smaller boutique firms. Typically on commercial side– hotels/resorts etc have been what I’ve seen. If nothing else, could be a good tax right off to go visit possible investment….

    BR–any thoughts?

  19. crack commented on Sep 22


    I think he is referring to projects/developements that are already sufficiently far along that not completing them would be worse than completing them and taking a hit. Think high rise condo buildings and large strip malls. New projects aren’t being started, but existing ones may be being finished.

  20. Mark commented on Sep 22


    Maybe instead of the “Goldilocks Economy” it was the “Pamela Anderson Economy” all along. Looked good from a distance but up close and “personal” it was another story.

  21. HT commented on Sep 22


    do you have specific info as to eastern europe? agree completely about US market

  22. Bob_in_ma commented on Sep 22

    “Maybe instead of the “Goldilocks Economy” it was the “Pamela Anderson Economy” all along. ”

    Two big asset bubbles, but no real substance? ;-)

  23. cm commented on Sep 22

    One recently rehabbed empty office property where I work (and there was a great need at least judged by its prior shape) is advertised as “proposed biotech/medical devices space”.

  24. Kevin_r commented on Sep 22

    Doesn’t Century 21 already have an ad where the agent learns some chinese dialect?
    That’s Mandarin they are all speaking in that ad.

  25. Mark commented on Sep 22

    I knew somebody would run with the “artificial enhancement” theme!

  26. crack commented on Sep 22

    This is sort of old, and more western european, but it does point to a housing bubble in Europe.


  27. crack commented on Sep 22

    This is newer, and again mainly mentions western europe, Spain in particular. Again it mentions a housing bubble in at least the western part of Europe.


  28. dblwyo commented on Sep 22

    Good post and interesting comments.

    Commercial construction lags residential and both are lagging to GDP growth and consumption demand. As is btw employment – reflecting old decisions.

    However GDP growth is slowing but not severely. Looking at the data the best you can see is that growth looks be 3% or under, which is not bad all things considered.

    But let’s consider this the Cinderella economy – where everything has to go right. And ask is it early in the ball or is clock chiming 11 ?

  29. brion commented on Sep 22

    Yea. “It’s different this time……It’s much much worse”

  30. CA Guy commented on Sep 22

    Barry: New reader. Great site!

    I too am confused by those who say that commercial construction will pick up the slack. I know there are alot of public facilities in the pipeline such as schools, and some hospitals are on a real tear, expanding their number of sites immensely (here in N. Cal it is Kaiser).

    As for other commercial sectors, it makes zero sense. How much can a maxed-out household spend? Not to mention that during a brief time driving about, anyone can see millions of already vacant square feet. It’s as if the whole economy has lost its senses.

  31. cc commented on Sep 22

    this bubble bursting will be huge ,
    but less so than the one that carried the economy in the 90’s

  32. vfsv commented on Sep 23

    “The hottest market sector recently has been semiconductors; Yet the book to bill ratio has slipped to “parity” — meaning little or no additional growth is expected; Both Japan and Germany semi sales are down on either a month-to-month or year-over-year basis;”

    You seem to be mixing your metaphors a little here.

    SEMI B:B at 1.0 (actually 0.996, see http://www.viewfromsiliconvalley.com/id52.html) is a sign semiconductor EQUIPMENT is falling & has no direct bearing on chip sales. Semiconductor/chip/IC sales are reported by SIA & they are still y-o-y up. (Although growing more slowly than wafer area shipped, which we see as a bright, blinking sign of future weakness, see http://www.viewfromsiliconvalley.com/id248.html).

    Unfortunately the (SIA) numbers showing y-o-y Japan & Germany chip sales falling is due to growth in China. over the last 5 -6 years, ALL SIA regions have lost sales & share to China. Now, when China chip sales start falling, that’s when you there’s a problem!

    Keep up with all the Silicon Valley issues at http://www.viewfromsiliconvalley.com.

  33. tyoung commented on Sep 23

    Stay away from Eastern Europe RE. It’s been picked over completely by Brits/Irish amateur investors leveraging the equity in their own bubbles. E. Europe was seen as a euro convergence play a number of years ago ie interest rates would fall dramatically in the runup to their joining the euro which would spark a RE boom. Well there’s been a boom but convergence is not happening and the euro is as far away as ever.
    The RE bubble is global.

  34. S commented on Sep 23


    3% GDP growth? Not sure how you get to 3% GDP growth for 3Q. It was 2.9% in 2Q and the economy has deteriorated since then. First, housing starts were fewer in 3Q than 2Q. Second, GM and Ford both cut production AND laid off workers during the quarter. So, not only did GM and Ford buy less stuff from suppliers, but the laid off workers likely pulled in their horns and cut back on spending. Third, 2Q GDP benefitted from a whopping 22% increase in non-residential construction spending. That kind of growth in unsustainable. Finally, about 0.5% of the growth in 2Q came from building inventory. That can’t be repeated in 3Q.

    I’m guessing 3Q GDP growth will have a 1 handle.

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