Yesterday’s FOMC meeting has lots of people chattering about whether the Fed did too much or too little.
Forget consensus, there is a notable lack of any sort of recognition of where we are in the overall economic cycle. Some of this confusion is a lingering effect of Economists lagging recognition of balance sheet versus cyclical recessions.
What other factors are making this such a challenge for the seers? Consider:
• The Fed’s QE/Twist is an unprecedented intervention. Economists have not figured out how to quantify the impact.
• The Warm Winter pulled lots of economic activity forward. Housing starts, nonresidential construction, auto sales and retail all benefited.
• Q1 looked much better than it should have courtesy of that warm weather; Q2 ended up looking much worse for the same reason. Average them together and you get a mediocre (but non recessionary) 1.5-2.5% first half GDP;
• The aggressive layoffs in the
privatepublic sector — teachers, firemen, cops, etc. — is an ongoing drag on the recovery. It is offsetting about 1% of jobs in private sector.• Ex-Public sector layoffs, Unemployment would be about 7.2%
• Parts of Europe are already in a recession. Spain, Italy, Ireland and the UK are contracting; Germany and France are on the verge.
• Greece is in an outright depression (if you want to include Ireland also, I won’t argue with you)
• Apart from and in addition to the reductions in economic activity detailed above, the Euro Zone is teetering at the abyss of a Credit Crisis. Their Lehman moment has not yet happened.
• China and India have seen a rapid deceleration int heir economies.
• The perma-bull attitude that infects so much of Wall Street works better during secular bull than secular bear or cyclical bull markets.
• In the US, the public has suffered from recession fatigue. While some people continue to up their savings, big ticket discretionary items like vacations and cars are showing improvements.
Thus, we are not in a recession, but we cannot rule one out over the next 18 months. And while our growth is mediocre, it is certaily better than the contraction of Europe . . .
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