The U.S. economy is “one giant soft patch”

The U.S. economy is “one giant soft patch” on the verge of a recession, economist David Rosenberg of Gluskin Sheff & Associates Inc. in Toronto, said today.
In a radio interview with Tom Keene on “Bloomberg Surveillance,” Rosenberg said the economy is in a “classic pre-recession pattern” and that “we are on the precipice of the economy contracting between now and the winter.”
Rosenberg called consumer spending, which accounts for about 70 percent of the economy, “the weakest link” and said that “housing is clearly not coming up off the bottom.”
“Capital spending is still positive but not enough to offset the other contractionary forces in the economy,” Rosenberg said.
The economy has slowed from last year. Gross domestic product expanded at a 1.3 percent annual rate in the second quarter after a 0.4 percent pace in the first three months of this year, according to Commerce Department statistics.
The economy expanded at a 3.1 percent pace on average in 2010.
The unemployment rate has been at or above 9 percent since April, according to the Labor Department statistics.
In an interview on Aug. 5, Rosenberg put the odds of a recession at 99 percent. “When you’re running the economy so close to zero, you’re like one little shock away from heading into a recession,” he said.

(Bloomberg, August 22, 2011)

Peter Schiff on CNBC : Is U.S. the Next Greece or Japan?

(from CNBC, May 24, 2010)

Irwin Kellner: It's beginning to look a lot like a "W"

After logging the fastest rate of growth in two years last quarter, the economy appears to be losing steam during the current period.

This is no big surprise; the consensus of forecasters surveyed weekly by MarketWatch has long been expecting slower growth during the fourth quarter.

Their latest projections call for a growth rate of 2.5% -- a percentage point slower than the government's preliminary take on the previous quarter. (See Economic Calendar.)

There's plenty of evidence that our panel may be right -- if not a tad optimistic. For one thing, total consumer spending -- the biggest single chunk of the economy -- fell in September for the first time in four months and by the biggest percentage since December 2008.

In October, retail sales excluding autos grew 60% slower than they did during the previous month, while preliminary reports for November show that consumer sentiment unexpectedly fell.

If you look closely you can see why consumers are pulling in their horns.

For one thing, personal incomes are barely growing as businesses have trimmed hours worked and cut wages and salaries. For another, employment continues to fall as the jobless rate edges ever closer to the postwar record of 10.8% set in November 1982.

The duration of unemployment as a percent of the labor force is the highest in at least a quarter of a century. More people are being forced to work part-time and/or beneath their skill level while the job openings rate is the lowest in recent memory.

This will continue as long as business can rely on increased productivity and outsourcing to take care of its needs.

Kellner's Forecasts

See economic calendar

date	report	forecast	previous
Nov. 23	Existing-home sales	5.55 million	5.57 million
Nov. 24	GDP revision	3.2%	3.5%
Nov. 24	Consumer confidence	45.0	47.7
Nov. 25	Jobless claims	510,000	505,000
Nov. 25	Durable goods orders	0.5%	1.4%
Nov. 25	Durables ex-transportation	0.4%	1.2%
Nov. 25	Personal income	0.0%	0.0%
Nov. 25	Consumer spending	0.3%	-0.5%
Nov. 25	New home sales	395,000	402,000
Nov. 25	Consumer sentiment	63.0	66.0

/conga/story/misc/kellners-forecast.html 42853

Consumer spending is also being suppressed by the $13 trillion in wealth people have lost because of the decline in prices of homes and stocks, along with their high debt loads and depleted savings accounts.

Industrial production barely budged in October compared with a 0.7% gain in September. New-home construction took a header in October, while prices of new and existing homes continue to tumble.

Home prices have a lot further to fall because supplies figure to keep rising. A record 14% of homeowners with a mortgage were either behind on payments or in foreclosure at the start of last month. This is the ninth straight quarter that this figure set a record.

Services are not immune, either. The ISM's measure of the economy's service sector fell unexpectedly in October after rising for a number of months.

In addition, many firms are worried over the rising cost of health care and energy not to mention talk of higher taxes. Washington is not focusing on creating jobs the way it should. ( See Nov. 10 column.) And states and local governments are raising taxes and cutting spending as they struggle to balance their budgets.

If all this were not enough there's the Catch-22 facing policymakers when it comes to economic policy.

Washington's budget deficit has exploded while the Federal Reserve has injected gobs of liquidity into the markets.

If these policies are reversed too quickly, they run the risk of pushing the economy back into recession. If they are not reversed quickly enough, interest rates will soar -- pushing the economy back into recession.

Holiday fear? You betcha.

(from MarketWatch.com, November 24, 2009)

David Rosenberg is trying to assess how a $20-trillion shock is going to influence the future

David Rosenberg' interview with Brian Milner:

You remain convinced that the U.S. is nowhere close to being out of the woods. Why is that?

We had three shocks in succession [in the U.S.]. We had a housing shock, followed by a credit shock, followed by an employment shock. Although credit conditions aren't back to normal ... there's no doubt that they are measurably better than they were just three to six months ago. But the other two shocks are lingering and still very significant.

You were predicting by 2005 that U.S. housing would take a serious tumble.

I had this bad gut feeling about home prices. I was early on the call. But you could see the cracks. We know that house price deflations don't end well. But this proved to be far worse than anything we saw in the 1990s.

Because you were an early bear at the table, plenty of smart portfolio managers dismissed what you had to say. Won't that happen again, now that the market seems to be bottoming out?

I know that people will say, well, there's the boy who cried wolf. And all I can say to that is: Remember, the wolf showed up at the end of the story.

I take it that U.S. housing remains the No. 1 concern.

It's hard to imagine that anything is going to stabilize until we put a floor under home prices. They are still declining to varying extents in most parts of the States.

What's critical in forecasting [the economic recovery] is trying to assess how a $20-trillion shock, which by the way is a 30-per-cent hit to the [U.S.] household balance sheet [on a par with what occurred in the 1930s], is going to influence the future.

This is very difficult to forecast. And there are long and insidious lags between a shock to the household balance sheet and the peak impact on consumer spending.

Why is that?

It takes time for households to determine if this is a permanent or temporary loss of wealth. If it's a temporary loss, there will be no impact on spending or the savings rate. If it's deemed to be permanent, then the impact is going to be significant, but it will happen quarters or years down the road. It takes a while for people to process.

So those predicting a turnaround by the end of this year are overly optimistic?

In a normal recession, we're off to the races by this stage of the cycle. But when you go back and take a look at other countries in other periods that also endured a credit contraction and asset deflation of this magnitude, the decline in GDP typically lasts two years, not 10 months.

And it takes six years for home prices to bottom out, and the unemployment rate typically rises over a four-year interval. There will be a time and place when we actually do put in that bottom. To think that it's going be this year is a little early.

You also point out that the average age of the consumer is also a big factor in crimping a consumer-led recovery.

We have the first consumer recession in the United States where the median age of the boomer is 52. The last time we had a [mild] consumer recession in 1990, the median boomer age was 34. They were still buying refrigerators and cars and microwave ovens. What's happening right now is that the boomer is going to his or her financial adviser and seeing two pieces of paper that scare them to death - their net worth statement and life expectancy table.

Let's turn to the other big shock, labour. You don't like what you see when you delve deep into the U.S. data, do you?

There are very disturbing trends. In lockstep with letting people go, companies have also been cutting people's hours at almost a record rate. The 33.2-hour [U.S. average] workweek is at a record low.

People don't look at that. But that is also a component of income. We have lost eight million full-time jobs in this recession.

In a normal recession, we'll lose 2.5 million. But not everybody was let go. Six million were. Two million were pushed into part-time work. The number of people working part-time and not by choice is up almost 80 per cent year over year. We have never seen a growth rate like that.

What does the dramatic increase portend?

The biggest effect is on income, which drives spending, which ultimately drives profits.

So I guess we should forget about consumer-related stocks for a while.

I still hear this from clients today: 'Don't count the U.S. consumer out. It never pays to underestimate the shopping prowess of the U.S. consumer.' I think people are still in denial. ... This is a new paradigm of frugality.

There has been a definite shift in psychology. So when you have [housing] affordability at record highs and very little thrust on home sales, there's valuable information there about the savings-spending relationship. It doesn't make you feel too good, admittedly.

People's attitudes towards credit, discretionary spending and home ownership have changed. This is going to take place over a period of years. To think that after eight months of a declining trend in consumer spending that this is over would be extremely hopeful.

So you would steer clear of consumer discretionary and housing stocks. What about U.S. financials?

What's the future business model? I would not be putting a large multiple on trading revenues. But they got dramatically oversold, and the Obama team did an excellent job in selling the stress test. But it's really hard to forecast the future in terms of what the structure's going to look like, how regulated they're going to be. What we do know is that the biggest client of the banks, which is the household sector, is going to be cutting back on credit. So it probably favors asset managers or those [other] parts of the financial sector that are geared toward savings.

Let's turn to Canada. Why so bullish on your homeland?

If you have the view, as I do, that Asia will come back first, then the implications for basic materials and industrials that are geared to that part of the world should be positive, at least in relative terms.

A third of the Canadian economy is devoted to the U.S. But that doesn't mean our market can't outperform. In fact, I think that it will because of the additional torque that we get from the push in the commodities sector.

Any more reasons to feel upbeat?

You don't have to do much more than take a cursory glance at the data to see that there are glaring differences [with the U.S.], that Canada is in much better shape.

How, ultimately, is that fiscal mess going to get cleaned up south of border? If you go back to the 1930s, you'll see that it was through relentless increases in marginal tax rates. That's going to work to our advantage.

I think that there's going to be a lot of money flowing into the Canadian capital markets in the next several years. It's very bullish for the Canadian dollar. ... Over time, Canada is going to be viewed as a bastion of stability.

You also say that Canadian fortunes depend on whether China's recovery story turns out to be real.

There's no doubt that our economy is very closely hitched to the U.S. market. But our stock market is actually very significantly tied to what happens in China, because roughly half is resource-oriented.

There's the old saying that in the land of the blind, the one-eyed man is king, and Canada is the one-eyed man, certainly relative to the U.S. If the story in China is the real deal, so much the better.

***

At a glance

Economist David Rosenberg, 48, started his first Bay Street job on Oct. 19, 1987 - one of the worst single days in stock market history.

Education: Bachelor and master of arts degrees from the University of Toronto

Career:

In 1987, four years after getting his start at Bank of Canada and Canada Mortgage and Housing Corp., leaves Ottawa for Bay Street and senior economics posts, first with Bank of Nova Scotia and then Nesbitt Burns.

In May, 2000, joins Merrill Lynch in Toronto as chief Canadian economist and strategist. In 2002, transfers to Wall Street as chief North American economist. Commutes to Toronto on weekends. Consistently ranked as one of the top economic analysts.

Jan. 1, 2009: Stays on after takeover of Merrill by Bank of America.

May, 2009: Moves back to Bay Street as chief economist and strategist with Gluskin Sheff + Associates.

Rosenberg has been recognized for his leadership and achievements in his field. He has ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years. He was also on the U.S. Institutional Investors All American All star team for the last four years, placing second in the 2008 survey.

Notable quote

"What we know about periods of asset deflation and credit contraction is that the impact on the economy tends to last for years, not quarters."

(from Globe and Mail, May 20, 2009)

David Rosenberg: American consumer spending is roughly 17% of the global economy

I am in a camp which believes that economy will be an elongated U-shape, but with a very slow and gradual climb out of the trough, more like this:

\_____/

Stock market will be elongated "W" shape. It will re-test its lows, it just having topped out in a bear market rally at its resistance level. It will now come to its senses and focus on business earnings, which will be subdued for a year yet. So it will be like this:

\_/\__/

David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc., former chief North American economist at Bank of America-Merrill Lynch, talked with Bloomberg's Erik Schatzker. The best ranking economist questions the pace of the recovery, sees elongated U-shape recovery and market re-testing the March 2009 lows.

00:00 Outlook for economy, equities; strategy
03:48 Consumer spending; currency market
06:02 Economic recovery; state of global economy

--The Standard & Poor’s 500 Index may fall beneath the 12-year low reached on March 9 because consumer spending hasn’t recovered from the longest recession since the 1930s

--“We have to get confirmation the March lows are going to hold. The conventional view was the November lows were going to hold. As we found out in the opening weeks of March, no, those lows didn’t hold.”

--Rosenberg will “keep an open mind as to whether the lows from March will hold or not as we go into the second half of this year. I’m not sure where the buying power is going to come from.”

--The S&P 500 rallied as much as 24 percent from an 11-year low of 752.44 on Nov. 20 to Jan. 6 on speculation the economy will recover amid government efforts to rescue banks and automakers. The measure erased those gains and fell another 10 percent to a 12-year low of 676.53 on March 9 as losses at lenders mounted and unemployment continued to rise.

--The nine-week gain that began March 10, the steepest over similar spans since the 1930s, was a “gargantuan short-covering rally.” He doesn’t expect the economy to recover in the second half. “I’m seeing no revival of consumer spending in the second quarter.”

--Retail sales in the U.S. unexpectedly dropped in April for a second month, indicating that rising unemployment is prompting consumers to conserve cash. The 0.4 percent decrease followed a revised 1.3 percent drop in March that was larger than previously estimated.

--The benchmark index for U.S. stocks plunged as much as 57 percent from an October 2007 record as writedowns and credit losses stemming from the collapse of the subprime mortgage market climbed to $1.47 trillion. The measure rallied 34 percent from March 9 through yesterday as the largest banks said they were profitable, the government pledged $12.8 trillion to drag the economy out of recession and policy makers around the world cut interest rates to near zero.

WATCH VIDEO FROM BLOOMBERG
(from Bloomberg, May 21, 2009)