JAW Speak

Jonathan Andrew Wolter

Liz Ann Sonders’ points to less rosey economic news

without comments

Reading time: 2 – 4 minutes

In a recent commentary article on Charles Schwab, Liz Ann Sonders recently pointed to signs of an impending recession. We’re experiencing an oil price shock, inverted yield curves, and a real estate slump. Three things that, while inconclusive, are not particularly desirable.
Recession Warning Signals

First, the oil price phenomenon:

“Since the late 1990s, oil prices have gone up from $10 to $76 per barrel! With OPEC effectively flat-out producing, the U.S. producing a record low percentage of its own consumption, pipeline problems in Alaska and our imports coming from increasingly unstable regions, a major drop in prices is unlikely. Add the effect of rising interest rates and rising medical expenses, and consumers are now spending 55% of their disposable personal income on “essential” non-discretionary consumption, an all-time record. The massive infusion of liquidity by the Federal Reserve, via 46-year record low interest rates earlier this decade, had been the tailwind offsetting the headwind of rising oil prices.”

So maybe the liquidity we saw in recent years will evaporate. Interest rates are rising, and if home equity stops flowing, consumer spending won’t be able to keep buoying up the economy. Consumers are important too. They account for close to two-thirds of our GDP.

Combine tightening consumer budgets with recent indicators of inverted yield curves. Inverted yield curves occur when longer-term interest rates are lower than shorter-term rates. Historically, these have preceded recessions. Especially a special one where the Fed inverts the curve by raising the fed funds rate above the 10-year Treasury yield. The Fed did this in June. Since the ’70s this happened 6 times and in every case the economy shortly therafter (or already) was in a recession.

“One of the well-watched models for recession predictability [the inverted yields thing I mentioned - JAW] now shows the odds of a recession at greater than 25% based on the degree of inversion (as of Aug. 11) between the 10-year Treasury bond and the 3-month Treasury bill, presently at -0.10 percentage points.”

Past Recession Patterns
Regarding housing, mortgage application volume was down nearly 30% year-over-year as of July 28th. Housing starts? They were down 11% from a year ago. Existing and new home sales? Yes, down too: 9% and 11%, respectively. One could hastily conclude people aren’t opening mortgages with the increasing rates. Or maybe Americans are too greedy and want too much for their homes, so buyers are more scarce. Perhaps. The inventory of unsold homes was up close to 40%.

The impending doom Ms. Sonders predicts, may or may not materialize. Regardless, I want your articles or predictions of the current economy. Please leave a comment below, just click the “comments” link.

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Written by Jonathan

September 24th, 2006 at 2:53 am

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