This Week's Jobs Data Supports Recession Rumblings
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Are we in a recession or aren't we? As you may recall from a previous column, the most accepted definition of a recession is a decline in a country's gross domestic product (GDP}, or negative real economic growth, for two or more successive quarters of a year. We haven't reached that point yet. However the jobs data out this week would surely support the position that we are in a recession.
On Wednesday, Federal Reserve Chairman Ben Bernanke told a U.S. congressional committee that a "recession is possible" and that although "we're slightly growing at the moment, we (the Federal Reserve) think that there's a chance that for the first half as a whole there might be a slight contraction." He added that he expects the economy to rebound slowly in the second half of the year, as the impact of lower interest rates and recently passed stimulus package kick in.
Yet consumer spending, 70% of the economy, was nearly flat in the first two months of the year. That isn't a good performance, but not bad enough to turn the 1st quarter gross domestic product negative. Also, the weak dollar is helping exports, and jobs in the service sector are growing. And the average pay scale for Americans was up 3.1% in the first quarter over last year, enough to off-set inflation.
Notwithstanding the negative bias of the news, the market was up 3.2% for the week, led by a 391 point surge on Tuesday. The blue-chip average is now down 4.9% year-to-date and 11% off its record close in October.
Looking to the bright side of the present conditions, some investors believe that the odds have increased for the Federal Reserve policy makers to lower short-term interest rates again when they meet at the end of April. This was born out by the surge in Treasury bond prices, (remember that as interest rates fall, bond prices increase). The market has now been on an upward trend since March 11, when the Fed unveiled a plan to lend certain Wall Street banks as much as $200 billion of its own Treasury bonds and bills for 28 days.
Several other Fed initiatives have helped prop up stocks, including the bailout of Bear Stearns, which was purchased by J.P. Morgan Chase at a fire-sale price and backed by the Fed. That action was a sticking point for many in that it raised the question of "moral hazard." Simply put, the moral hazard in the Fed's action is that the financial institutions, and the lenders to them, will continue to act in an irresponsible way if they know the Fed will be there to save them should things go wrong. This is not possible for the average man if he cannot make his mortgage payment.
Looking at the big picture you could argue the Fed did the right thing and perhaps avoided a domino effect of far-reaching consequences in the credit markets. The interesting aspect of the Bear Stearns affair is that it was largely a crisis of confidence. At the hearing on the matter last week, Bear's chief executive, Alan Schwartz said that the firm's balance sheet was strong - as good as that of any other financial institution - but that Bear Stearns could not keep up with the rumors. By Thursday, March 13, the rumors had become a "self-fulfilling prophecy" and resulted in a "run on the bank."
Kind of reminds you of times gone by. Much of what caused the stock market crash of October 1929 and the "great slump" of the early 1930's was a crisis of confidence. Hopefully we have learned from the past and now have enough checks and balances in our financial system to avoid an out-and-out depression. Unfortunately, there seems to be no way of side-stepping a mild recession here and there. We could be in one now, and some will feel it more than others.
Meanwhile, remember to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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