The uniqueness of this recession is the panic about the eventual seriousness of the recession and temporary loss of credit access for many businesses in early September.  The panic was inevitable since the problem was neither anticipated by most nor well understood when it happened.  Everyone saw both Congress and the presidential candidates bewildered by the unexpected development and quite willing to defer to technical experts to find and implement a solution while they set about the important task of finding someone to blame.

This put enough spending, both investment and consumption, on hold to assure that October will be the weakest month in the economy since the post 9/11 period. Spending in the current quarter began at a level below the 3rd quarter average so GDP will drop in the 4th quarter as much a 4%. The downward momentum will bring another sizable, although smaller decline in the winter.

Private commercial construction will be one of the industries taking an outsized hit in the current quarter because it is so closely tied to financial markets.  Other industries with larger than average declines will be the motor vehicles and electronics industries.  The former has little reserve capacity left to absorb short term losses.  The latter is a very cyclical industry that tracks closer to the world economy than to the US economy.

The anticipated 4% GDP drop is an annualized growth rate.  It can occur if spending in November – the middle of the 4th quarter- is 1% below spending in August – the middle of the 3rd quarter. The jobs report for October already puts labor hour worked down 0.8% from August.  The retail sales report for October, excluding the decline in gasoline prices, show consumer spending on track to decline more than 1% from August to November. Ominously, hours worked on construction job sites are off 2.8% from August to October.

What will keep the 4% declining pace from continuing into next year?  Evidence that the credit fix is beginning to work will take the “hold” off some spending.  The economy began this recession with relatively lean inventories.  Dumping surplus inventories always accounts for most of the GDP decline during a recession via cuts in production jobs.  However, some panic selling of inventories is already underway.  Because commodity prices, especially oil and metals, were further above sustainable prices than usual at the onset of the recession, falling prices will cushion the decline in nominal consumer incomes. The ongoing price decline will be approximately large enough this quarter to offset the decline in spending that stems from the sharp recent drops in household assets, both housing and stocks.

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11/19/2008 - posted by Grus Personnel

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