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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Ramsey Su who wrote (69075)	8/30/2006 1:03:02 AM
From: CalculatedRisk	Read Replies (1) \| Respond to of 110194

A Forecast for a Fork in the Road nytimes.com Excerpts: The economy has now come to one of those turning points that Dr. Moore loved. When this summer began, growth was moving along at such a nice clip that the Fed was trying to slow it down to keep inflation in check. But as Labor Day and the unofficial start of the work year arrive next week, the situation feels very different. The long-feared housing slump is here. Automobile sales have been falling. Gas still costs more than $2.80 in most of the country. The shopping slowdown that had already hit Wal-Mart has spread to more upscale chains like Starbucks and Whole Foods, as Daniel Gross first pointed out in Slate magazine. Perhaps most telling, the people at the Economic Cycle Research Institute are getting nervous. “We’re not calling for a recession yet,” Lakshman Achuthan, the institute’s managing director, told me. “But the risks to the economy have materially increased.” ADD his concern to some other indicators starting to flash red, and I think it’s reasonable to put something close to 50-50 odds on a recession starting sometime in the next year. ... Every three months, the Philadelphia Fed surveys about 50 economists, mostly from Wall Street, and asks for their forecasts, which are almost always sunny. But, fortunately, the Fed also asks them to put a percentage on the chances that the economy will shrink in each of the next five quarters. These percentages make up something I named the Anxious Index a few years ago, a term the Fed has since adopted, and the index has been far more prescient than the economists’ headline forecasts. Since 1968, when the forecasters have said that there is a 30 percent chance or better that the economy will shrink in the following quarter, it almost always has. (The 1987 stock market crash, which didn’t produce a recession, is the one exception.) In the most recent survey, released Aug. 14, the economists put only a 10 percent chance on a downturn in the fourth quarter of this year. Further out, however, they were less confident. They said there was a 16 percent risk that the economy would shrink two quarters from now. About 40 percent of the time they have gotten this anxious in the past, a recession has started at some point during the following year. This cycle is probably even harder to predict than most, because of the mix of economic strengths (like the healthy balance sheets of banks and companies) and weaknesses (like the iffy balance sheets of consumers). Not even the job market offers a clear picture, which makes the Fed’s job trickier. If you look at highly skilled jobs, be they in engineering or general contracting, the economy seems quite strong, as Ben Bernanke, the Fed chairman, has said. But for workers without college degrees or specific training, this looks a lot like a slump. ... At the Economic Cycle Research Institute, the forecasters have noticed that the last six months bear a striking resemblance to two different kinds of periods: the run-up to a gentle slowdown, like those of the mid-1980’s and mid-90’s, and the run-up to recession. In both situations, consumer expectations fall while interest rates and inventories rise, which has already begun to happen. But the two paths — slowdown and recession — historically diverge sometime after the six-month mark. Starting Friday, with the August employment report, we will begin to get a sense of which road we’re going to take. I hope you enjoyed your summer.