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Recession? 13 signs it's here

Thu, Feb 21 2008, 10:07 GMT
by David Karsbøl

Saxo Bank

Whether or not a full-scale recession is on the way is the question on everybody’s lips in 2008. Saxo Bank’s Head of Strategy, David Karsbøl, believes it is already upon us. Taking 13 key indicators, David Karsbøl, one of MoneyWeek's top 10 tipsters of 2007, explains why 2008 looks certain to bring a recession to the economy.

1. Bank credit is drying up. Banks are becoming more reluctant to issue high-risk mortgages with stories on tighter lending terms now appearing on a regular basis. This is a follow on from the credit crunch, with banks now being more conservative in their lending and appraisal standards. They are tightening their lending policies and it is generally more difficult for homeowners to finance new homes.

2. The number of months of supply of US houses for sale is at 9-10 compared to 4-5 historically. This suggests that prices could continue lower by at least 10-15%, but probably more. This figure shows the estimated amount of time it would take to sell the number of houses currently on the market in the US. At the moment this is double what would normally be expected, something that reflects a significant downward pressure on prices. Added to this is the increase in people owing more on their homes than what they are worth - the number will increase further and more homes will be repossessed by lenders.

3. Household finances are maxed out. Financial obligations as a percentage of disposable income are at all-time highs. This means that income is not being entirely spent, but rather it is increasingly being used to pay back interest on already existing loans. The result of this is that even if rates are low, consumers may not be willing to borrow, hence the expected economic stimulation will not happen as they will have no where to turn to with the new money. There are no new asset bubbles to replace the housing market and so there is no obvious destination for leveraged investments among the general population.

4. US M1 Money Supply Growth Year-on-Year has been below zero since mid-2006. This means that credit creation has apparently stopped or part of it has stopped which is a negative sign after a sustained period of strong money supply growth.

5. The Unemployment Rate has stopped dropping in the US. The figure is now at 4.9% compared to 4.5% at the end of 2006. This is what we believe usually happens when the housing market has topped we feel that the unemployment rate could go as high as 8% over the next two years, which is one indication of a recession to come.

6. S&P500 Earnings Growth Year-on-Year is now negative (-8%) after seeing double-digit growth every single month since 2002. Growth premium in stocks should be smaller now than previously, which is an indication that both businesses and consumers are scaling down on consumption.

7. Eurozone Retail Sales Year-on-Year at the beginning of February was -2%. This figure is the lowest in the measures history, i.e. since 1996. This is an obvious sign of economic slowdown and is further reflected in the poor Consumer confidence figures, of which more later.

8. US Chain Store Sales growth is dropping significantly. The 13-week average is approaching all-time lows. This is a key economic marker and these disappointing figures point squarely at a slowdown.

9. ISM Non-Manufacturing in the US released at the start of February showed a massive contraction. The Non-Manufacturing ISM Report is an important economic indicator as it shows the purchasing levels of the US service economy. Clearly when these figures contract, we are looking at a negative outlook for the service sector - another clear sign of recession.

10. UK Consumer Confidence is at the worst level in the measures history, i.e. since 2004. This shows that already consumers are feeling the pain and are not too upbeat about the future of the economy.

11. US ABC Consumer Confidence at -33, the lowest since the early 1990's (the last housing recession). The significance of these points (10 &11) is quite apparent. That they should be so severe historically adds extra gravitas to their importance as an indication of impending recession or slowdown.

12. US Annualized GDP growth for Q4 was out at 0.6%. Although this is not yet negative, we are not far off seeing a contraction. What makes this figure so significant is the drop of over 4% from the Q3 figure, which suggests that the trend is heading towards a negative. Two consecutive months below zero, and we officially have ourselves a recession.

13. The US yield curve has been massively inverted until the spring of 2007 (spread between 3 month rates have been higher than 10 year rates). This is an indication that the fixed income traders believe the Fed has been tightening monetary policy too much, thereby suffocating the recovery and that ultimately both rates and inflation will have to move lower.

Published on  Thu, Feb 21 2008, 14:04 GMT

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