So says Joseph Stiglitz, Nobel Prize winner in economics, former World Bank chief economist, and current Columbia Prof.:
Alan Greenspan really made a mess of all this. He pushed out too much liquidity at the wrong time. He supported the tax cut in 2001, which is the beginning of these problems. He encouraged people to take out variable-rate mortgages.
His macro forecast has a 50% chance of U.S. recession. The other 50%?
"Growth will certainly slow to less than half of its 3% potential."
Why? All of this comes back to one of our favorite themes: Housing was the key driver of the economy from 2002-05. It disproportionately drove job creation and wages. Far too much capital was allocated to the entire sector, beyond the natural limits that population growth, income gains and interest rates place on it. As credit costs went higher and easy financing was choked off, the Housing boom began to reverse. This led American consumers to begin to run out of rocket fuel for spending.
The canary in the coal mine is the holiday shopping season.
The economic good news is that Americans typically keep spending -- even after they run out of money. The bad news is, well, you already know what the bad news is. We are already seeing some discouraging signs for Holiday Retail: Fed Ex (FDX) warns that shipping volumes are down; Starbucks (SBUX) reports its first ever decline in same store traffic.
After a weak back-to-school season, and a disappointing September and October, all eyes now turn to Black Friday. The usual suspects are cranking up their forecasts, but this year, they may be fighting to strong a tide.
We expect a modest holiday retail season -- anywhere from +2.5% to -1.5% year-over-year. Shopping volumes are likely to be slower than many Wall Street retail analysts are presently expecting.
This comes at the same time that inflation pressures are causing a quandary for retailers: If they raise prices, they risk losing some customers and revenue in the process (i.e., Starbucks). Or, they can eat the cost input increases, and lose profitability.
Why does this matter so much? Because Retail is serious business: According to the National Retail Federation [NRF], the last 2 months of the year account for 20% of total annual sales. For department stores, it's closer to 24% and for jewelers, 31%. And according to the International Council of Shopping Centers [ICSC], nearly a third of retailers' profits come in Q4.
A lousy holiday season has deep ramifications: it says a lot about consumers' budgets and indirectly reflects the state of wages and income. Mostly, it reveals the state of consumer sentiment in real terms, rather than merely expressed in a telephone survey. Last but perhaps most important, consumer spending accounts for ~2/3rds of GDP.
Seasons greetings, indeed . . .
Sources:
Greenspan `Mess' Risks U.S. Recession, Stiglitz Says
Reed V. Landberg and Paul George
Bloomberg, Nov 19, 2007
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=abh8h7M3uKBA
Holiday Sales May Be Worst Since '02 as Retailers Cut Forecasts
Cotten Timberlake
Bloomberg, Nov 19, 2007
http://www.bloomberg.com/apps/news?pid=20601205&sid=aETVIvpR._fk
