What about the Pocket Recessions?

I continue to believe that to this point the economy is experiencing what I am terming 'pocket recessions' while the overall economy is still exhibiting slow positive growth which the recent GDP report has confirmed. These pocket recessions are in some cases very severe especially in areas such as housing and residential construction along with specialty lending firms. I've also read through several earnings reports and transcripts of calls and have noticed a fairly common phenomenon that Florida and to a lesser degree California are struggling while the rest of the states are behaving much better thus far. So what has saved us from a deep recession thus far?

In my opinion, a couple of things: 1) Exports - Just take a look at the earnings results from several of the multinational companies along with even some smaller companies and you will see much faster growth in the first quarter in overseas markets than domestically. Of course, one of the largest reasons is the weak dollar (although recently we have crossed the line to where it is starting to create more problems than assisting in growth i.e. inflation in food and energy). 2) A proactive Fed - We may pay for this down the road, but at least in the short to intermediate term all of the liquidity in the form of interest rate cuts as well as the special lending facilities have kept the economy afloat.

Looking to the back half of the year, I am anticipating a rotation as we see stronger growth in the U.S. than overseas with the large amount of economic stimulus in the marketplace. We will, in my opinion, see a sizable pickup in the dollar (especially against the insanely overvalued euro) which in turn should help somewhat with the recent bouts of commodity inflation. I am expecting a large outperformance in domestic stocks over continental European stocks when this occurs.

Now a couple of things could throw this thesis off. First, if commodity prices do not retreat (especially oil), then it will be difficult to see significant growth in he economy. Second, the Government and Fed are always wildcards and while they can help us out they can also hurt us severely.

All in all, it will be a very interesting few months. I'll mention in a future post how, although I am positive on the last 2/3 of the year and into early next year, I see larger problems down the road (possibly in the mid to late 2009 period).

Comments

[pochovilla:]

Pocket recession? More than you think. Add a few cities and the list grows. After paying for gas, food, energy doctor/dentist visit the consumer (at least a very large number) looks in the pocket and is reminded about a personal pocket recession that economists consider anecdotal. The feel good GDP number (.6%) has a very large portion of retail gasoline price increases reflected in the raw number. While this may make pundits declare "what recession ?", this opinion is not evenly distributed among "we the people".
I watched Hillary in Indiana do a photo op (video) at a filling station. Apparently this is the first time in several years that she paid for gas. If the truck was diesel powered the shock value would have been better. It's a good thing she doesn't have to deal with home heating fuel at her residences.

2008 May 01 06:06 AM

[Dan Weiss:]

Ponchovilla,

Despite what I have said about it being an environment of pocket recession there is no doubt in my mind that people are feeling pain across the board (it just doesnt quite reach at this point the likely definition of a recession as explained by the NBER). Now, we could all argue with the NBER on exactly what a recession is but at this time I consider the environment to be very slow growth with serious but pocket recessions

2008 May 01 09:48 AM

[billddrummer:]

Excellent commentary, and spot on with your analysis. Slowing construction demand in states like AZ, FL, NV and CA create pocket depressions--construct... for single family homes is off as much as 40%, depending on the market segment. The ripple effects can be massive, but are highly localized. On the other hand, the rest of the economy appears to be lurching forward, albeit more slowly than in the past.

This puts into perspective another phenomenon that's happening--the deleveraging of the American balance sheet. With credit tightening (not a bad thing) and assets falling in value (also not a bad thing) the American consumer is in the position of having to pay down debt he would have refinanced 2 years ago. The drag on consumption is real, but after the deleveraging is complete, consumers will have more discretionary dollars to shop with.

Whether it takes a year or more is anyone's guess. But the upside to this condition will be an American consumer with less debt and more savings. And no one thinks those are bad things.

2008 May 01 11:15 AM

[AvlGuy:]

Billddrummer, you rightly cite the impact of deleveraging. It’s a huge and very real wildcard. There's little historic US data on the deleveraging unfolding, therefore how it runs it course is indeed an unknown. It provides fuel and a mechanism for a future spiraling downward of valuations, consumer spending, employment, public spending (state/city) and wealth. Especially during a 'U', 'W' or 'L' recession. It's worse when one looks at how much real estate development from 2003-2008 was driven by over-leveraged easy debt. The story does not end at a real estate bubble busting. Rather, it begins there. The RE bubble frothed the birth of other vulnerable bubbles. Easy-credit birthed a commercial real estate bubble that birthed what may be a short-lived revitalization of innumerable urban centers nationally, full of restaurants, specialty retail, boutique hotels, and of course hi-end lofts, condos & townhouses. Easy over-leveraged credit allowed consumers to buy those lofts & condos, and the home-as-ATM made it easier to spend more on shopping, travel & dining, and autos. Real estate fueled payrolls in construction, retail, and also cycled back to FIRE employment.
Deleveraging is halting all the dollar turnovers, in some cases reversing the flow. Add in the fact that less than 20% of retail floor space under construction is pre-leased.
Then add in the recession.
It's quite a challenge to see how pocket recessions do not spread in daisy-chained fashion across geography and industries.
Any good news? Yes. San Diego media reports last week that much of the county’s housing is now affordable based on median salaries and median home price. I expect more ‘pocket affordability’ to occur. However, the recession/ deleveraging is a packaged deal that delivers unemployment, shrunken payrolls, and social strains. Especially if its an ‘L’ or ‘W’ recession.
.

2008 May 01 12:45 PM

[bruin532:]

I believe nothing coming out of this goverment, beginning with WMD

2008 May 01 08:42 PM