Pollack: If recession comes, it would be mild


June 13th 2016
The Monday Morning Quarterback
A quick analysis of important economic data released over the past week
There seems to be a concern over how long the recovery will last. At the present time, some forecasters are suggesting a slowdown or even a recession in 2017.  But it is simply too early to tell at the present time.  Despite weakness in the employment report earlier in the month, recent data is relatively positive.  This is good news.  If the slowdown in employment turns out to be an aberration, the likelihood is that the economy will continue to plod along as it has since the recession ended.  And, at least at the present time, it appears that if there were a recession, it would be mild.
Not all slowdowns are like the Great Recession we experienced in 2007.  In fact, that was the worst recession since the Great Depression.  Most recessions are mild because the imbalances that cause them are quickly corrected.  Even though the FED would again find itself in uncharted waters without its usual collection of tools to counter a slowdown, they should have enough to help improve conditions.
In addition, the excess supply of housing, office, industrial and retail space has diminished significantly over the past few years.  Thus, the basic demographics, especially related to housing, should make any slowdown relatively mild.  Our overall conclusion, therefore, is that the economy will continue to inch along over the next year.
U.S. Snapshot:
  • The Blue Chip economic panel suggests that real (inflation adjusted) GDP in 2016 will be 1.9%.  Another anemic showing.  The forecast for 2017 remains at 2.3%.  Not much better but the consensus is still not projecting a recession.  On the other hand, any politician claiming this is a good showing is practicing sophistry at is finest.
  • While growth in household net worth is slowing (up 2.4% over a year ago in the 1st quarter vs. 3.6% in the 4th quarter of 2015), it is at a new record high.
  • April was a strong month for retail sales but it wasn’t an especially strong one for consumer credit which rose $13.4 billion vs. the prior month’s outsized gain of $28.4billion.  Revolving credit (mainly credit card debt) rose $1.6 billion.  Non-revolving credit (mainly car loans and student debt) rose $11.8 billion reflecting the month’s strength in vehicle sales as well as increases in student loan debt.  Instead of using their credit cards to fund the April spending spree, consumers dipped into savings as the savings rate dropped sharply from 5.9% to 5.4%.
  • The University of Michigan consumer sentiment index remains positive.  It came in at 94.3 for the preliminary June estimate compared to 94.7 in May which was the best result since June of last year.
  • Nonfarm business productivity declined at a 0.6% annual rate during the 1st quarter.  Output increased 0.9% while hours worked increased 1.5%.  Unit labor costs in the nonfarm sector increased 4.5% in the quarter.  These are trends that will hopefully reverse because if they continue, they will create more inflationary pressures.
  • According to Corelogic, while the number of homes with mortgages that are “underequitied” (have less than 20% equity in the home) continues to decline, it still accounts for 18% of the mortgaged homes in the U.S.  These owners are locked in their homes and are not likely to move.
Arizona Snapshot:
  • Corelogic reported that the percent of “underequitied” homes in Arizona represents 22.0% of all homes with mortgages.
  • Total listings in the Greater Phoenix market are up 5.5% from a year ago to 25,980units.  That is a 2.9 month supply.  In Greater Tucson, there are 4,408 active listings, down 2.6% from a year ago.
  • The median price of a residential sale was $225,000 in May compared to $221,000 in April and $211,750 a year ago.  In Tucson, median home prices are $179,000 for May, $176,000 for April and $171,250 for a year ago.
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