Is the US heading for Recession

Normally after Christmas, manufaturers order for the new inventory. Now, the whole issue is in a confused state. Wait till first week of Frebrusry and see if manufacturers are ready to replace their inventory. Then again, since Walmart gets 70% of products overseas, US manufactuerers may not have any major expansion to bring jobs.

We are definitely in a funk....

 

Patching the dam with a band-aid

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That does not sound right. As per Wall Street Journal, the GDP of China is $3.249 Trillion and India $1.224 Trillion. Since GDP formula is based on spending (Consumer + Government), and assuming consumer spending is 70% of the total - that is still about $3 Trillion.

 

OK let us see...

From TIME

"With many of the world's economic movers, shakers and interpreters gathering in the Swiss mountain resort of Davos just as markets from Mumbai to Madrid were freaking out, there was no shortage of explanations as to why. The short answer: U.S. consumers, who have been increasing their spending without pause since all the way back in 1991, are tapped out. They Scrooged their way through the holidays — retail sales were the weakest in five years — and employers started to get nervous. They've dialed down their hiring, sending unemployment inching up 0.3% in December. It might not sound like much, but that's 474,000 fewer people on the payrolls than the previous month — enough for the financial system that enabled this spending binge to take notice and begin the painful return to sobriety."

From Yahoo news that Sandy provided a link elsewhere:

"But those seeking good news found some in a Labor Department report that said the number of people seeking unemployment benefits last week fell for a fourth straight week. Applications for benefits dropped 1,000 to 301,000, pushing claims down to the lowest level in four months."

From International Herald Tribune

" (China's) Household consumption, however, is the lowest of any major economy. It fell to 36.4 percent of gross domestic product in 2006 from 37.7 percent in 2005, when the comparable figures for the United States and India were 70 percent and 61 percent, respectively. The downtrend is not new: in 1990 China's ratio was 49 percent."

This number does not jibe with Time's number

 

A wild ride
Jan 24th 2008
From The Economist print edition

There will be odd rallies, but fear will continue to stalk the financial markets


JAMES CARVILLE, Bill Clinton's political adviser, once said he wanted to be reincarnated as the bond market so that he could “intimidate everybody”. This week the stockmarkets showed they could make pretty good use of the knuckle-duster, too.

It did not even take a fall on Wall Street to spook the Federal Reserve into slashing interest rates by three-quarters of a point on January 22nd; the American markets were closed for a public holiday the day before. The Fed reacted instead to a slump in global markets and the prospect, indicated by the futures market, that the Dow Jones Industrial Average would drop by more than 500 points at the opening. Small wonder that traders are now talking about the “Bernanke put”─the idea that, like his predecessor, Alan Greenspan, the Fed chairman will ride to the rescue whenever markets falter.

On January 23rd the markets chalked up another success when, after driving down the share prices of the two largest bond insurers to the point where they threatened to buckle, the prospect of a rescue surfaced. It came just in the nick of time. Half way through January 23rd, many global stockmarkets, including America's NASDAQ, were at least 20% below their peaks, a decline that put them in bear-market territory (see chart). World stockmarkets, as measured by the MSCI, were almost there. Despite its recovery on January 23rd the S&P 500 was still down 14.5% from its peak in October.

The markets have pulled out of such swallow dives before, notably in 1998 when rate cuts revived sentiment in the wake of the Asian crisis and the collapse of Long-Term Capital Management, an American hedge fund. Whether the latest recovery marks a turning point, or merely a pit stop on the way to a bear market, depends on whether the Fed has moved sharply and deeply enough to save America from recession. It also depends on how the rest of the world reacts to America's woes .

There are plenty of reasons for pessimism. The credit market, which has been a better gauge of the credit crisis than shares, is still sickly. As of January 23rd, the cost of insuring against default by European speculative bonds had risen by almost one-and-a-half percentage points over the previous month

The credit crunch continues to sap the strength of the financial system, which may curb banks' ability to lend. By flooding the money markets with liquidity near the end of last year, central banks helped unjam the troubled interbank market. But a year after subprime-mortgage woes started to emerge, house prices are still falling and investment banks are owning up to ever larger write-offs on mortgage-related investments.

If the problems are still largely focused on the subprime-mortgage market, they are not safely quarantined in the United States. Before the year started, investors had taken comfort from the concept of decoupling—that the rest of the world, and particularly Asia, could keep growing regardless . Generally, much of the world, particularly emerging Asia, is less exposed to America than it was. However, the slide in the Baltic dry index of shipping rates could be an indicator of falling global trade volumes (it may also reflect extra shipping capacity). And commodity prices (including oil) have slipped on fears the global economy is slowing.

Emerging markets, which had yielded much better returns than the developed world did in 2007, have also been dragged down since the start of the year. And riskier currencies have lost ground to the relative security of the Japanese yen and the Swiss franc.

Never satisfied, futures markets are betting that the Fed will cut rates again when policymakers meet at the end of the month. Would another half a percentage point be enough to stop the rot? One salutary thought, according to Teun Draaisma of Morgan Stanley, is that on the 15 occasions since 1970 when the Fed has cut rates by 75 basis points or more, the average gain for European stockmarkets over the following six months has been 10.3%. Fredrik Nerbrand of HSBC Private Bank thinks markets are due for a rebound because the selling has become so indiscriminate.

But even if rate cuts bolster confidence, they may not come soon enough to stop corporate profits tumbling. According to Tim Bond of Barclays Capital, the recent falls in American and European share prices imply a 20% or so drop in profits from their cyclical peak. That is close to the average decline in previous profits downturns. However, this cycle has been more extreme than normal; profits recently reached a 40-year high as a share of American GDP. They thus have further to fall if they are going to return to the mean.

The dismal dollar
Also, the Fed's actions do not just have an effect on share markets. Alan Ruskin of the Royal Bank of Scotland says that rapid rate cuts mean the dollar risks becoming a funding currency for the “carry trade”, rather as the ill-starred Japanese yen has been. (The trade involves borrowing in a currency with low interest rates and investing the proceeds in a currency with higher rates.) Mr Ruskin says that the gap between 12-month dollar and Swiss-franc rates is already as low as it was in the last cycle, when the Fed cut rates to 1%. “By the end of this cycle, dollar short-term rates will be lower than all 40 liquid currencies except the Japanese yen and Hong Kong and Taiwanese dollars.”

If the dollar becomes part of the carry trade, it will tumble even further. And a falling currency makes it harder to persuade foreigners to finance America's trade deficit. David Bowers of Absolute Strategy Research reckons the subprime crisis has “destabilised the symbiotic relationship between Asian and Middle Eastern savers and American consumers.”

Those foreign investors may also get spooked at the direction of Fed policy. They have seen the bank cut rates in response to last August's credit turmoil and now a January stockmarket plunge. They may start to feel that the Fed has turned from a watchdog against inflation into a labrador puppy. Thanks to the global slowdown, there is no short-term inflationary threat. But the longer-term risks have probably gone up. And, as James Carville discovered in the 1990s, the bond-market vigilantes can be powerful enemies if they feel neglected.

 

Everyone will suffer though not as much. It is all relative. Big economies will crash hard, small ones will have some pain but sqeek by...

No body knows...but if past is any guide like what happened in Argentina....USA may lose its economic dominance. That can be hard on our military...one never knows what will happen....