U.S. Already In Recession

I hadn't really noticed that we were out of the last recession, but The Telegraph reports that the U.S. has already slid into another recession:

Output slowed to stall speed over the winter. The US economy tipped into outright contraction in the second quarter, even before facing the "fiscal cliff" later this year – tightening of $600bn or 4pc of GDP unless action is taken to stop it.

Nothing serious is yet being done to head off the downward slide. If ECRI is right, the implications for the global system are ugly.

It is never easy to read the signals at inflexion points. Washington is always caught off guard. As ECRI’s Lakshman Achuthan says, it took the Lehman collapse ten months into recession in September 2008 to "wake people up".

What we know is that retail sales rolled over in February and broader trade sales peaked in December. Industrial output peaked in April. The nationwide ISM index of manufacturing crashed through the break-even line of 50 in June, just as it did at the onset of the Great Recession in late 2007, but this time at a faster pace.

Job growth has slumped to 75,000 a month over the last three months, too low to stop unemployment rising again to 8.2pc, or 14.9pc on the wider U6 measure.

Albert Edwards from Societe Generale expects the US economy to shrink 2pc this year, leading to a 40pc fall in profits. He says the S&P 500 index of stocks will ultimately plumb fresh secular depths, below the 666 bottom of March 2009.

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It is worth reading "The Great Recession: Market Failure or Policy Failure?" by Robert Hetzel from the Richmond Fed, the most damning critique ever published by a serving insider.

His argument – to over-simplify – is that the slump was entirely avoidable. There was no exorbitant bubble in the years before, no stretched elastic waiting to snap back.

The Fed – and the European Central Bank – caused the damage by tightening after recession had begun, ignoring frantic warnings from monetarists alert to the danger.

The sub-plot is that Paul Volcker and Alan Greenspan would never have made such a mess of affairs. They would have slashed interest rates earlier in compliance with the Fed Model as it became clear that the inventory was piling up.

The US recession began in late 2007. The slide accelerated in 2008 as the `China effect' pushed oil to $147 a barrel, with copper and corn rising in lockstep.

The Fed should have loosened monetary policy pari passu. It lost its nerve in early 2008, prisoner to old fallacies that low rates (then 2pc) signify loose money and that commodity supply shocks are inflationary. It stopped cutting, then turned hawkish, talking up rates across the yield curve.

The Fed Minutes of June 24 2008 were the coup de grace. The next policy move "could well be an increase in the funds rate," it said. By then the US economy was heading for the cliff. The collapse of Fannie, Freddie, Lehman, and AIG followed in the Autumn: symptoms of the crisis, not the cause.

Ben Bernanke bears much of the blame, though in fairness he was constrained by hawks and a nasty a dollar storm -- with veiled threats of a US bond strike by China, Russia, et al.

How could he of all people have got it wong? This was a man who once blamed the Fed's scorched earth policies for causing the Great Depression.

The answer is a Déformation professionnelle. He was blinded by own "credit channel" theory that slumps are caused by banking crises.

His theory proved to be wrong. The chain of causality was the other way round. The credit system was not flashing red warning signs in early to mid 2008.

The alert was coming from the money data. Bernanke was not paying full attention because he disdains the quantity of money theory of Milton Friedman and countless others before him -- including Keynes -- as hocus pocus. Yet the moneratists were right. They saw the steam engine coming straight down the tracks.