Monday, January 07, 2008

Investment Advice at No Charge

From the investment firm of Morgan Stanley:

Incoming data suggest that tighter credit has pushed the US economy to the brink, and we reiterate our call for a mild US recession in the first half of 2008. Weak employment data and slowing in export orders reported by purchasing managers undermine the case that a healthy consumer and strong global growth would forestall a downturn. Moreover, the ongoing housing recession is deepening, declines in capital goods bookings hint that business equipment spending will contract, and inventory liquidation seems likely. Our headline growth forecast for 2008 is unchanged at 1.1% using year-on-year arithmetic, but that largely reflects a stronger-than-expected 4Q07. On a Q4/Q4 basis, we now see real growth at 0.5%, 0.3% lower than a month ago. Most of the weakness is concentrated in the first half of the year; we project the economy will contract by about ¾% annualized in the first half of 2008, compared with 0.3% last month.

(Uh . . . means we've got a recession coming. But don't worry, not even a whole year's worth. Except . . . .)

The bad news, moreover, is that surging energy prices represent an additional threat to such wage gains when adjusted for inflation, and more broadly higher energy quotes threaten real income and spending. Because the recent oil price hikes are more the product of shocks to supply than demand, they will depress global growth and push up inflation. Only half of the $25 jump in crude quotes since the summer (to just shy of $100/bbl) has so far shown up in gasoline prices at the pump, as crack spreads have been stable and lags have delayed the pass-through to refined products. So far, that 30 cent/gallon increase has cost consumers $39 billion in annualized discretionary spending power; full escalation of refined product prices by another 30 cents would hammer consumer wherewithal at a time when soaring food quotes are also draining spending power, jobs are slipping, consumer lenders are more cautious, and household wealth is under pressure. Moreover, the escalation of both energy and food quotes seems likely to keep headline inflation as measured by the CPI above 4% at least through February, potentially complicating the Fed’s ability to respond to a weakening economy.

Keep in mind that these types of folks are the ones claiming not long ago that the column in question wouldn't be being written right now by anyone. And that energy thing? Only a giant part of every state and local budget. Why corrections sentencing? Ask these states with budget hole stories out just today. Anything else they have in common? Why, prison pops blowing out the wazoo.

That's all for Econ 101 today. Don't forget we have a test soon.

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