Wednesday, May 4, 2011

Contra an Oil shock recession

- by New Deal democrat

A couple of weeks ago, I made the case that the Oil shock of 2011 had begun. Consumer confidence, on cue, had suddenly decreased. Buyers changed to more fuel efficient autos. Yesterday brought word that April auto sales totalled 13.1 M units annualized, slightly higher than in March but lower than February, meaning that vehicle sales have essentially flatlined for the last 3 months.

At least one more signature of an imminent slowdown was released in the first quarter GDP report: median compensation. Below is a graph of its YoY% growth (blue) compared with YoY% of inflation (green). Notice that every time inflation, mainly fueled by Oil prices, has surged - 2006 to $90, 2009 to $147, and now to $114 - such that YoY inflation overtakes YoY median wage increases, GDP (red) slowed down acutely within several quarters:

This doesn't tell us how long the increase in Oil prices will exceed that of wages, but we can certainly say that the longer it goes on, the more will be the damage.

In my post several weeks ago, however, I also said I did not foresee an actual new recession. There are several data series I track which argue that, even if there will be a slowdown or stall for several quarters, a recession is not likely. Certainly with the release of April's LEI (up .4) there is no indication of any downturn this quarter. Compare this with the LEI's in 2007 and 2008:

Secondly, in order to have a recession you have to have a downturn in economic activity, and that is usually led by housing. In fact, housing permits are one of the 10 LEI above. Well, housing has been on its back for so long, that it would be difficult for it to fall futher. Here is the graph in the change in housing permits month by month since the beginning of 2007:

When housing was in free fall, we got a recession. Housing has been flatlining for two years now. If it doesn't fall, it is nearly impossible for the economy to generate a significant downturn.

A third reason is that people might be better able to withstand $4 gas due to an increased cushion of savings. Here is a graph of total personal savings:

There is no doubt that consumers have more of a stock of $$$ "fuel" to fall back on to get through this Oil shock.

Finally, the real personal savings rate (the savings rate minus the inflation rate) is an excellent leading indicator for GDP in the future. While this has fallen significantly, it is still positive

-- and we have not yet seen the full effects of the very high level of savings for the last couple of years, as that stockpile of "fuel" is gradually expended.

All of these argue that the Oil shock, particularly if it is short-lived, will lead to a short stall rather than an actual renewed recession.