Friday, August 19, 2011

The Philly Fed fiasco and the debt debacle

- by New Deal democrat

Jimdotz commented yesterday wondering if the plunge in the Philly fed could be a reaction to the debt debacle, just as consumer confidence probably was (and just as the purchase mortgage cliff-dive reported yesterday probably was). While there is no smoking gun, I think he has a good point.

Back in September 2008 Bill McBride a/k/a Calculated Risk said that one of the effects of the panic emanating from Washington was that ordinary people probably got the message that: "Wow, this is bad. Let's make sure our money is safe, and watch our expenditures." With the Philly fed fiasco, I wonder if we haven't just had a similar moment.

This was one of the twenty worst readings of the Philly Fed index in the last 40 years, putting it among the 5% worst readings ever. In other words, a full bore, mid-recession reading. Beyond that, it was the second steepest drop in one month in the history of the index. Only early 2000 when the dotcom bubble burst had a worse plunge.

Below I've put together a list of every month that the Philly Fed was below -30 in the last 40 years, together with the reading the month before. -30 readings don't come out of nowhere. They typically follow a number of months of worsening negative numbers. This one simply fell off a cliff.

Here's the data:

Oct-74 -26.1
Nov-74 -32.3
Dec-74 -57.9
Jan-75 -45.3
Mar-80 -19.3
Apr-80 -37
May-80 -53
Jun-80 -54.4
Jul-80 -57.2
Aug-80 -39
Nov-81 -26.2
Dec-81 -34.6
Aug-90 -18.2
Sep-90 -43.5
Oct-90 -48.2
Nov-90 -27.2
Dec-90 -37.1
Jan-91 -31.9
Dec-00 -8
Jan-01 -36.1
Aug-08 -22.8
Sep-08 -1.4
Oct-08 -38.9
Nov-08 -41.2
Dec-08 -36.1
Jan-09 -28.4
Feb-09 -33.9
Mar-09 -30.8
Jun-11 -7.7
Jul-11 3.2
Aug-11 -30.7

I see a real danger here that the seize-up in activity could be self-reinforcing. It strains credulity to believe that a cutback of this scope was due to fears about European bankers. Rather, it seems far more likely that suppliers, like consumers, had a visceral reaction to the utterly reckless brinksmanship about paying the nation's bills on display in Washington. If so, we are paying a very heavy price for that economic lunacy.

Bonddad here:

A little over a week ago, I wrote and article titled If a Recession Comes, Blame Washington, where I wrote:

The problem with the debt deal is it took government action off the table at a time when governmental action is needed. Instead of borrowing at insanely low rates, investing massively in a degrading US physical and intellectual infrastructure, Congress is taking action off the table. Remember that governmental spending is a component in the GDP equation -- a fact lost in Washington policy debates, as is the different between consumption and investment. In short, Washington is focused on exactly the wrong thing at exactly the wrong time and as such should bear the brunt of any economic slowdown we face.

Since the debt deal was signed, we've had a massive stock market sell-off. Also note that we've also seen major investment houses cut GDP growth forecasts (and we have yet to see a credible positive projection from this deal). And as NDD points out, we've also seen a massive drop in consumer confidence. Now we have the Philly Fed printing a terrible number. Personally, I agree with NDD's thesis that the utter stupidity of Washington during the debt debacle showed the world that the US is willing to not pay its bills and place the entire US economy in play as a political football. This is why S&P downgraded the US outlook (which I agreed with and which, I believe, is turning out to be a correct assessment).

We are governed by fools.

Also, consider the following from the WSJ:

"Buyer confidence may be an all-time low," said Anthony Sanders, a real estate finance professor at George Mason University. "The economy is scaring the living daylights out of most potential homebuyers."

Contributing to the gloomy outlook for the economy is a pullback in federal, state and local government spending. Standard & Poor's, the rating firm, said Thursday that the deficit-reduction deal it previously pronounced as inadequate "could undermine the already fragile economic recovery."