ecri: no recession, other possibilities

[jk]

a post at bill fleckenstein's site:
Hello Bill,

I have emailed you before regarding a forecasting firm called ECRI. They continue to nail the economic and inflation cycles, having called the 2001 recession, the "jobless recovery", the CPI up cycle, the housing downturn and most recently the global industrial slowdown that is currently underway. Their long leading index began showing a slowdown to emerge in the 2nd half of 2006 in late 2005.

I go through this only because they are now saying that a general recession in the 1st half of 2007 is now very unlikely. They see the global industrial slowdown continuing (hence weak commodity prices), but they see the US service sector accelerating late in Q1 through mid year. Combining the two they are forecasting a modest uptick in growth through the 1st half.

Is it not possible that the manufaturing portion (housing centric specifically) of the economy is in recession while the massive credit creation plus willingness to borrow continues to fuel the service sector? Seems to me that the finance sector is a MAJOR driver of the service sector and as long as more and more debt is being offered/taken, then this could prop up the economy longer than the "acute" bears think.

I agree with your assessment long term, but what do you think about the possibility of a 1987-style event prior to the economy finally rolling over? You have mentioned the same kind of reckless leverage being used in 1987 and that crash occurred without a general recession.

I know you likely disagree with ECRI's forecast, but what probability do you put on a 1987 style market event that clears the system of a lot of the reckless leverage (Yen carry trade, options selling etc) but without a general recession occurring?

fleck:• I just don't see the services sector coming to life when it was housing related stuff that kept the economy going... so now that it's tanking, suddenly services will spring to life and save the day? I don't see that... maybe it will but I don't see why it ought to. If we have an '87 like event-- which I expect at some point-- the economy will roll over big time after it.

[Tet]

Re: ecri: no recession, other possibilities

I agree with your assessment long term, but what do you think about the possibility of a 1987-style event prior to the economy finally rolling over? You have mentioned the same kind of reckless leverage being used in 1987 and that crash occurred without a general recession.

I know you likely disagree with ECRI's forecast, but what probability do you put on a 1987 style market event that clears the system of a lot of the reckless leverage (Yen carry trade, options selling etc) but without a general recession occurring?

fleck:• I just don't see the services sector coming to life when it was housing related stuff that kept the economy going... so now that it's tanking, suddenly services will spring to life and save the day? I don't see that... maybe it will but I don't see why it ought to. If we have an '87 like event-- which I expect at some point-- the economy will roll over big time after it.

I'd say the new raise in minimum wage in California to $7/hour and at the end of next year to $8/hour gives a lot of motivation for the Wal-Marts, Home Depots and the Burger flippers of the world to automate. I would imagine Federal minimum wage increase becomes law this year as well. Watch auto check out take off and auto burger flippin take over. Tech booms in the past have corresponded with minimum wage increases, democrats like tech and in the past tech has carried the housing problems before. I'm assuming by service economy even though burger flippin is now considered to be manufacturing is what the ECRI forecast refers to. Service sector capital expenses to get rid of labor is now set to take off, the US economy has always ate it's own young in the past and will continue to do so. I started buying tech end of the summer, but it certainly wouldn't surprise me to see a 1987 or 9-11 event, I'm not sure if there's enough money to steal from in the pot by this spring but certainly by this fall. Peace.

[DemonD]

Re: ecri: no recession, other possibilities

I'd say the new raise in minimum wage in California to $7/hour and at the end of next year to $8/hour gives a lot of motivation for the Wal-Marts, Home Depots and the Burger flippers of the world to automate. I would imagine Federal minimum wage increase becomes law this year as well. Watch auto check out take off and auto burger flippin take over. Tech booms in the past have corresponded with minimum wage increases, democrats like tech and in the past tech has carried the housing problems before. I'm assuming by service economy even though burger flippin is now considered to be manufacturing is what the ECRI forecast refers to. Service sector capital expenses to get rid of labor is now set to take off, the US economy has always ate it's own young in the past and will continue to do so. I started buying tech end of the summer, but it certainly wouldn't surprise me to see a 1987 or 9-11 event, I'm not sure if there's enough money to steal from in the pot by this spring but certainly by this fall. Peace.

FYI, Wal-Mart pays above minimum wage for all entry-level positions. Can't speak for home depot.

For unskilled labor jobs, walmart actually pays fairly well. Where they don't do so well is in benefits, which they have made an effort to increase in recent years in response to negative PR.

Also, in terms of the stock market, a lot of the profits come from consumer spending. Minimum wage increase allows the lower end of the spectrum to buy more "stuff" from... tada! walmart. The minimum wage increase will not affect walmart at all, but will help their bottom line. I'm not sure who gets hit most by minimum wage increases. Probably restaurants and other tip-based businesses. Maybe small startup businesses? And maybe small businesses in midwest states where the cost of living and inflation hasn't really gone up all that much.

In any case, that's more money for people at the low end of the spectrum to spend at walmart, as walmart keeps their same pay scale.