The Recession We Couldn't Avoid

There is no doubt in my mind that the Australian economy is now in recession. Paul Keating once remarked that the 1990's recession was "the recession we had to have", I'm calling this one, the recession we couldn't avoid.

According to the Australian Industry Group, the Manuafacturing sector has been in contraction for 6 months, the services sector for 8 months and the construction industry for 9 months. Yesterday we saw the ANZ job ad series plunge in November. Today the NAB business survey was awful. From the report:

• Business confidence edges down to a new record low (including the 1990/91 recession).

• Business conditions sharply down again - to levels last seen in late 1992.

• Forward orders fall sharply (again) to 1991 lows and capacity utilisation falls significantly.

• Medium term expectations also sharply lower – including lower capital & hiring plans.

• Survey implies negative growth in domestic demand and non-farm GDP in Q4 2008.

• NAB’s measure of credit availability suggests little change in credit availability.

• Confidence down everywhere – as are conditions, with the exception of mining & transport.

• Global forecasts for 2009 cut to 1¾% (from 2.4%) with sharply lower growth in USA & Europe.

• Australian GDP forecasts cut due to the lower start point in Q4 2008 and weaker global growth. We now expect growth in 2009 of only 0.5% - implying recession in the non- farm economy (at least).

• We also expect more fiscal policy action, weaker labour markets and an even more aggressive RBA. We now forecast the RBA to cut rates to 3% in early 2009 (previously 3¾%).

NAB is a little more realistic than ANZ, NAB is basically calling a recession, at least in the non-farm sector. A 0.5% GDP growth rate next year is probably still too optimistic, but even that implies a couple of quarters of negative growth. NAB has also come down to my forecast for the RBA's cash rate of 3%.

All the myths about the mining sector and our leverage to China's booming economy have been shattered. As is the idea that our financial and property sector is somehow immune. Welcome to the recession we couldn't avoid.

ANZ Job Advertisements Fall Sharply in November

The ANZ job advertisement series fell the most ever in a single month in November. Total job ads fell -8.6% in November, newspaper ads were down -12.0% while internet ads fell -8.4%. From the report:

Annual growth in newspaper ads is now the weakest since 1991, the last
time the economy experienced recession. Annual growth in job ads during the recessions of 1982 and 1991 fell to around -50%, so annual growth as at November 2008 remains above those past recession points.”

Yes for now it remains above those levels, how about in 6 months time?

“Over the last two months, newspaper job advertising has declined by the most in the 30-year history of the survey. This tells us that hiring intentions have been heavily impacted by the latest wave of uncertainty and financial distress caused by the global financial crisis. There is a reliable relationship between newspaper job advertisements and employment over the following six months. If the recent weakness in job ads is sustained, it would be consistent with a contraction in total employment over the first six months of 2009. This of course would result in a much more rapid rise in the unemployment rate than we are currently forecasting.

Who would have thought? An economist underestimating the impact of the global credit crunch. Given the tepid GDP number for the third quarter I think there is good chance that the Australian economy officially entered a recession sometime in October or November. That was quicker than I had anticipated and attests to how sharply the global economy deteriorated in late September into October. We can begin to expect some declines in employment in coming months and the unemployment rate to start a long steady climb.

US Job Losses Worst in 34 Years

US job losses in November were the worst since December 1974 according to the bureau of labor statistics report today. US non-farm payrolls fell -533,000 in November, whilst September and October numbers were revised down by an additional -199,000. Details in brief were as follows:

construction -82,000
manufacturing -85,000
service providing -370,000
retail trade -91,000
professional and business services -136,000
education and health services +52,000
leisure and hospitality -76,000
government +7,000

In total -163k goods producing jobs were lost whilst -370k were lost in service providing industries. That is important as service providing jobs had been holding up relatively well. So we can safely say that job losses are now across the board and the recession has infected just about every sector of the economy.

Adding November job losses and the revisions to prior months together, an additional -732k more jobs were lost from last month. So why then did the unemployment rate only rise to 6.7%? The unemployment number is calculated from a different survey. This survey, the household survey, showed the ranks of the unemployed rose by just 252k whilst 422k job seekers left the labor force.

The differences between the household survey and the establishment survey (used to calculate the non-farm payrolls number) tend to get ironed out over time. So don't be surprised to see a jump in the unemployment rate to more than 7% next month.

The stock market action following the report was bullish from the glass half full perspective. Over the last couple of weeks, the economic data has been getting sharply worse, however the stock market has managed to rally despite such news.

The glass half full perspective would cite this as a sign that the bottom is in for the stock market. When the market no longer goes down on bad news but continues to go up, it's a sign that the market has discounted the worst. The other idea gaining credence is as follows; because the US economy is already a year into the recession, then we are closer to the end of the recession than the beginning, and because historically stocks turn up on average, 5 months before the end of the recession, stocks are primed to take off.

The severe recessions of 1973 - 75 and 1981 - 82 both lasted about 16 months, so if we thought the current recession was similar to those then we might buy into the reasoning outlined above. However I believe the recession will be longer than any of those in the post WWII era, probably lasting most if not all of 2009. Thus any rally in the next couple of months will ultimately fail.

US Jobless Claims Hit 26 Year Highs

The 4 week moving averages for both intial Jobless Claims and Continuing Claims hit fresh 26 year highs in the latest week. Note the shaded area that has been added to the right hand side of each graph since the NBER offically announced the start of the recession earlier in the week.


There has been little doubt about the fact that the US economy has been in recession for months (except for a few pollyannas on CNBC, more on that later). The question now is how bad it will be . There are increasing comparisons to the recessions of 1982 and 1974, I think that comparison is a valid one and talk of the new great depression is exaggerated.

There is increasing talk about how the stock market looks forward and will turn up before the end of the recession. Somehow when that platitude is repeated people conveniently omit the 2001 recession after which stock prices did not recover for more than 12 months. MY guess is that the recession will be longer than most think, probably lasting for the bulk of 2009 and that the stock market will have a few more false starts before a bottom is found.

ADP Report Shows Biggest Job Losses in 7 Years

The ADP employment report for November showed 250,000 jobs were lost in the US economy, the biggest decline in the ADP series for 7 years. There is not much to say about the report except that it is ugly all round. For the second consecutive month jobs were shed in the small business sector, the one category that had been adding jobs for most of 2008. From the report:

This is the second consecutive monthly decline in small business employment reported by the ADP Report since November of 2002. Falling employment at medium and small firms clearly indicates that the recession has now spread well beyond manufacturing and housing-related activities.

Economists are expecting job losses of around 325,000 for Friday's Non-farm payroll report and given that the ADP report has been consistently on the low side of the BLS number, that looks like a fair estimate in light of today's ADP report.

RBA Slashes Cash Rate to 4.25%

Cast your mind back to October 7th this year when the RBA pulled out a surprise 1% rate cut and the markets cheered pushing the XAO up more than 1% toward the 4600 level. At that time I noted that we had seen this movie before and to be:

wary of the dead cat bounces that inevitably follow rate cuts in this type of environment

So here we are today sitting 1000 points below the levels of early September and the we get another 1% rate cut , however this one couldn't even inspire a late afternoon rally, although it should be noted that the US was down almost -9% the previous evening.

Back in early September when the RBA tentatively cut the cash rate by 25 bps, I noted that they waffled on about inflation when inflation was not a problem at all, it was the slide toward deflation that was the concern.

So how is it that just 3 months ago the RBA was concerned about inflation and they have now cut the cash rate a full 3% since that time?

Quite simply the RBA is reactionary and data dependent, they are unable or unwilling like all central banks, to get out in front of a problem. But now that they have we can see that like the Fed, the RBA is a one trick pony, all they can do is try and reflate by cutting interest rates. However as has happened in the US that has little effect in a deflationary environment, and the reason why the Fed has now started to just print money.

Don't get me wrong, I'm not advocating that central banks should be able to anticipate problems and cut or raise rates well in advance. In fact I think central banks should be scrapped, or at least the futile exercise of interest rate tinkering should be done away with. My point is not to look to the central bank for forecasts about the future of the economy as they are always playing catch-up to reality.

Australian Economy Continues to Tank

The monthly performance of manufacturing index released today fell to a new record low of 32.7, well below the dividing line of 50 that separates expansion from contraction. Highlights from the report:

• Recent results reflect an accelerating loss of consumer and business confidence, driven by worsening news on the global economy, falling household wealth, and the weak housing sector. This climate is being reflected in falling demand for manufactures.

• November’s fall in the Australian PMI® reflects declines across all components of the index. Production fell for the sixth consecutive month and more strongly than in recent months. This reflected the ongoing decline in new orders, which fell rapidly and for the seventh consecutive month. In line with the easing of production,employment fell for the ninth month in November.

• On the positive side, wages growth eased slightly and selling price growth was broadly stable. Input cost growth rose marginally.

• Inventories fell moderately, while supplier deliveries fell solidly. Exports fell sharply in line with the decline in global manufactures trade.

• Manufacturing activity fell in all states with New South Wales the best and Tasmania the worst performing states.

Also released today, the TD securities Melbourne Institute inflation gauge which showed a drop of -0.6% in November, the biggest decline in six years. That brings the year to November reading down to 3.0% from 5.0% just a couple of months ago. Some comments from the TD securities:

''The substantial turnaround in inflation fundamentally changes the economic and policy outlook," Joshua Williamson, senior strategist at TD Securities, said in a statement. "The previous inflation problem has been turned on its head."

Actually, for anyone paying attention inflation was never a problem. As mentioned back in March, inflation is a lagging indicator and the stagflationary conditions being experienced 6 months was just the transition from inflation to deflation.

So market pundits were busily rushing about like lemmings forecasting up to 125 basis points of cuts at tomorrow's RBA meeting and rejigging their estimates of where the cash rate may end up in this cycle. The market has been well ahead of these fools already forecasting a cash rate of 2.75% by May of next year.



My own forecast of a cash rate of 3% now looks like it might be on the high side as the RBA comes to grips with the realization that they will be dealing with deflation in 2009 rather than inflation.