Thursday, December 11, 2008

Fighting the Last War (or: This Is Not a Replay of 2001)

Who doesn’t want to look at the current economic forecasts and want to do some prognosticating based on the last recession? After all, there's a lot of nostalgia for a recession that was practically over before it was even called out for being what it was. The NBER declared it started in March 2001 and over in November 2001. And lately, I’ve read a few market projection opinion pieces that sure sound like they are trying to run the playbook from the last recession, even if that premise is not explicitly stated. So what’s different?

As usual, I’ll start out with a chart:
This chart needs a little clarification:
- The days are done on market sessions for SPX rather than on calendar days. (True for subsequent charts as well.)
- Day 1 is one calendar year prior to the NBER declared start of the recession. March 2001 for the tech bubble and December 2007 for the current one.
- The data series noted with “TB” are the tech bubble runs.

All things considered, the charts are not that much different if you were just to take a quick glance at it – U3 moving up, Fed slashing rates, SPX plummeting – albeit at much faster rates on those last two items. But when more detail is added to the picture it gets far darker.

Here are some additional specifics on the unemployment rate then and now. (For more, revisit my inaugural blog post.)
At a similar point in the last recession, U3 (SA) was 5.7% vs. the 6.7% currently observed. But worse, the participation rate was 66.6% whereas now it is 65.8%, which likely adds to the general malaise in the employment area.

Unemployment is not the entirety of the picture here, however. There is also the consideration of the recovery from the recession in 2001, and this is where it starts to get uglier. Homeowner’s equity stood at 56.98% in Q4/2001 and consumer credit held by commercial banks was just about $235B. Flash forward to today and homeowner’s equity as of Q2/2008 rests at 44.66% and consumer credit has shot up to $363.1B. Additionally, net equity extraction has declined precipitously to $9.5B – probably reflecting the combined reality of less credit available via HELOCs and limted remaining equity in homes. Over the period from Q3/2001 until the Q2/2008, the total net equity extracted has been approximately $3.72T.

And all of this is happening on the backdrop of an economy for which consumer spending drives nearly 70% of GDP.

My 2 Cents worth of 2001 narrative: The broad economy stabilized but many households had one less income, reflected in the participation rate which never recovered. Once the employment situation allowed for enough comfort to do so, these households and others, decided to juice their lifestyles (despite new income levels) via equity withdrawal and spending on credit. (See chart at source 4 below)

Bottom line: be very wary of anyone who sounds like they are trying to replay the last recession. The conditions are vastly different and far more disturbing.