IRF News Flashes

3/11/2008 - The FED’s decision to add another $200 billion of liquidity into financial markets stimulated a major rally on Wall Street with the Dow Jones industrial average increasing by more than 400 points. The Fed's action was a part of a coordinated effort by the FED, the European Central Bank, the Bank of Canada and the Swiss National Bank. These central banks agreed to make loans to investment banks in exchange for mortgage-backed securities. Eventually, it is hoped that this will create a market for these bonds that market participants have found to risky to buy, thereby freeing up the liquidity log-jam in the world’s financial markets. Some, including we at the IRF, believe that this will take the pressure off the FED to lower interest rates much further. While we believe this was a clever, and potentially useful move by the FED, we also believe they need to understand that big banks aren’t the only ones facing a liquidity crisis and that this move will not help solve the debt problem that currently enslaves many Americans.

3/7/2008 - Employment Picture Looks Bleak and Bright.

The national economy just shed another 63,000 jobs, pushing the total job loss for the year to 80,000. This confirms that the first quarter is clearly in a recessionary mode. In addition, mortgage delinquencies continue to reach new highs nation-wide and retail sales have softened further. However, nothing so far about the most recent national statistics has been surprising. The IRF fully expected the first two quarters of 2008 to produce discouraging results. In November, we indicated that stabilization would not likely come until sometime this summer, and that a recovery from this summer’s lows would be painfully slow.

In contrast, the TWC/BLS revisions for Houston were released in partial form on Thursday (Only the new January 2006 and January 2007 employment numbers have been released so far). These new numbers show that Houston gained nearly 100,000 jobs in 2007 in contrast to the originally estimated 60,000 jobs. The upward revision was about 10,000 more than expected. The really pleasant surprise is that Houston’s energy economy has not slowed significantly as previously reported. Given the recently unfolding national trends, growth in the regional energy economy will be crucial to local growth in 2008, .

2/1/2008 - A series of economic data that came out this week has provided a somewhat clearer picture of the U.S. economy. The FED’s move to lower the federal funds rate to 3.0% was not only an important policy move, but a good indicator that the FED believes that the national economy is sinking ever closer to a recession. Part of their explanation is that they now perceive a rather dramatic change in the health of the labor market. This perception was confirmed later in the week by Department of Labor reports on initial claims, which exploded upward by nearly 70,000, and on total job creation, which declined by 17,000 jobs.

Were the job market to remain this weak with initial claims running near 375,000 per week and monthly job growth at or below the zero mark, a near-term recession would be a certainty. On the other hand, the FED’s appropriate reduction in interest rates will eventually help to stabilize the economy. The FED’s move was clearly a bit too late, but not necessarily too little. A federal funds rate of 3.0% is about where rates should be.

We at the IRF still believe that while the probability is high, a recession is not a certainty. However, we also believe that a return to a strong economy is in no way imminent. Throughout all of 2008 the economy will likely remain quite anemic, and the doldrums could extend well into 2009. The nation would be better off without any “stimulus package”. There is just no quick fix right now. Patience and change are the operative words. We must truly fix the problems in our economy that got us here, and that’s going to take time and courage. Attempts at quick fixes which merely cover up the symptoms will actually only drag out the recovery process

1/24/2008 - What Recession?

The Labor Department just released the weekly numbers for initial claims for unemployment. Surprisingly, they remain very close to 300,000. That is nowhere near recession levels. Could have all of the excitement earlier this week have been excessive panic? Perhaps, but it is possible that the BLS is still having difficulty seasonally adjusting these numbers. We’ll have to wait and see, but clearly this statistic will be worth watching carefully. Were initial claims to stay down near the 300,000 level, the chances of a recession will have diminished significantly. If they go back up over 350,000, then we can all start worrying again.

01/22/08 - Rate Cut Is the Right Move, But Not A Quick Fix

The Federal Reserve Bank cut the federal funds rate by 75 basis points today, dropping the rate to 3.5%. This is getting close to what the economy has needed for several months now. Hopefully, the next step will be to lower the rate to an even 3.0% at their open market committee meeting at the end of this month. Such a reduction between regularly scheduled meetings reflects the fact that the Fed has suddenly awakened to the serious realities of the current downturn and worsening credit market crises coming between regularly scheduled meetings. This is clearly a "stave off the recession" move, similar to past moves in the early 80s and early 90s. But one should understand that while the rate cut is a solid step in the right direction, it will not prove to be a quick fix for what ails the nation. Patience is going to be required. Housing affordability must increase requiring a continuing drop in home prices. Consumers must start saving, meaning that the economy can’t sustain itself on uncontrolled consumer spending in the future. The nation’s number one priority now should be to return to a positive national savings rate, which means reduced consumer spending and a balanced federal government budget. Only then will the trade deficit significantly shrink and our sale of American assets abroad at fire sale prices comes to an end. The bottom line is that none of what really needs to be done to turn this economy around will happen quickly, nor is this change in behavior certain.

01/04/2008 - More Signs of An Imminent Recession

Total national employment rose by a meager 18,000 jobs in December and the unemployment rate rose to 5%, the highest in more than 2 years. The numbers themselves are not as worrisome as is the trend. Job growth has been steadily declining for several months and initial claims for unemployment have been steadily rising. The trend is what is ominous and there appears to be no near-term relief in sight. The fact that without additional government jobs employment would have actually fallen in December is particularly worrisome. Finally, we are beginning to see the construction sector shed jobs, the absence of which this summer had surprised many. But the layoffs are relatively widespread affecting a large part of the goods producing part of the economy.

This recent data simply adds more evidence of an impending recession that has poured in over the past month. Another sign of troubles is the fact that during what normally is the strong Christmas season, the money supply has actually been contracting, indicating that both consumer and business spending is dwindling.

The most recent data provides a persuasive agreement for even more aggressive Federal Reserve Bank policy, putting aside for now worries about inflation which is almost exclusively driven by high oil prices, not excessive money growth and easy credit. The last thing we can afford to happen right now is for the stock market to collapse. A simultaneous collapse in housing and stock prices would put us in the same predicament Japan found itself in the early 90s, a predicament that took that nation over a decade to pull out of.

Despite the fact that the Houston economy is outperforming the national economy right now, don’t be fooled into thinking that this additional bad news is irrelevant to Houston. The worse the national economy stumbles in 2008, the greater risk of non-energy job losses in Houston, and the increased likelihood that energy demand will shrink, impacting our booming energy sector as well.