Was the Great Recession Just a Precursor to an Even Worse Downturn?

Recently by Robert Wenzel: WSJ Disses the Hindenburg

Rick Davis at Consumer Metrics is out with his latest numbers on the economy. They show no end in sight to the current leg of the downturn. This view is compatible with those monitoring the slow to no growth M2 money supply.

It should be noted that when Rick mentions "consumer demand" in his report he is really referring to demand for durable goods (This is what his numbers measure). And "durable goods" in my book should be classified as capital goods. A decline in this area of the economy is thus consistent with Austrian Business Cycle Theory.

It should also be noted that Rick in this report breaks down the Great Recession into its various phases and classifies the subprime crisis as just an early indication of the crisis that then changed its form.

This coincides with my thinking about the Great Recession. As I wrote to my private clients earlier this year:

It is extremely instructive to review in detail how the financial crisis unfolded to get a sense for where things stand now.

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The start of the financial crisis can now be pegged to the February 27, 2007 announcement that The Federal Home Loan Mortgage Corporation (Freddie Mac) would no longer buy the most risky subprime mortgages and mortgage-related securities. Prior to that announcement the real estate market was in a roaring full-fledged bull market.

One key to a roaring bull market is that more and more money needs to be added to the ballooning structure to keep it climbing. If the flow of money simply slows down, then the most leveraged who are betting on a quick return will find difficulty making that quick return. In the stock market, those seeking quick returns are exemplified by day traders, in the real estate market it is the equivalent "flippers".

The Freddie Mac announcement slowed the flow of the most risky, most aggressive money that was blowing up the real estate bubble. It was enough to prick the bubble.

But if that Freddie Mac announcement was not followed by a tightening of the money supply by the Federal Reserve, especially in the Summer of 2008. The Freddie Mac move would have been just a bump in the road.

I then go on to say that the crisis would have eventually developed anyway, but Bernanke’s lack of money printing in the Summer of ’08 spurred everything along.

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Rick’s commentary on his data supports this view. However, I caution, Rick’s data is the best around, but he does tend to view things from a somewhat Keynesian perspective of aggregate demand being the key factor that dries the economy. He does throw in the occasional analytical commentary that the "consumer thought this", "the consumer did that" etc.

In other words, he collects the best data, and we can use it for our purposes in trying to detect from an Austrian Business Cycle perspective where exactly we are in the cycle, but ignore his commentary when it gets too Keynesian and where he thinks the consumer drives the economy.

Here’s Rick’s latest:

The "Great Recession" that began in 2008 has had many nuances, some of which can only be seen in data with higher resolution than that provided by the BEA or NBER. Our day-by-day profile of consumer demand helps us understand triggering events while also making it clear that many recent changes in consumer behavior have begun to linger — much as the recession itself now appears to have done.

We have previously reported that consumer demand for discretionary durable goods is now at recessionary levels after starting to contract on a year-over-year basis on January 15, 2010. On the surface this would indicate a "double-dip" recession following the 2008 economic event. We may have inadvertently promoted the "double-dip" aspect of 2010’s contraction by often graphing the two events superimposed upon each other in our "Contraction Watch" chart — as though they were independent episodes.

But to even a casual observer there is something unsettling in the above chart, especially if we’ve been told that the "Great Recession" was a once-in-a-lifetime event that required once-in-a-lifetime amounts of new national debt to fix. Clearly, the 2010 contraction already appears well on the way to equaling or exceeding the "Great Recession" in severity despite those "fixes."

By the end of August, the 2010 contraction had out-lasted the "Great Recession" in duration, and was contracting at a rate that we might expect to see only once in every 15 years. But it is highly unlikely that two fully independent contractions this severe would happen only two years apart — just as the 1937 recession is not generally thought to be just another closely spaced severe recession, but is rather seen in the proper context.

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