Jerry Bowyer
May 16, 2008
Recession? Not so fast, I say
By Jerry Bowyer

© National Review Online

The Wall Street Journal daily watering hole of the market bears titled its Wednesday page-one economic report: "Recession? Not So Fast, Say Some." With a question mark safely inserted before the bull case, and the idea of a non-recession safely relegated to "some say," the Journal's status as pessimism central remains intact. But as a member of the "some say no recession" camp, I'm here to say the economy still looks pretty good.

Before I explain why, allow me to summarize the recessionista case:

    Consumers use their homes as giant ATM machines, spending beyond their means in response to the wealth effect of higher home prices. As home prices plunge into a giant suck hole of depreciation according to the Case-Shiller index (the only index worth watching) the consumer will simply stop spending. And since the consumer is 70 percent of the economy (or some such number) this will trigger a recession. And now that gas prices are sky high, retail spending will plunge even more. In fact, we're in danger of something much worse than a normal recession ...

You know the rest: It's the 1930s all over again . . . blah, blah, blah . . . Herbert Hoover . . . blah, blah, blah . . . the Great Depression . . . blah, blah, blah. . . .

And it's utterly wrong.

Let's begin with the data: Retail spending dropped very little last month, and it didn't drop at all if you exclude autos. Meanwhile, consumer spending has consistently been up compared to the same time last year. The consumer will simply stop spending? Hasn't happened.

Of course, the data were going to be wrong all along since the recessionistas based their forecast on flawed assumptions.

For one, people don't spend more based on the value of their houses. People typically don't even know the value of their houses unless they're in the midst of selling or appealing a property-tax assessment. People spend based on their expected long-term incomes.

Basing big-picture assumptions on Case-Shiller is a faulty approach, too. This index tells us the story of urban metro-area home prices, including the unusually high jumbos and the unusually low sub-primes. On the other hand, the OFHEO house price index tells a much less volatile story and gives us a better peak at the typical homeowner the guy between jumbo and sub-prime.

Oh, and gas prices will never, ever, ever reduce retail spending since gas is a component of retail spending. Chain stores own gas stations. More money spent on gas is not a subtraction from overall consumer spending, it's a transfer from one retail department to another.

The fact that you're not reading this information in a lot of places is a sad reflection on the state of financial punditry in America.

Recession? Not so fast, I say.

© Jerry Bowyer


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