U.S. News & World Onion?

When I first read today's post, "Mental Recession? Maybe. Economic Recession? No," by James Pethokoukis, "money and politics blogger" for U.S. News & World Report's Capital Commerce blog and the assistant managing editor of the magazine's Money & Business section, I thought I was reading a story from The Onion, a satirical (and often entertaining) site that serves up "fake news" as though it was the real thing.

After I went back over what he had to say, I realized that Pethokoukis was dead serious about the notion that the economy is just going through a bit of a rough patch. That is despite the sheer volume of evidence that indicates otherwise. What made it even more interesting, however, was the fact that he quoted Bruce Kasman, JPMorgan's chief economist, to back up his assertions. Mr. Kasman apparently supplied three "reasons" -- all of which are backward-looking or totally bogus -- why this is true.

Well, I did a quick Google search, and found an interesting entry at the Wall Street Journal's Real Time Economics blog, dated March 7th (before the Bear Stearns bailout and the more recent spate of financial market blow-ups). It was entitled "J.P. Morgan: ‘Slouching’ Into a Recession," and it featured some interesting insights from, as Pethokoukis describes him, "one of the "smartest guys I know." Here is what RTE wrote:

Add yet another recession call to the mix. J.P. Morgan Chase says the latest decline in payrolls is enough — combined with drags from housing, credit and energy markets — to indicate the economy has fallen into a recession.

Chief economist Bruce Kasman, in a conference call with clients, said a key question up to now had been whether the weaker economic growth would be accompanied by a change in business and household behavior. The three straight months of private-sector payroll declines sealed the view that the business sector is cutting back, in a way that will build on itself for the next few months, he said.

But instead of a hard “break” into recession, “we’re kind of seeing a slouching,” he said. Consumers haven’t quite retrenched though they face significant drags, he said. Among businesses, the softening in labor demand hasn’t been accompanied by a surge in layoffs, and capital spending has stayed afloat. “It’s not a full-blown breaking in business behavior,” Mr. Kasman said. “What we’re seeing is a real economy that has been dragged down by some substantial forces of weakness. … It’s enough for us to believe first-half growth will be averaging in negative territory.”

The firm’s economists still see a mid-year rebound due to lower interest rates, tax rebate checks and some relief from the credit stress and energy prices. “But mid-year feels an awfully long way off right now,” Mr. Kasman said.

Now read through the Pethokoukis' piece, pasted below. Can you honestly tell me that you don't feel (like I do) that the U.S. News blogger might have a real future ahead of him at the Onion -- or maybe, in stand-up comedy (with Mr. Kasman, perhaps, as his warm-up act)?

One the smartest guys I know is Bruce Kasman over at JPMorgan, and he still doesn't think the economy is going to fall into recession, much a less a severe, 1982-style downturn. (Neither, by the way, does the Fed.) Rather, he sees the economy muddling along with 1 percent GDP growth in the second half. Here are his three reasons:

1) Profit margins at nonfinancial companies remain healthy. "This is a testament to the fact that firms have produced strong productivity gains—estimated to have risen at a 2.5% pace in 1H08."

2) Trade remains strong. "This is related to the decline in the dollar and the composition of US exports which is concentrated in agricultural products, industrial supplies, and capital equipment—items that remain in demand by rapidly growing emerging market economies."

3) Businesses will have to rebuild their inventories. "Apparently, retailers and manufacturers are using the lift to demand from rebate spending and strong exports in 2Q08—in which final sales grew at a faster than 3% clip—to clear their shelves. In addition, the agricultural sector is experiencing a forced inventory drawdown due to floods and bad weather conditions. This destocking is holding back our estimate of 2Q08 growth to 2.2%. But it will add significantly to growth in the coming quarters. It should be noted that only twice in the last three decades—at the end of 2001 and 1982—did firms destock at the pace seen in 1H08. In both these previous cases, a stabilization in stockbuilding contributed more than 1.5 percentage points to growth over the following two quarters."

Comments

[Independent Accountant]

Stand up comedy? See my 2 July 2008 post on 2008's Palmer Raids. There are a lot of clowns all around.

[weinerdog43]

I gave up reading US News years ago. It appears their electronic version is just as much in the tank as the paper version. The Onion indeed.

[cklimen]

Great stuff here - first time visitor
You should probably change your subtitle from "the coming economic unraveling" to "the current economic unraveling" - at this point, it seems the latter would be more appropriate!

[Groty]

Profit margins always come down when you get slack in the economy. Doug Cliggot, who interestingly enough was formerly with JPMorgan, says profit margins peaked in 3Q06 and that once they start contracting it historically takes 14 quarters for them to hit bottom. This one is a joke.

Same with trade. Most of the world's stock markets are in bear markets, signalling a sharp slowdown in global economic activity. Exports will suffer. I recently did a spot check of '09 earnings and revenue estimates for 20 big industrials/exporters, and they are WAY WAY WAY too high, IMO.

I do agree with his third point to a degree. In part because this slowdown has been foreseen for quite some time, executives have kept inventories at historic low levels relative to sales. But with most people expecting an "L" or an extended "U" shaped recovery, I suspect executives will remain cautious about rebuilding inventories. Adding 1.5% to GDP from inventory builds seems aggressive.