Friday, December 15, 2006

WSJ: The old rules don't apply

by Calculated Risk on 12/15/2006 06:39:00 PM

The WSJ suggests:

"... the U.S. central bank and much of Wall Street are now betting that the old rules don't apply, and that a recession next year, while possible, is unlikely."
And the WSJ quotes Dr. Leamer:
"This time will be different," Ed Leamer, who heads the forecasting center at the University of California at Los Angeles's Anderson School of Management, predicts in a report. "This time the problems in housing will stay in housing." It's a prediction, he admits, that "keeps us up at night."
Will this time be different? Will the problems in housing stay in housing? Or will the problems spread to the general economy?

A Citigroup research note on retailers this morning starts with:
"We have a neutral outlook on the ... retailers in our coverage universe ..."
And concludes in BOLD:
"We are keeping a close watch on the housing market as we progress through 2H06."
Obviously asking: Will the problems in housing stay in housing?

Current data, like the better than expected November retail numbers (although Q4 is still on track to have the weakest nominal retail growth since the 2001 recession), indicate the housing bust might not be significantly impacting retail sales yet. Other data, such as from trucking company YRC Worldwide, are not as comforting:
"... the economy has slowed significantly in the fourth quarter, resulting in lower volumes than we anticipated across all of our asset-based business units," stated Bill Zollars, Chairman, President and CEO of YRC Worldwide.... Fourth quarter tonnage is projected to be lower than 2005 by a mid-single digit percentage for each business unit.
And more:
[Jordan Alliger, an analyst at Deutsche Bank] cited perceived risks to the economy in 2007, which could further weaken the unusually sluggish demand truckers have witnessed in the second half of this year.
...
"Should the peak season volume malaise extend deeper into 2007 and call into question the so-called 'soft-landing' economic scenario, we could yet prove far too conservative with our newly revised down forecasts," the analyst wrote.

Justin Yagerman, an analyst at Wachovia Capital Markets, said the soft freight demand raises concern about the health of the economy.

"Conversations with carriers have shown no indication of improving economic forces as freight demands remain muted," Yagerman said in a research note on Wednesday.
But the key isn't what is happening right now; the key is what happens early next year. (Note: I know I've been repeating this timing for some time - but it is almost here!).

Residential construction layoffs will be significant soon (probably starting this month or in January). Home equity extraction has been falling rapidly. Nonresidential construction might have peaked. Foreclosures are rising and will probably be at, or near, record levels in 2007 (at least in California). And issues with mortgage credit quality are finally coming to light.

We will find out soon if the "problems in housing will stay in housing". Right now I'm not sanguine. And I can understand why Dr. Leamer has trouble sleeping.