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Saturday, November 24, 2007

Merrill's Rosenberg: Recession

by Calculated Risk on 11/24/2007 08:16:00 PM

From Alan Abelson at Barron's: Skeleton at the Feast (hat tip Jas)

In a piece [Merrill Lynch's David Rosenberg] put out Friday, he says unequivocally that if you're looking for the earnings recession, you need look no more -- it's here. ...

With the tally now encompassing 90% of the companies reporting, third-quarter earnings per share dropped 8.5% from the third quarter last year. ...

David stresses that profits drive the business cycle -- capital spending and employment feed off them. And he sighs: "It has always been thus." Hence, he's ineluctably forced to the conclusion that a recession in the economy "is either here or no more than two quarters away."
I believe Rosenberg is referring to operating earnings excluding the huge GM loss(1). S&P 500 operating earnings are off 8.5% from Q3, 2006 and off 12.4% from Q2 2007.

I'm not sure about the recession being "here now". There are signs of a slump in non-residential structure investment, but software and equipment investment still appears steady. And the all important holiday retail sales are apparently off to a healthy start: Retailers post robust start to holidays
According to ShopperTrak RCT Corp., which tracks sales at more than 50,000 retail outlets, total sales rose 8.3 percent to about $10.3 billion on Friday, the day after Thanksgiving, compared with $9.5 billion on the same day a year ago. ShopperTrak had expected an increase of no more than 4 percent to 5 percent.
It is always hard to tell in real time when a recession has started, but I don't think the U.S. economy is in recession - yet.

Note 1: as reported earnings, including GM, are off 27.8% from Q3 2006.