It seems as though everything is going through its “natural” paces in the US economy: first there was the massive credit crunch in the mortgage market which came on the heals of the bursting of the property market; then in train, durables and semi-durables took a hit and now it appears as though corporate earnings and thus profits are being squeezed. There is a textbook recession in the making. First, workers lost the wealth effect (for those who own their house) from their appreciating home values and soon it seems they are going to lose what little security they derived from near full-employment.
The up side is that even heavyweights like L. Summers are pushing for the federal government and the Fed to deliver an old fashioned Keynesian demand push. If oil continues to drop and if food prices hold steady there just might be enough flexibility in the US economy to handle that kind of stimulus without generating inflation. As Greenspan noted some time ago the American worker is so traumatized that even in the context of full employment there have been little to no signs of wage push inflation.
Enjoy Christmas but be careful you may be paying-off your credit cards in very different conditions from the recent past.
NB. my intuition tells me it is not inflation the Fed should be worried about but rather the inverse driven by over production in the face of declining or stagnant demand. That would imply a protracted period of depressed corporate earnings indeed.
View of the day: The earnings recession has arrived
By David Rosenberg
While the debate rages over whether the real economy is going into a recession, the reality is that the earnings recession has already arrived,” warns David Rosenberg, chief North American economist at Merrill Lynch……
Mr Rosenberg says it is reported earnings that investors ultimately pay for. “So, this is not just about a pullback in risk appetite or a ‘panic’ – that’s the story in the money and credit markets. The story for equities is that the earnings cycle seems to have ended more abruptly than investors had anticipated.”