Chicago Daily Observer

A funny thing happened on the way to the most predicted recession in US history: it didn’t happen.
The theory behind the widespread recession forecast was that the declining value of US homes, the shrinking amount of mortgage equity withdrawal, or a credit squeeze would lead to either a severe slowdown or outright decline in consumer spending. Prominent economists – including one Nobel Prize winner – made comparisons to the Great Depression, predicting a long and deep downturn. Alan Greenspan declared a recession was likely and said this was the worst financial crisis since the end of World War II.
Trouble is, someone forgot to convince consumers they had to stop spending. Despite consumer confidence readings that are downright awful, “core” retail sales are up at a 10.2% annual rate in the past three months. In other words, consumer confidence statistics may express how people feel, but not ... Read More...

From Brian Wesbury's Weekly Column for the Chicago Daily Observer

The price of oil jumped $11 per barrel last Friday (a record daily dollar amount), after a $5 move on Thursday. For perspective; just seven short years ago, in 2001, oil was trading at about $20/barrel.
The spike in oil was due to a confluence of factors. A senior Israeli official suggested an attack on Iran – to prevent the latter country from acquiring nuclear weapons – was a possibility. The European Central Bank raised the specter of a rate hike, which hurt the dollar, especially after the unemployment rate jumped to 5.5%, possibly pushing any Fed rate hikes further off into the future.
A re-ignited oil price has re-energized the outlook for recession from some analysts. Despite avoiding one so far, these analysts are convinced that a teetering consumer will be pushed over the edge by $4 ... Read More...

Despite the coldest and snowiest Midwest winter in decades, global warming has taken over the Congressional calendar. This week Congress will vote on a bill that is designed to regulate so-called “greenhouse” gas emissions through something called a “cap and trade” system. Not since rationing in World War II, has the US contemplated such a draconian interference in the economy. While cap and trade is unlikely to pass this year, every major presidential candidate supports the approach. In other words, it will be back.
The bill, which is named “America’s Climate Security Act,” would actually set up two cap and trade systems – one for most types of “greenhouse” gases (mainly carbon dioxide) and another for hydro-fluorocarbons.
Under these systems, the federal government would set a maximum limit on the emission of certain gasses. This is the “cap.” Under this cap it would sell or give-away permits to ... Read More...

Federal Reserve officials, academics and journalists seem fixated on the question of what the Fed should do – if anything – in the face of a “bubble” in financial asset prices, housing prices, or commodities. This debate was originally kicked-off in late 1996 when then Fed Chairman Alan Greenspan rhetorically asked if some sort of “irrational exuberance” had taken hold of the stock market, which had rallied strongly for two straight years.
The good news is that apparently there is a consensus at the Fed that monetary policy should not be used to “pop” bubbles. The bad news is that the Fed has yet to come to grips with the fact that mistaken monetary policy is often a primary cause of bubbles to begin with and that the world would be much better off if the Fed focused on one thing and one thing only – a stable value ... Read More...

Later today the Treasury Department will announce federal budget figures for April (the month when tax payments are due). We expect the figures to show a $161 billion surplus in April, which would leave the federal budget, after the first seven months of the 2008 Fiscal Year, with a $150 billion deficit. For comparison, the deficit for the same period last year (in FY 2007) was $81 billion.
Trouble is, those rebate checks most taxpayers have just started receiving – the bulk of which will be distributed in May, June, and July – are going to make a large dent in the federal budget this year. The Congressional Budget Office anticipates a deficit of $357 billion for all of FY 2008 – roughly $200 billion more than last year.
However, even at this supposedly lofty level, the deficit would still be only 2.5% of total US Gross Domestic ... Read More...

It’s not hard to understand why fears of recession are elevated, or why some economists even think the US is in one right now. From their 2005 peaks, existing home sales are down 32% and new home sales are down 62%. Home prices are falling at their fastest pace in decades. Car and truck sales have been abysmal, with US-made vehicle sales down 15.3% versus a year ago.

The credit markets have seen enormous turmoil, with huge write-downs at major financial institutions, wider risk spreads, and a correction in the stock market.

These developments, or news about them, have helped drop at least one measure of consumer sentiment to its lowest level since the end of the 1981–82 recession, when the unemployment rate was up above 10%.

The conventional wisdom is not always wrong. But ... Read More...

When we add up almost all the components of GDP – consumption, business investment, home building, trade, and government – we get a great big goose-egg (0%) for the first quarter of 2008. Consumption, business investment, and trade add to GDP, while weakness in housing and government fully offset these gains.
However, the one component we left out – inventories – looks like it rebounded strongly in Q1, after a large decline in Q4. As a result, we expect the first report on Q1 real GDP to show a growth rate of 1.5%, which is near the high end of what economists are forecasting.
At this point, we are forecasting 0.5% growth in Q2, with a sharp rebound in the second half of 2008 to real growth rates near 4%. The weakness we expect in Q2 is primarily due to inventories, with the other components ... Read More...