M. Cary Leahey

1
The DE Recession ScorecardSummary Table and
ChartsAugust 19, 2008

• M. Cary Leahey
• Senior Managing Director
• Decision Economics
• cleahey_at_pdeeco.com

2
Outline

• The Recession Scorecard (Page 3)
• Is It Really a Recession? (Page 4)
• LEI (Page 5)
• Consumer Sentiment (Page 6)
• Retail Sales (Page 7)
• Employment (Page 8)
• Initial Claims (Page 9)
• Housing Starts (Page 10)
• ISM (Page 11)
• Yield Curve (Page 12)
• Corporate Quality Spreads (Page 13)
• Equity Prices (Page 14)
• Crude Oil Prices (Page 15)

3
DE recession scorecard has been mixed. 8 of 11
components are in recession territory (compared
to 8 in July, 7 in June and 4 in December). The
financial market variables have stabilized--the
equity market has improved slightly, the high
yield spread has moved sideways in recession
territory, and the yield curve is steady. Retail
sales growth has weakened in July. Consumer
sentiment is holding to near 30-year lows. Job
declines have gotten no worse although weekly
claims have jumped. Oil prices and other
commodity prices have fallen a lot.
4
Many analysts think there has been no recession
since GDP growth was only barely negative in the
revised 2007Q4 data and accelerated toward 2 in
2008H1. But the recession designation is based
on monthly data, of which payrolls is the most
important. The six-month change in payrolls has
turned negative and every time it has turned
negative, a recession has developed. Given past
experience we may not know we are officially in
a recession until after the recession is over.
5
The LEI is approaching the -3 to -4 range that
usually denotes a recession. In deep downturns,
the year-ago growth rate could fall to -10.
6
The drop in gasoline prices has helped consumer
sentiment stabilize at the mid-to lower end of
recession ranges. Confidence has fallen to 50 in
a deep recession.
7
Real retail sales growth has weakened in July
after solid gains in May and June in response to
the rebate. They are just at the upper end of
the recession range. While the bulk of the rebate
has been delivered, it may take households
another 6 to 9 months to decide how much of it to
spend. So it is too soon to deem the rebate a
failure or even disappointing. Interpreting the
pace of consumption growth in 200H2 will be
difficult. Real retail sales could fall to a -8
year-ago growth rate if things get really bad.
8
Employment losses are stabilizing at 50K plus per
month, a pace of decline far less than past
downturns. The mild 2001 recession contained
job losses of 150K per month for a time. This
suggests that firms are holding the line on jobs
cuts which may prevent the recession from truly
unraveling. The risk, however, is that the
slowdown will lead to further jobs declines and
perhaps contribute to another round of financial
stressthe so called negative feedback loop
central bankers fret about.
9
Initial claims have jumped recently to the 450K
range, well into recession territory. But the
figures may be distorted by legislative changes
which allow some who have exhausted their initial
benefits to reapply. In the deep 1982 downturn,
initial claims peaked at 650K plus. In the last
two downturns, claims rose to only 500K.
10
Housing starts are well within recession ranges
now. Starts bottomed at 800K during two of three
last downturns. Are starts finally bottoming
well before the expected bottoming in home prices?
11
The national ISM remains well above the upper end
of the typical recession range and appears to be
bottoming. The index fell to 30 during the deep
1975 and 1982 downturns and to only 40 in the
previous two downturns. Will the widening global
recession mean an eventual drop in manufacturing?
12
The funds rate has moved below the level of
10-year notes in late January. A steepening
yield curve is an important ingredient of a
recovery. The curve tends to steepen to 200 bps
by the end of the recession.
13
High yield spreads entered the lower end of
recession-like territory in February. In the past
two recessions, spreads peaked at 1000 bps.
However, the absolute level of corporate yields
is low compared to the past two downturns. The
equity rally and subsequent bust mean that
spreads left and then re-entered recession
territory.
14
Equity prices have rebounded and then sunk again
and are about 20 from the highs. Declines of
20 are typical during recessions.
15
Crude oil prices are definitely in recession
territory at or near record highs after
inflation. But they have dropped sharply on signs
of a spreading and widening global
recession.(Note This crude oil price is
refiners acquisition cost which runs about 10
below WTI).