M' Cary Leahey

1
The DE Recession ScorecardSummary Table and
ChartsJune 17, 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 is mixed. No component
has switched in or out of recession ranges in
May, so 7 of 11 components are in recession
territory (compared to a peak of 8 in March and 4
in December). The big improvement has come from
retail sales, which jumped in May in response to
the rebates. But consumer sentiment continues
to slide to near 30-year lows, with a near-30
year high on 1-year inflation expectations,
characteristic of the stagflation-lite situation
at present. In the financial sector, the
improvement seen in yield spreads and the stock
market has stalled.
4
Many analysts think there has been no recession
since GDP growth has not turned negative. 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
Both indexes of consumer confidence and sentiment
have taken another downward lurch and are just in
the lower end of recession ranges. Confidence
has fallen to 50 in a deep recession.
7
Real retail sales growth has rebounded beyond
consensus expectations in response to the rebate.
Real retail sales are just at the upper end of
the recession range. The timing of the rebate
from May to September will skew spending measures
and make interpreting any potential pickup in
consumption difficult. Real retail sales could
fall to a -8 year-ago growth rate if things get
really bad.
8
Employment losses are stabilizing at 65K per
month, a pace of declines 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 may be stabilizing around the
lower end of the recession range of 375K. 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 may even be
bottoming. The index fell to 30 during the deep
1975 and 1982 downturns and to only 40 in the
previous two downturns.
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 have just 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 has meant that spreads have
reversed and the spread has fallen 100 bps, just
out of recession territory. But the spreads have
stabilized in the past month as the equity rally
has stalled.
14
Equity prices have rebounded but remain 10 below
the August peak. Declines of 20 are typical
during recessions, so we are worried that this is
a bull rally in a bear market.
15
Crude oil prices are definitely in recession
territory at or near record highs after
inflation. (Note This crude oil price is
refiners acquisition cost which runs about 10
below WTI).