Recession Ahead?

No-one knows for a certainty that 2008 will be a year of recession. Gurus are all over the map with their crystal balls, some wishfully calling for a "growth recession," while others see a very rotten time ahead indeed.

But better pay close attention--because a great deal is riding on the recession odds. There's the value of your portfolio, the cost of money, your job, the price of oil, inflation and very likely the identity of the next inhabitant of the White House. The worse the recession, I would say, the better the chances of the Democratic candidate.

According to the Economic Cycle Research Institute, seven out of 10 citizens now believe we are or will soon be in a recession. That could be a powerful sentiment slowing the economy. Certainly the credit crisis reflects that we have been in a serious slowdown for some time now. The leading home price index is at a six-year low, financial services are at a 13-year low, while non-financial services are at a 56-month low, according to figures kept by ECRI.

Sounds pretty bad, doesn't it?

Be on your own personal recession watch. Carefully follow the major drivers of the economy.

Most crucial are the job figures. which are holding up, but have softened to under 100,000 new jobs last month. Any two months in a row of negative job growth--meaning there were job losses--is usually the key indicator that a recession is around the corner, asserts Lakshman Achuthan, of the ECRI, a private organization that keeps the most intensive watch over all statistical indicators of the economy.

Second, the industrial manufacturing figures, which are holding up due to exports based on the weakening dollar, are the next best barometer of the U.S. economy. Still, manufacturing is well below the June high, suggesting that this sector is "subdued," according to the ECRI December report.

Third, housing is down and expected to fall lower. Merrill Lynch economist David A. Rosenberg says in a report that the roof caving in on housing starts with a 43% plunge in new single-family homes.

Consumer expectations are falling as confidence lags due to the inability to borrow vast amounts of money on rising home values. Interest rates, of course, are headed lower, due to the credit crunch, and may also be a sign of the recession coming. The same Merrill report suggests that chain store sales are looking very soft in the critical December holiday period, which many stores count on for a good part of their yearly turnover.

Corporate earnings are holding up for now, but are expected to slow significantly, perhaps by 16%--which represents the median decline in corporate earnings during recessions over the past 50 years, according to Morgan Stanley. "Earnings are now 62% above trend. If history repeats--and I see no reason why it shouldn't --there is a huge earnings shock coming," says Abhijit Chakrabortti, Morgan Stanley U.S. strategist. That's far more bearish than projections by Goldman Sachs or T. Rowe Price, the mutual fund company.

Investor expectations, neither bullish nor bearish, are flat, indicating that investors can't make up their mind about the recession because they can't see it. Don't wait for the National Bureau of Economic Recession (their Business Cycle Dating Committee is the body that officially calls a recession) to tell you that we're in one, because they ordinarily wait until economic activity has fallen for six months. By then, it's too late--the stock market will have sagged.

Even the Economic Cycle Research Institute believes, based on today's figures--which are a mix of positive and negative--that a recession isn't inevitable. Yet its Weekly Leading Index has fallen to its lowest point since November 2002, suggesting, admits Achuthan, that "U.S. Economic growth prospects continue to worsen."