Recessionary signs aplenty

It was only a few weeks ago that former Federal reserve Chairman Alan Greenspan proffered the view that the chances of a near-term U.S. recession were “about 50/50”. Yesterday’s speech by the current Fed Chief, Ben Bernake, spoke volumes about the increasing economic nervousness south of our border. This from today’s WSJ:

In a speech that reflected more urgency about the economy than he has expressed since August, when the current credit crunch began, Mr. Bernanke strongly hinted the Fed would reduce its short-term interest-rate target, probably by half a percentage point from its current 4.25%, at the central bank’s next meeting, Jan. 29-30. While the Fed could act before then, it would be unlikely to do so in the absence of a dramatic deterioration in the markets or exceptionally bad economic data.

Mr. Bernanke told Women in Housing and Finance and the Exchequer Club in Washington that inflation remained a concern but indicated that wouldn’t stand in the way of lower interest rates. The “outlook for real activity in 2008 has worsened, and the downside risks to growth have become more pronounced,” Mr. Bernanke said. “In light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary.”

According to the WSJ’s own monthly survey of private economic forecasters, the chances of a U.S. recession during the next 12 months are up to 42% from 23% six month ago.

What data are these folks seeing? You can find it yourself.

– American Express (AXP:NYSE) cited a sudden but broad-based consumer slowdown yesterday as it lowered Q4 and 2008 guidance and boosted its reserve for credit losses by US$440 million. This from CIBC’s U.S. research team:

After the close yesterday, AXP lowered 4Q07 and 2008 guidance as a result of sudden yet broad based U.S. consumer trends in the month of December. Inclusive in its 4Q07 guidance is a $440 million boost to reserves in anticipation of worsening credit throughout 2008. During the conference call last night, mgmt. stated that across all U.S. consumer and small business segments, it witnessed a sharp slowdown in spend and rise in delinquencies. Incorporated in our lowered 4Q07 and 2008 estimates are lower spend and higher loss assumptions. AXP’s stock has underperformed the broader indexes over the past 12 months as a result of its tied association with the overall perception of the consumer. While we continue to believe AXP’s high spend customer base will fare better relatively, they are clearly not immune from the slowdown. We believe AXP will still perform better than its financial peers in 2008. However, given our grim outlook on the rest of the sector, this may not be saying much. We continue to believe that within financials, AXP is “the best house in a bad neighborhood.”

– And then this morning, RBC released its own dour views:

Instead of bringing consumers a sense of renewed optimism, the New Year brought a severe case of post-holiday blues which have taken a serious toll on consumer sentiment, according to the most recent results of the RBC CASH (Consumer Attitudes and Spending by Household) Index. Consumer confidence fell across the board and Americans’ expectations for the future dipped into negative territory, according to the survey of 1,027 Americans taken earlier this week. As a result, the overall RBC CASH Index, released today by RBC, stands at 56.3 for January 2008, more than nine points below December’s 65.9 level.

“The decline in the overall Index, to its lowest level since data collection began in 2002, highlights the impact that rising food and fuel costs and declining housing values are having on consumer confidence, said T. J. Marta, Economic and Fixed Income Strategist for RBC Capital Markets.” With none of these headwinds likely to abate any time soon, consumers could pull
back further on spending, increasing the risk of a recession.

– Barron’s kicked off the New Year with a specific slap at the Canadian currency, calling the Loonie the “short” of 2008. Hedge fund managers don’t need much more of a hint than that, and the Canadian $ marketmakers were certainly quick to comply. Sure enough, folks that haven’t yet bought any currency for their March break trip saw the dollar quickly ease from US$1.02 to US$0.99 over a few short days. But a drop of a few pennies won’t be enough to insulate the Canadian economy from a U.S. economic contraction.

For every entrepreneur getting ready to pitch his/her story to a VC or merchant banker over the next few weeks, be sure to have your story straight about what a 2008 U.S. recession would mean to your business plan. While investors may put money into companies for long term reasons, they sure don’t pull the trigger if they think you’ll miss the first two quarters post-transaction.

MRM