Opening Bell: Did We Dodge A Recession?

Conventional Wisdom now says yes, maybe; tax the rich, teach the vets; UBS official indicted; etc.

Well, that was fast.

The Wall Street Journal on page one says economists are hedging their bets on a recession, saying the business outlook has improved markedly in just the past month. And New York Times columnist David Leonhardt similarly writes on C1 that what was “fanciful” a month ago—that the U.S. might avoid recession—is less so now, something Bloomberg suggests is signaled by new consumer data.

What happened?

The Federal Reserve put a floor under the cratering credit markets with the bailout of Bear Stearns and the opening of direct loans to Wall Street. Its slashing of interest rates is beginning to filter through the economy. The Journal, the Times, Bloomberg, and the Financial Times all point to the $110 billion in stimulus checks the government has begun passing out as a brake on any free-fall.

But the immediate impetus for the stories is a spate of not-miserable economic reports, including employment and consumer spending. Consumer spending dropped 0.2 percent in April (that’s not inflation-adjusted, in real terms it was worse), but the Journal and Bloomberg say it was up a better-than-expected 0.5 percent, not counting car sales.

Employment meanwhile hasn’t fallen off the charts, though it’s down significantly. While the NYT sees that indicator as half-empty, writing that the economy has fewer jobs than it did six months ago, “a perfect predictor of recessions” over the last half a century, the Journal sees it as something like half-full, noting that new jobless claims are “well below” the 400,000 level typically seen in recessions.

But the list of factors the economy must overcome is daunting: soaring energy and food costs (and import prices, up 15 percent from a year ago) that are kicking up inflation, tighter credit, a housing market that has another few trillion of home wealth to burn through, overextended consumers more pessimistic than at any time in decades, and a financial system that is still deeply troubled. The Journal puts a good bit of news down low, reporting that the Minneapolis Fed president told it the U.S. can’t avoid recession.

And, as the Journal notes, a recession is “a period of significant decline in economic activity… that lasts more than a few months.” With 0.6 percent annual growth in the last six months, that definition is already awfully close to being met. If the U.S. pulls out of this nosedive, it’ll be one for the history (and econ) books.

Recession. No recession. Recession

As if to prove economists are of two minds, here’s the same Lehman Brothers’ dismal scientist in different papers. The FT:

“Given all of the negative news… the strength in this report is a startling reminder of the resilience of the US consumer,” Drew Matus, senior economist at Lehman Brothers, said.

And the WSJ:

“I think the problems are just starting,” said Lehman Brothers economist Drew Matus, citing high gasoline prices and tightening lending standards, saying that prolonged stagnation can be worse than a recession.

Bloomberg and the WSJ report that Fed chief Ben Bernanke said financial markets are “far from normal,” which is Fedspeak for “still screwed,” and some officials are making noise about raising interest rates to battle inflation. The FT reports that the Fed is looking at disowning the Greenspan laissez-faire philosophy of asset bubbles.

Reuters says a Philadelphia Fed survey of economists finds that the odds of a recession have increased. Non-economists, as polled by the Los Angeles Times and Bloomberg, say we’re already in recession by a seventy-eight to seventeen margin.

UBS official indicted

The business papers report that the U.S. indicted a former UBS banker and a Lichtenstein executive, accusing them of helping a rich developer skip out on taxes—a “widening probe” sparked a couple of months ago when a bank employee in the tiny European bank haven leaked incriminating info to investigators.

The FT and the Journal both front the news, which the NYT puts inside its business section. The Journal’s lede is the juiciest, saying the two are charged with “opening secret bank accounts, destroying documents, using Swiss credit cards and filing false tax returns.”

The WSJ says the charges are further evidence that “elaborate tax-evasion schemes available only to the super-rich are teetering toward a collapse.” Here’s how serious the feds are: the UBS guy they charged fell into their nets when he came singing to them about the wrongdoing, the Journal says, but “prosecutors opted to indict him anyway.” Pass the popcorn, this ought to get interesting.

Refiners pinched by oil prices

The Times on its Business Day cover looks at how high oil prices are sticking oil refiners, too.

After last year’s stellar profits, American refiners are going through a traumatic period. In a time of record gasoline prices, some of them actually lost money in the first quarter, and for virtually all refiners, profits are down sharply.

Experts say the refiners are caught in a double bind. The price of their raw material, oil, is rising because of strong global demand. At the same time, consumption of gasoline in the United States is falling as a result of slower economic growth and consumer efforts to conserve.

Oil consumption dropped 3.3 percent in March from a year ago and the paper says refiners are cutting way back on production, stirring suspicions among consumer advocates.

The WSJ on A3 and the Times on C1 write that Congress voted to stop stockpiling oil for emergencies in a bid to relieve pressure on demand. It’s a move Bush has promised to veto, though Congress looks to have the votes to override it. The Senate passed it 97-1.

Voters, if the gas-tax hooha wasn’t evidence enough, let it be known that the politicians hear you and have unleashed the full pander. Pausing the stockpiling will hardly make a difference in gas prices—the amount comes to 0.1 percent of oil demand every day, but it will hurt if a shock comes down the pike.

“The SPR is an insurance policy,” said Keith Hennessey, a top economic-policy adviser to Mr. Bush. “Just because your budget is being squeezed doesn’t mean you stop paying your insurance policy.”

Tax the rich, teach the vets

House Democrats are pitching a new tax on the rich to pay for a $50 billion, ten-year Dem proposal to increase veterans’ education benefits, the Journal scoops on A4. That’s just in time for a going-nowhere proposal to get them further pegged by the GOP as tax-and-spend liberals in the general election. The legislation would add 0.5 percent to the tax bills on income above $500,000 a year for an individual or $1 million for a couple.

Buying the boss’s house

The Journal fronts a Marketplace story on yet another way the housing bust is hitting companies. It seems companies have bought the houses of top executives that have been transferred and are losing big bucks. Qwest lost $1.8 million on its CEO’s house, and at least seven others have taken $500,000 hits. ProLogis, a real-estate firm, has taken $500,000-plus hits on homes for two different execs.

Some shareholders, as you can imagine, are not happy.


Corporate gadfly and billionaire investor Carl Icahn is trying to keep the spotlight on Yahoo by buying up 50 million shares and preparing for a shareholder-activist-style battle for board seats, the papers say. He wants to bring Microsoft back to the table, and the Journal, LAT, and FT report that other hedge fund investors are thinking about whether to get involved.

The NYT notes that it’s not quite time to get all breathless. Icahn has just 3.5 percent of Yahoo’s shares and he’s had some failures in his pressure bids recently. But considering that Yahoo just turned down a bid at nearly a two-thirds premium, the company is ripe for troublemaking.

Chevy Tahoe: environmental savior

The Boston Globe looks at how the green label doesn’t mean much sometimes. How did a twenty-mile-per-gallon Chevy Tahoe get labeled “Green Car of the Year” by the Sierra Club of all people? By slapping a hybrid motor in it.

Reality Check Quote of the Day:

“How a 6,000-pound behemoth can be the green car of the year is beyond me,” said David Champion, director of Consumer Reports Auto Test Division. “It’s a marketing exercise rather than reality.”

Trib to hold Cubs, for now

The Chicago Tribune reports its owner Tribune Company may delay selling the Chicago Cubs because of “costly” repairs at Wrigley Field. The paper notes that the $650 million sale of Newsday eases the pressure for a quick sale to pay down debt maturing this year.

Sources involved in the bidding process said word is filtering back to those potential buyers that Tribune Co. will hold onto the team rather than sell at distressed prices if would-be buyers drop their prices too steeply in anticipation of having to pay for Wrigley Field renovations themselves.

Downgrade on the way for MBIA?

Despite analysts saying Monday that MBIA would likely keep its AAA rating despite its big first-quarter loss, ratings firm Moody’s said “not so fast” yesterday to it and competitor Ambac Financial after eyeing losses on second mortgages and home-equity lines of credit. The WSJ inside Money & Investing says that “sets up another round of scrambling for capital to preserve credit ratings and imperils their efforts to move beyond the turmoil of early this year.”

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.