Economic Storm Signals? The Eye of the Hurricane?

There are a number of folks who are trying to 'blow sunshine up your a%%' regarding the economic situation in the US.

Maybe they are right, and all the nasties of the sub-prime/scratch-and-dent/nuclear-waste loans are out of the system. I tend to believe that the loan "crisis" is overblown, but not done and over with. However, the Banks are not out of the woods: "Discount-window" Bank borrowings continue to increase, now running at $14Bn/day. That's not real good.

Maybe that's the right take.

On the other hand, we give you Kasriel of Northern Trust.


There seems to be sentiment developing that the U.S. has weathered the worst of the current cyclical economic storm and blue skies are ahead. We disagree. Any blue skies you see are likely to be short lived. The economy is in the relative calm of the eye of the business-cycle hurricane. The mortgage credit problems are not over. And credit problems in other sectors are just beginning as the housing recession spreads to the rest of the economy. When the economy recovers from the current recession, perhaps in the first half of 2009, that recovery is likely to be muted as financial institutions are still rebuilding their capital and, therefore, will not be able to extend much credit to the private sector

...
Real private final domestic sales – i.e., the sum of personal consumption expenditures and private fixed investment expenditures – contracted at an annualized rate of 1.0% in the first quarter, which was the largest contraction since the fourth quarter of 1991

...
In the 12 months ended April, the BLS reported that nonfarm payrolls increased by 381,000. However, the birth/death adjustment has added 787,000 new nonfarm payroll jobs in this 12-month period. So, net of the birth/death adjustment, nonfarm payrolls would have declined by 406,000

Good news from Kasriel? Sure:


...This lack of credit creation also would be expected to temper the rate of inflation going forward. We continue to expect energy prices to recede as growth in the global demand for it slows. Indeed, U.S. demand for physical volumes of imported energy products has been contracting for about two years

Well, yah, except for the Fed's fiddling and frickackulating:


If a central bank engineers negative inflation-adjusted interest rates when other central banks are maintaining positive inflation-adjusted interest rates, the currency of the economy with negative inflation-adjusted interest rates will depreciate against the others, all else the same. And a depreciating currency usually is accompanied by higher inflation. There are signs that the depreciation of the dollar in recent years is inducing faster price increases of imported consumer goods and those faster import price increases are beginning to be passed on by retailers

You've already seen some of that--but it was "fiscal"--i.e., flooding the market with USDs, rather than interest-rate-manipulation driven.

Best case? Sluggish economy, holding its own but barely, price-deflation in energy and housing countered by price inflation in commodities, including food.

Cross your fingers, folks.

HT: Calculated Risk