RE: The Fed cut the rate .5; DOW is up; last quarter of 2007 showed slow growth not contraction

The Fed's sky high interest rates (aka the reduction in the money supply) is exactly what caused commercial and home construction to come to a standstill and what caused the jobless rate to skyrocket. The Fed's tightening led to a rise in the 10 year treasury from 9% to 15% within 18 months. That will cause construction to dry up all day long. And the prime rate jumped about 8 points from late '79 to mid '80 (12% to 20%). That's bound to reduce borrowing of anything where the debt instrument used is tied to the prime rate (cars for example) and cause the sale of big ticket items to plummet. Inflation by itself does not cause a recession - its the Fed fighting inflation by constricting the money supply.Also I wasn't trying to compare the 81-82 recession to our current economic environment - just trying to show that it wasn't caused by Reagan or Carter.

malmo wrote:

Californian wrote:

81-82: caused by the Fed cranking up short-term interest rates to 20%

80: same as 81-82, also add the tripling in oil prices

Caused by the cranking of Fed rates? You do realize that interest rates and inflation was in double digits early 1979 and continued unabated until late 1981/82? Commercial and home construction was at a standstill, unemployment through the roof, nothing about the 81-82 recession is similar to today. (except perhaps oil prices).

Recessions are over before anyone knows about them. All you can do is get the number of the bus that ran over you.

http://www.schwabinsights.com/2008_01/strategy.html

Flagpole Willy wrote:

The Fed just cut the rate at 2:15 today, The DOW went up as a result,

By the way, the Dow never goes up because what's largely already expected by the market happens. The subsequent Fed statement may have lended some ammunition, but it was just dumb money chasing the momentum. As for all the recession talk, the stock of Starbucks, the ultimate barometer of discretionary consumer spending (still can't totally undestand why people pay $5 for a cup of coffee and sugar), continues to get beat up.

Fed Funds and housing starts (millions)

1978-04-01 6.89 2.2

1978-05-01 7.36 2.1

1978-06-01 7.60 2.1

1978-07-01 7.81 2.1

1978-08-01 8.04 2.0

1978-09-01 8.45 2.0

1978-10-01 8.96 1.9

1978-11-01 9.76 2.1

1978-12-01 10.03 2.0

1979-01-01 10.07 1.6

1979-02-01 10.06 1.8

1979-03-01 10.09 1.7

1979-04-01 10.01 1.9

1979-05-01 10.24 1.9

1979-06-01 10.29 1.8

1979-07-01 10.47 1.8

1979-08-01 10.94 1.8

1979-09-01 11.43 1.8

1979-10-01 13.77 1.7

1979-11-01 13.18 1.5

1979-12-01 13.78 1.5

1980-01-01 13.82 1.3

1980-02-01 14.13 1.3

1980-03-01 17.19 1.0

1980-04-01 17.61 1.0

1980-05-01 10.98 0.9

1980-06-01 9.47 1.2

1980-07-01 9.03 1.3

1980-08-01 9.61 1.4

1980-09-01 10.87 1.5

1980-10-01 12.81 1.5

1980-11-01 15.85 1.5

1980-12-01 18.90 1.5

1981-01-01 19.08 1.5

1981-02-01 15.93 1.2

1981-03-01 14.70 1.3

1981-04-01 15.72 1.4

1981-05-01 18.52 1.1

1981-06-01 19.10 1.0

1981-07-01 19.04 1.0

1981-08-01 17.82 0.9

1981-09-01 15.87 0.9

1981-10-01 15.08 0.8

1981-11-01 13.31 0.8

1981-12-01 12.37 0.9

1982-01-01 13.22 0.8

1982-02-01 14.78 0.9

1982-03-01 14.68 0.9

1982-04-01 14.94 0.9

1982-05-01 14.45 1.0

1982-06-01 14.15 0.9

1982-07-01 12.59 1.2

1982-08-01 10.12 1.0

1982-09-01 10.31 1.1

1982-10-01 9.71 1.2

I have looked at the numbers for real estate in my area over time. The job growth rate and unemployment rate are much more correlated to changes in housing prices than 10 year bond rates and mortgage rates. I was surpised to see this but it makes sense.

I would imagine that housing starts would be correlated to changes in housing prices. Thus, they too would be more correlated to job growth and unemployment numbers than changes in 10 year bond rates (not the federal funds rate), but I couldn't say for certian because I didn't look at those numbers.

I realize there is a difference between the federal funds rate and the ten year bond rate, but I thought I'd throw out what I learned.

What I see is a gradual rise in the fed funds rate from 7% in the spring of '78 to 11% in Sep '79 translating to a modest decline in housing starts (2.2 million - 1.8 million). Then when the Fed gets aggressive from Oct '79-Apr '80 (recuding the money supply to drive the fed funds rate from 11% to 17% within 6 months), they cause housing starts to collapse 50% in 7 months. Seems to support the fact that extremely aggressive Fed action was the biggest culprit in obliterating the housing market. When they drastically reversed course and cut rates aggressively in the sping of '80, housing starts rose more than 50% in a short period of time. Their second wave of aggressive tighetning seemed to have more of a lagged effect, but once the fed funds rate was running north of 15% again, it only took a few months to criple housing starts again.

......................Fed Funds..30 yr..HouseSt..UI

Sagarin wrote:

For clarity's sake, put away the Wikipedia, and read the following for definition of a recession:

http://www.nber.org/cycles/recessions.html

Sagarin,

What you have provided is A definition of a recession. While it might actually be a better way to determine the health of the economy than the 2 consecutive quarters of contracted GDP, the traditional definition IS the 2 consecutive quarters of contracted GDP.