My guess is last Tuesday...

Economic forecasters are getting their chips down on early recession forecasts in the hope of winning the "Cassandra" derby and gain mucho exposure on CNBC and (O frabjous day!) and interview by a major money honey if they get lucky.

The analytic crowd likes to give odds on the U.S. economy falling into recession, but Merrill Lynch figures the consumer knows something Wall Street isn’t admitting: that a recession has already arrived.
Citing results from the latest University of Michigan survey of consumer sentiment, economist David Rosenberg points out that the year-over-year trend in buying intentions for large household goods is closing in on the pace that was evident just ahead of the last two economic downturns in 1990 and 2001. [More]

Most watched is the action of you and me and our credit cards during the early few months of the holiday season (now officially extending from Independence Day to the Ides of March). And some see a little spending fatigue.

The malaise in the mortgage market is starting to spread to credit-card and auto loans in what one analyst has dubbed consumer credit "contagion." It's an ominous warning signal for the economy.

Many of the nation's big banks and credit-card companies have begun acknowledging they are seeing a shift in consumer behavior, including more people unable pay off their debts.

Things are unraveling faster than expected for some like Capital One Financial Corp., which on Tuesday boosted its estimates for credit losses next year to potentially above $5-billion in part because of elevated delinquencies on its cards. [More]

Economists are watching the fallout from the housing market. The loss of the feeling of wealth and the ability to extract equity to fund consumption may just be beginning to be felt.

The question, though, is just how much consumers will restrain their free-spending ways. Research by economist Carroll suggests that every $1 decline in house prices lops about 9 cents off of spending. The current value of residential housing is about $21 trillion, according to the Federal Reserve. So if home prices fall by 10%, as many people expect, that would lead to roughly a $200 billion hit to spending over the next couple of years. A 15% tumble in home prices would produce a $300 billion pullback in spending, or about 3% of personal income.

That accords well with calculations by BEA economists. They figure that households took out $340 billion in cash from mortgage and home-equity financing in 2006. That source of funding could largely disappear over the next couple of years.

Three percent—that doesn't sound like a lot. Look a little closer, though, and it's a bigger hit than it seems. The reason is that much of what the government counts as consumer spending is not directly controlled by households. For example, the $1.7 trillion in medical costs is counted as consumer spending, but 85% of that is spent by the government and health insurers, not individuals. And $1.5 trillion in "housing services" is listed as part of consumer spending, but for homeowners it really just represents the value of living in a home rather than any spending they can change. It's mainly a bookkeeping convention, not a real outlay. [More]

[Note the value of residential real estate above : $21T. Now compare to the value of all farmland: $1.7T]

One of the odder statistics tracking our spending is the decline in the growth of gift cards. These were bona fide goldmines for retailers as as much as 27% of their value was never redeemed. Guess what - consumers have caught on. Whether the shrinkage or the impersonality of the gift card has finally turned recipients off, growth is slowing.

The past couple of holidays, you've patted yourself on the back for buying gift cards for your picky teenager or out-of-town relative. "They can choose what they want, and I get credit for being thoughtful," you've thought.

Well, hang on just a minute. While the popularity of gift cards has skyrocketed over the past four years, the rate of growth is slowing. The National Retail Federation said Tuesday that sales of gift cards would grow 6% to $26.3 billion in 2007. But that's much less than the 35% growth in 2006.

What's going on?

"Kids are getting bored with gift cards," says Candace Corlett of WSL Strategic Retail, a consulting firm.

Part of the problem is that the cards get lost or don't get used before their expiration dates, or the amount on the card is too small to buy anything decent. [More]

But while the consumer outlook is iffy, other experts see a different set of players in the US and global economy. For one, emerging economies like the RISC countries are growing more rapidly and could pick up much of the slack if American spenders tire.

The best hope that global growth can stay strong lies instead with emerging economies. A decade ago, the thought that so much depended on these crisis-prone places would have been terrifying. Yet thanks largely to economic reforms, their annual growth rate has surged to around 7%. This year they will contribute half of the globe's GDP growth, measured at market exchange rates, over three times as much as America. In the past, emerging economies have often needed bailing out by the rich world. This time they could be the rescuers.

Of course, a recession in America would reduce emerging economies' exports, but they are less vulnerable than they used to be. America's importance as an engine of global growth has been exaggerated. Since 2000 its share of world imports has dropped from 19% to 14%. Its vast current-account deficit has started to shrink, meaning that America is no longer pulling along the rest of the world. Yet growth in emerging economies has quickened, partly thanks to demand at home. In the first half of this year the increase in consumer spending (in actual dollar terms) in China and India added more to global GDP growth than that in America. [More]

One thing to remember as well: with the US dollar sinking, much of the overseas growth could help US-made products. A second economic "bright spot" is a questionable plus - US government spending, especially for the war. But this addition to the economy is more likely a huge cost instead.

You may recall that you got rid of your loyal White House economic adviser Lawrence B. Lindsey back in 2002 after, among other sins, he claimed that a war in Iraq might cost as much as $200 billion. At the time, White House staffers sneered that Lindsey was being alarmist. Hardly. One commonly cited estimate of Iraq's cost, based on an August analysis by the nonpartisan Congressional Budget Office, is $1 trillion, and that's probably on the low side. A report released last week by the Democratic staff of Congress's Joint Economic Committee put the war's 2002-08 tab at $1.3 trillion.

But all these figures don't quite get at Iraq's real cost. Indeed, we usually don't even frame the question the right way. We'd do better to recognize what we've lost, rather than focusing only on what we've paid.

We often think of cost simply in terms of dollars spent, but the real cost of a choice -- what economists call its "opportunity cost" -- consists of the forgone alternatives, of the things we could have had instead. For instance, the cost of seeing a movie is not just the dollars you plunked down for the ticket, but also the subtler cost of missing a dinner at home or a cocktail party at work. This idea sounds simple, but if applied consistently, it requires us to rethink and, yes, raise the costs of the Iraq war.

Set aside the question of what we could have accomplished at home with the energy and resources we've devoted to Iraq and concentrate just on national security. Here, the hidden cost of the war, above all, is that the United States has lost much of its ability to halt nuclear proliferation. [More of economist Tyler Cowen's superb essay]

All these factors seem to weighing on our citizens and coloring their deliberation of choices about the future. Not mere political choices, but economic and personal ones as well. I've never placed much weight in consumer confidence surveys, but the persistence of negativity in the US despite relatively good economic figures does not bode well.

If we are simply mistaken as status quo defenders allege, what will it take to make us cheer up and be more optimistic? If, on the other hand, our generalized foreboding arises from an intuitive judgment deep in our "old brains", it could prove to be remarkable prescient, simply because it can become self-fulfilling.

Are we entering (or in) a recession? Does anybody care in ag if corn stays over $4?

Let me know.

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