Paul Krugman zeros in on the how the "widely watched" indicator of trends in the service sector [70% of the economy] "has fallen off a cliff."
More specifically, the Institute for Supply Management reported that its new composite index measuring the health of the service sector was 44.6 in January. A reading above 50 indicates expansion, while below 50 indicates contraction. That was down from 54.4 in December. "This is an absolute collapse of this index," said Nigel Gault, chief U.S. economist at Global Insight... AKA "fallen off a cliff."
Krugman also leads us to a
paper by Carmen Reinhart and Kenneth Rogoff - PDF for which there "has been a lot of buzz."
Reinhart and Rogoff explore the historic record for the "Big 5" bank-centered financial crises in
industrialized nations. They cite "the five most catastrophic cases" to be episodes in Finland, Japan, Norway, Spain and Sweden.
They address some specifics the common refrain, "but this time it's different," only to make me more uncomfortable with the mainstream economists and pundits who use this refrain. Notworthy is the following:
This time, many analysts argued, the huge run-up in U.S. housing prices was not at all a bubble, but rather justified by financial innovation (including to sub-prime mortgages), as well as by the steady inflow of capital from Asia and petroleum exporters.
So, average Americans are at the mercy of a petro-dollar induced real estate price rise making homes unaffordable and pushing people into exotic mortgages? So, we're supposed to take comfort in the argument that the housing prices, bid up by foreign oil money, will remain high (the bubble won't burst)? Is that supposed to give me confidence in our economy and corporate globalization?
On to the prediction, or should I say comparison.
The figure below compares the US real estate bubble with the average of the "Big 5." Years are marked along the bottom of the graph, with "T" representing the year of the onset of the financial crisis. By that convention, "T-3" is three years prior to the crisis, and T+3 is three years after the onset of the crisis.
The left side of the axis a normalized index of housing prices, allowing comparison between different time periods and currencies. The authors not "the run-up in housing prices in the United States exceeds that of the “Big Five” ... by a lot. One can't help think of the saying, "the bigger they are, the harder they fall."
There's more to the paper, which I'll let you read. It's only 11 pages long and not too techincal.
Sources:Paul Krugman,
A Long Story, February 8, 2008.
Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International
Historical Comparison, Carmen Reinhart and Kenneth Rogoff, Draft, January 14, 2008. (Linked above).
US Service Sector Contracts [recession] in January.
