by Calculated Risk on 5/15/2008 05:17:00 PM

From Paul Kasriel and Asha Bangalore at Northern Trust: In the Eye of the Economic Hurricane

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.

The "eye of the hurricane" meme is definitely gaining traction! Here are some comments on Q1 GDP:

Click on graph for larger image.

The plus-sign in front of the Commerce Department’s preliminary estimate of the change in first-quarter real GDP was deceiving. Real final sales of domestic product, which is real GDP excluding the change in business inventories, contracted at an annual rate of 0.2% in the first quarter. Except for the negative impact of Hurricane Katrina in Q4:2005, this was the first decline in real final sales since the first quarter of 2002. 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 (see Chart 1). So, the housing recession is now spreading to consumer spending, business equipment spending and nonresidential construction spending.

The worst of the "credit crisis" might be over, but the real effects of tighter lending, less capital spending, rising unemployment, and consumer defaults on credit cards and auto loans is just starting.

There is much more in the Northern Trust commentary.