U.S. Economy: Widespread Recession or Financial System Crisis?

Most of the steps taken by the Federal Government so far have been an attempt to prevent the current financial market crisis from getting worse, which would undoubtedly spill over to Main Street and the rest of the economy. The reason why there is a debate about whether we are in recession right now, or whether we will fall into one next year or not, is because the problems thus far are contained to a few areas. If those problem spots can be resolved to any measurable degree, we could get a quick economic and market recovery. If they spread, we are in for a prolonged and expanded downturn.

To see exactly how well most areas of the economy are holding up, we need to look no further than a breakdown of S&P 500 earnings by sector. Below is the breakdown of earnings from 2006 through current 2009 estimates:

Notice what while S&P 500 earnings will be down this year, for the second straight year, eight of the ten sectors are expected to have earnings gains for the third consecutive year in 2008, as well as further gains in 2009. This data shows exactly how much impact the financial sector’s woes are having on the market. The consumer discretionary sector is an obvious casualty of such fallout, but everything else is fairly strong.

Personally, I think 2009 earnings estimates remain too high, though they have come down some already. Although I think the odds are remote, it is easy to see that, when one assumes the financials will rebound sharply, such a high S&P earnings number is possible in 2009 because the other sectors remain on firm footing.

Our economy is not yet in a widespread recession. Financial services are in trouble and are spilling over to the consumer sector. It might not be very comforting, but if we can get the financials consistently back in the black, even if they earn half the amount they did a few years ago, the economy and markets could hold up okay next year and beyond.

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3 Thoughts on “U.S. Economy: Widespread Recession or Financial System Crisis?

  1. Anonymous on September 23, 2008 at 10:47 AM said:

    I wish I could believe that.

    Financials are the backbone of the economy.

    If anything keeps them red long enough – especially fear – others will inevitably crash as well; and it would be rather fast than slow.

    Also…at least once a day now there is an article stating something along the lines that the current problem started when financials got so big that nobody knew anymore what assets exactly they were holding and at what risk.

    This also describes the state in most other industries.

    Pharmaceuticals, healthcare, energy, IT – you name it.

    People just don’t want to see it.

  2. I agree a 34% increase seems a bit indulgent.

  3. Ryan Barnes on September 24, 2008 at 1:17 PM said:

    The 34% only seems high in proportion to the 2008 figure. If we were to back out even a modest percentage of the writedowns against earnings for financials this year, we could substantially lift S&P earnings for 08, which would of course put the 09 estimates on a normalized path.

    Biggest risk now seems to be the earnings estimates for tech, telecom, and consumer stocks. There could be meaningful downward revisions heading into vital 4th Qtr.

    Cheers,

    Ryan

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