Has the Recession Arrived?

Has the long forecasted recession arrived? My answer is YES. Here is why:

* The banking system is crippled with huge mark-to-market losses on securities held to maturity. (See: Shulmaven: Winter Comes to the Bank Stocks) Further the loan losses associated with bad commercial real loans have yet to be recognized. Hence lending is being curtailed across a broad front of borrowers.

* New claims for unemployment insurance reached an 18 month high last week at 264,000. The labor market is nowhere near as strong as it was.

* The price of copper made a new low for the year at $3.72/pound down 14% from its January high. This is the metal with a Ph.D. in economics, although as my friend John Lipsky always reminds me it is from the Universidad de Cattolica de Chile. 

* The stock market has gone nowhere over the past two years with nominal stock prices down 1% and real stock prices down 14%. Hence the consumption fuel coming from the wealth effect has evaporated.

* First quarter consumption was flattered by an 8% increase in Social Security payments, obviously not to be repeated for the balance of the year.

* Although real GDP is likely to to be up in the second quarter because of a modest swing in inventories, real final sales will decline and that will set the stage for a decline in both final sales and the overall GDP in the third quarter.

* Because inflation will remain sticky, the Fed will need a significant move up in the unemployment rate before pivoting to a lower interest rate regime. Thus the Fed policy would allow for a mild contraction in the economy.