Recession Watch: We're Probably Already In One

Henry Blodget | November 16, 2007 1:02 PM

stockcrash.jpg

New Items: Enough bad news coming from enough industries now that it's reasonable to think we're already in a recession (Economists can't pinpoint recessions without the benefit of hindsight, and most usually start while economists are still predicting that we won't have one). Of course, whether we are technically in a recession or not is irrelevant--it's the trend that matters.  And the trend is still getting worse. We continue to believe that the growing weakness will eventually hit online advertising, hurting AOL, Yahoo, Google, and others.

Last 24 hours: FedEx cuts outlook, blames higher prices and economic weakness. Starbucks has weak quarter, blames economy and price inflation. Internet Brands reduces size/price of IPO. New York Times reports weak October revenues, especially in retail advertising...

See Also: How Bad Could This Market Crash Get? Very

Overview. We continue to believe we may be in the early stages of a cyclical downturn for advertising and the Internet sector--one that could affect not only start-ups and second-tier players but majors like Time Warner (TWX), Google (GOOG), Yahoo (YHOO), AOL, et al.  Such downturns do not begin suddenly, and they are not instantly obvious (except in hindsight).  Rather, as with the housing market, the environment changes gradually, over many months, with early signs slowly becoming a steady torrent of bad news.

For two months, we have been tracking data points that we believe illustrate the changing environment.  It's always possible that the worst is over, but these cycles usually take years, not months, to play out.  Full timeline after jump.

Timeline

Nov 16:   JC Penney cuts outlook, blames economy and housing.
Nov 13:   Echostar says US Already In a Recession
Nov 8:     Toll Brothers says Oct Worse Than Sept, Bernanke cautious, LOOK whiffs

Nov 2:     Mortgage plague spreads, $96 oil
Oct 30:    $93 oil, falling houses, UBS blows up
Oct 25:    Merrill blows up, Caterpillar says weakness spreading, BOFA whacks 3,000
Oct 23:    Omnicom Fine Q3, but New York Times sees October weakness in retail ads
Oct 19:    WPP Misses targets, Wachovia and BOFA bomb, $90 oil
Oct 18:    Yahoo and then Google report strong quarters, no evidence of slowdown.
Oct 17:    Thornburg, mortgage-banker to rich people, bombs: not just sub-prime problem
Oct 15:    Beazer, Countrywide, Tax receipts down to "recession levels."
Oct 12:    Spending by Top Ten Web Advertisers Drops in Sept vs. Aug?

Sep 28:    News Corp's Fox Interactive Media misses sales targets in July/August
Sep 28:    Housing gets even worse.
Sep 20:    Google reports anecdotal advertiser cutbacks from mortgage crisis (though not on Google)
Sep 19:    CBS and Viacom say they see no signs of advertiser cutbacks
Sep 18:    NY VC Fred Wilson: The Coming Downturn

Sep 14:    First online ad estimate cut for mortgage crisis.
Sep 13:    Countrywide gets life support, but we still worry about online ads.
Sep 12:   Ad network Burst Media reports cancellations from "budget constraints"
Sep 11:    Mortgage giant Countrywide fires 12,000, WaMu sees "perfect storm"
Sep 11:    TNS reports two quarters of decline in US ads--first since 2001.
Sep 10:   Online mortgage ads remain strong in August: Good sign or false signal?

Sep 6:      Countrywide crumble and stock foreshadows Yahoo, Google, et al?
Sep 5:      OpCo "cautiously optimistic" about mortgage mess.  We're cautiously pessimistic.

Aug 30:    How Bad Could Mortgage Mess Get for Google, Yahoo, et al
Aug 29:    Will mortgage crisis hurt web ads?  Sure looks that way.
Aug 29:    Bankrate CEO call provides more reason to worry about online ads.
Aug 27:    Cracks in Manhattan's commercial real-estate market?
Aug 22:    JupiterMedia CEO Meckler says every Internet company now for sale.

Aug 17:    Dear Internet Industry: Brace for harder times
Aug 17:    What happens to Yahoo, Google, et al, in recessions?
Aug 16:    About that crashing stock market
Aug 3:      Bankrate confirms online ad market strong, print weak
Aug 1:      The market's crashing: Are you recession proof?

July 20:    Google blows up the stock market

Recommendations/Ramifications

Sep 18:      NY VC Fred Wilson: The Coming Downturn
Aug 17:     Dear Internet Industry: Brace for harder times
Aug 17:     What happens to Yahoo, Google, et al, in recessions?
Aug 1:       The market's crashing: Are you recession proof?

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19 Comments

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MIKE H said:
OPEN YOUR EYES. RECESSION IS IN FRONT OF YOU. OR JUST LOOK AROUND YOU.

YOU HAVE TO BE BLIND OR AN ARROGANT PUMPER, FOR YOU NOT TO SEE IT.

MIKE H
G. said:
What if.... just what if... the GDP, employment, inflation numbers etc. are all... "wrong?" Distorted? Fabrications? Lies?

They are... the GDP has been in minus territory for over two years, inflation numbers don't include energy or food prices and the real inflation number is now 8.4%, unemployment is actually 3% higher then stated 4.8% ... it's actually 7.8% etc...... six years worth of numerical lies

The radical Neoconservative Bush Administration has "cooked the books" concerning GDP, employment, inflation and other numbers released monthly by the US Bureau of Labor Statistics.

As Hitler did during World War II, this administration utilizes “Authoritarian Rule” and the “big lie theory”… the bigger the lie the more likely people will believe it.

Wake up America... you've been had.
VJ said:
Jason,

The definition you provided (two quarters of negative GDP) is both outdated as well as moot:

* It is outdated because the NBER (National Bureau of Economic Research), which is the private-sector firm that officially determines when national recessions begin and end, stated long ago that recessions are no longer limited by that definition.

* It is moot because the GDP numbers from this administration are bogus, just as their jobs and inflation number releases are. As one explanation points out, although the Q3 GDP was reported at 3.9%, it was likely closer to 1%. Read it here:

http://bigpicture.typepad.com/comments/2007/10/i-call-shenanig.html

Then, when one subtracts the government spending on the military and privateers in both Iraq and Afghanistan, which this administration counts as GDP, the actual GDP is NEGATIVE (unless one is an advocate of Socialism ?).

01.20.08
.
G. said:
What the Bush Administration, Fed and Wall Street can’t see is the American Economy, which purchases over 30% of all goods manufactured in the world, has been “debased.”

Under the Regan and Bush’s Neoconservative Republican leadership, who’s creed was “Greed and Supply-side Economics’ ”, the administrations legislated tax breaks for corporations and the Elitist top 1% of Americans at the expense of the other 99%. Couple this with a collapse of the mortgage banking industry & housing prices, a liquidity crisis and pending student loan catastrophe. Then add in years of Union busting, NAFTA, CAFTA, Vietnamese, Central America and other Trade agreements, hundreds of thousands of H1-B & L-1 work visas, years of outsourcing jobs to 3rd world countries and open borders which eliminated the higher paying jobs, pensions and benefits for a majority of Americans. The huge amount of spendable income these higher paying jobs formerly supplied America and the World Economy has disappeared… gone forever. Resulting in a gigantic transfer of wealth from average Americans to the world’s Elitist top 1% and coffers of Corporate America.

As HBO’s lead character in John From Cincinnati once said… “The end is near”.
Our Country said:
It is only a matter of time before corporations start to really feel the pain of the consumers. Real Estate sales are down due to inflated housing costs, and the rising living costs.

Just in the Chicagoland area, I'm personally seeing houses over priced, which have been on the market for as much as a year, some even more.

The low quarterly figures seen by the large corporations is just the last in the chain of events. Unfortunately, it will be consumers that take the brunt of the pain.
Jason Malcolm, III said:
"A recession is defined to be a period of two quarters of negative GDP growth. . . . Thus: a recession is a national or world event, by definition."
http://economics.about.com/od/economicsglossary/g/recession.htm

US GDP Q1: 1.9%
Q2: 3.8%
US GDP Q3: 3.9 percent

The trend is up, not down.

The rate of economic growth over a two-quarter long period of time: 2.2% for the two quarters ending in 2007Q2, 1.3% for the two quarters ending in 2007Q1

Again, the trend is up, not down.

Anyone looking at this chart would have to call your bluff
http://www.bea.gov/briefrm/gdp.htm

No one is predicting negative GDP numbers, lower (2.5%)? Yes. Negative? No. Therefore, but it's very definition, we're not in a recession nor does it appear we will be in the near future (2 quarters).

GDP = consumption + investment + (government spending) + (exports − imports)

Consumption is fine, investment is fine, gov't spending is increasing, and our exports are doing better because of the drop in the dollar.

Stop trying to create another self fulfilling prophecy as done in the housing market.
Joe Average said:
Timing is certainly part of what separates a good idea from a bad one.

Entering a field with tons of competition and no barriers to entry at the tail end of a liquidity boom is a really bad idea.

If you have little value to add, it's been done before it's a bad idea. How hard is that.

I don't know if Google will be around in 20 years, but I'd bet their stock won't be much higher (inflation adjusted) if they are.

Jason Malcolm, III said:
"A recession is defined to be a period of two quarters of negative GDP growth. . . . Thus: a recession is a national or world event, by definition."
http://economics.about.com/od/economicsglossary/g/recession.htm

US GDP Q1: 1.9%
Q2: 3.8%
US GDP Q3: 3.9 percent

The trend is up, not down.

The rate of economic growth over a two-quarter long period of time: 2.2% for the two quarters ending in 2007Q2, 1.3% for the two quarters ending in 2007Q1

Again, the trend is up, not down.

Anyone looking at this chart would have to call your bluff
http://www.bea.gov/briefrm/gdp.htm

No one is predicting negative GDP numbers, lower (2.5%)? Yes. Negative? No. Therefore, but it's very definition, we're not in a recession nor does it appear we will be in the near future (2 quarters).

GDP = consumption + investment + (government spending) + (exports − imports)

Consumption is fine, investment is fine, gov't spending is increasing, and our exports are doing better because of the drop in the dollar.

Stop trying to create another self fulfilling prophecy as done in the housing market.
Henry Blodget said:
The only issue for start-ups in a recession is that money will likely be harder to raise. Most of the 1999-2000 class of Internet start-ups got wiped out not because the ideas were bad but because there was too much competition and the sources of funding suddenly disappeared.

Revenue is also harder to come by, but most start-ups don't depend on it. The companies that will be hurt by the drop in revenue are the ones that go from profit to losses and don't have a lot of cash in the bank.

Companies with a lot of cash and a strong position (Google) will actually get even stronger as competitors weaken. Their stocks will still probably get hit, though.
Drew Robertson said:
Already. Check our numbers here. http://railfax.transmatch.com/
One could make the argument that we've already had our recession and are only now coming out of it. But not me. I'm not a disputatious.
David said:
The majority of your "Recession Watch" links are all associated with the housing bubble in one way or the other.

The internet companies that you describe are all have positive reports.

Perhaps your ominous recession is a slump in a specific sector (housing) and companies' business associated with that sector will take a hit?
Nate Westheimer said:
Do you think this is a problem MORE for startups than GOOG and AOL, etc, or LESS for startups. Isn't there more room to innovate and provide value during a recession? Are business more agile? (A 10% cut in personnel at a 10 person startup doesn't look as bad as a 10% cut at a 100,000 company).
TM said:
So, what to make of Amazon? If all the bricks-and-mortar retailers are just starting to get pounded, AMZN must be a wonderful short here.

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