PIMCO’s Gross Worries About Recession

Twitter is an odd place for a famous investor to make a crucial forecast. That did not keep bond king Bill Gross of PIMCO from tweeting that America is “approaching recession when measured by employment, retail sales, investment, and corporate profits.”

He might have at least gone on CNBC, where he seems to be a nearly universal presence. Whatever the medium he picked, he is one more well-regarded financial mind who has voiced the belief that the United States is near a tipping point. But they each may be wrong if the consumer acts as he has until very recently.

The circumstances of the American economy has become dire enough that even the International Monetary Fund revised GDP prospects downward. Some experts believe that without a firm decision on 2013 tax rates made by Congress and the Administration, GDP improvement could slip as low as 1% in the final quarter and early next.

The foundation of the comments by Gross and others like him is that momentum in the huge consumer-based economy will shrivel and die. There have been signs of this recently, but they are not definitive. The Federal Reserve reported that consumer credit rose $17.5 billion in May. By many measures that is the largest increase in almost five years. The increase in borrowing means that consumers are buying something, although that has not shown up in retail sales. But it has in other big sectors, like auto sales.

Pessimism about consumers is rooted primarily in two things. The first is that the real estate market has not recovered. The other is that people are worried about their jobs. In each case, many Americans have had to live with low home prices, underwater mortgages and a jobless rate higher than 8%. It may be a stretch to say that Americans have become comfortable with these things, but they have survived them long enough to get used to them as daily realities. So far, these realities have not pushed consumers into their shells — at least not entirely.

Other factors favor the consumer. The first among these is falling prices for oil and gas. Rising fuel prices were supposed to trigger a new recession. The effects of their decline should at the very least put money into the consumer’s pocket that many economists believed would not be there as the year progressed.

Another factor has helped the consumer stay moderately active. The price of most items has not risen much, if at all. A dollar today buys pretty much what it bought two or three years ago.

It is too early to say that a new recession will be led by consumers. Their views about the economy may be very different from Gross and many of his peers.

Douglas A. McIntyre