Oil futures climb
As early as January, Fed officials had a hunch that gas prices were about to soar. Members watched as oil futures, a measure of the direction of oil prices that the typical driver may not watch closely, climbed higher. “I should note that households are on the verge of experiencing another stiff increase in gasoline prices over the next couple of months,” said David J. Stockton, who was then an economist with the Federal Reserve, during a Jan. 9, 2008 conference call. “And households are probably not yet aware that that’s on the way, except for those that actually follow oil futures markets.” Oil prices peaked that July at nearly $150 a barrel and consumers faced sticker shock at the pump when gas prices topped $4 a gallon. Prices eventually came tumbling back down as the mortgage market collapsed. While higher gas prices aren’t necessarily a sign of an impending recession, consumers struggling to pay for gas often cut back spending in other areas, which can hurt the economy. And once energy price spikes subsided, Fed officials noted in the Dec. 16 meeting that any consumers feeling that relief had much bigger issues to worry about—such as sinking home prices.
Retailers slash prices
One sign there’s recession afoot: Consumers move to the bargain basement. U.S. Federal Reserve Chairwoman Janet Yellen—then the president of the Federal Reserve Bank of San Francisco—said during the January 2008 meeting: “On consumer spending, two large retailers report very subdued expectations going forward following the weak holiday season, which involved a lot of discounting.” By October, consumers were glum. “A home appliance retailer adds that he has never seen more uncertainty and gloom from both the retailers and the vendors,” Yellen noted. “This sentiment is echoed by a large retailer who says simply, ‘The holiday shopping season is going to stink.’” By December, shoppers were indeed staying home. “Retailers are seeing a noticeable drop in attendance at their stores,” said Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas.
Credit card debt soars
This was one of the first warning signs that Americans were facing an economic crisis. “Some of the recent rise in delinquency rates for credit cards is in states with the largest house-price declines, and could represent spillovers from weak housing markets,” according to Nellie Liang, an economist on the Board of Governors of the Federal Reserve System, at the Jan. 29 to 30, 2008 meeting of the Federal Open Market Committee. At the April 29 to 30 meeting, Fisher noted: “Wal-Mart reports the ‘cascading’ use of credit as a form of payment, as their CEO for U.S. operations put it.” By October, 60% of banks surveyed had tightened standards on both credit cards and other consumer loans, according to William Bassett, a member of the Board of Governors of the Federal Reserve.
Bond markets rally
Bond market strength is often regarded as a sign that nervous investors are moving their money out of the stock market. The January 21, 2008 conference call was no exception. “Bond markets reacted as you might expect,” said William Dudley, then-executive vice president of the Market Group at the New York Fed. “Bond markets rallied as people became more pessimistic about the stock market.” As an indicator, it’s only as reliable as skittish investors, however. Stockton found what would turn out to be a brief glimmer of hope at the April 29 to 30, 2008 meeting. “More broadly, with bond spreads down, the stock market up, and market expectations for the path of policy revised higher, the situation certainly looks less menacing than at the time of the March meeting.”
Consumer sentiment drops
“The total drop that we have seen in recent months is similar to drops seen before previous recessions,” Stockton said of consumer confidence, a gauge of how consumers feel about their finances and the economy overall, during the Jan. 9 conference call. At the time, consumer spending was still exceeding expectations, justifying Stockton’s claim that officials were “not ready to make a recession call yet.” But confidence continued to sink as consumers faced steep job losses, sinking home prices and higher energy prices. By August, officials noted consumer sentiment had reached “sub-basement levels” and businesses were reporting weaker demand for goods. By September, consumers were falling behind on their loans and the credit crunch had begun. “Consumers do not have the same resilience now that they did at one point,” Randall Kroszner, then a governor of the Federal Reserve, said during the Sept. 16 meeting, two days after Lehman Brothers collapsed. “It’s not surprising that, after having run this marathon, they’re going to be a bit tired.”