March 02, 2008
Just how badly is the U.S. economy doing?
That's the topic of a piece I wrote for today's San Diego Union-Tribune.
Posted by James Hamilton at March 2, 2008 06:45 AMdigg this | reddit
I got in without registration, just FYI.
Posted by: Aaron Krowne at March 2, 2008 08:54 AM
Hamilton, I'm pleased to see you actually mention inflation as a correction to nominal statistics like retail sales.
But I have a few criticisms of the article.
One, you place the blame for the housing bubble and collapse entirely on a "malfunctioning credit market". That is an interesting theory, that seems to posit zero responsibility to the massive intervention of foreign central banks in the bond market, or the Fed's misguided foray into negative real interest rates after the '01 recession (we're back there again). This isn't surprising, of course; this kind of dysfunction is usually considered "too big to criticize", and you finish up the story by positioning the Fed (perhaps known "affectionately" to economists -- but few others anymore) as "the solution to recession".
The brings me to my next point: this piece still comes off as apologetics for questionable government and mainstream economic statistics. I don't think even the NBER tries to claim negative GDP numbers are the discriminant of recession anymore. By the consumer sentiment, sales, manufacturing numbers, housing numbers, and jobs numbers (unemployment has already troughed), we are clearly in recession. There's also a contradiction in this piece that admits inflation is around or above 4% for the purpose of correcting retail sales, but implicitly allows only "core" inflation corrections to the GDP. These approaches can't both be right.
And of course, GDP is a distraction anyways, as now that foreign borrowing is starting to matter again, GNP is the more realistic number.
I urge you to abandon your implied logical positivism. The reality is not in the statistics (specifically, a selective, flawed set of them): the reality is in the reality, and it takes direct experience and a more holistic set of indicators to determine that.
Posted by: Aaron Krowne at March 2, 2008 09:09 AM
Regarding: "We can almost count on receiving further revisions to those estimates. But the problem is we can't know right now whether those future data revisions are going to be up or down" you may have seen the Calculated Risk notes on Gretchen Morgensen's article in the Sunday NYT on the different perspective of Market Trim Tabs ("MTT").
From the NYT, "Mr. Bidermanís [MTT's] assessment of current employment and personal income pictures, for instance, is gleaned from sources that include daily deposits of withheld income and employment taxes reported to the United States Treasury. This compares with the monthly employment analyses put out by the Bureau of Labor Statistics, which are preliminary and, Mr. Biderman says, based on flawed surveys and extrapolation of historical data.
No surprise, he says, that the initial figures from the bureau are so often adjusted significantly later on.
TrimTabs calls its new measure the Consumer Spendables Indicator, and it sensibly includes these crucial sources of consumption cash: after-tax wages; after-tax income from nonwage sources, like capital gains, dividends, pensions, partnerships and self-employment; and net equity extraction from consumersí homes, either through property sales or mortgage refinancing."
I will admit that we don't know with certainty what directions the revisions will be when made, but I do know with certainty which way I would bet - that would be down.
To the extent I think Bernanke has been a disaster thus far as Fed Chief, it's because he's been so consistently guided by data that's subject to regular revision and is only reported with a lag anyway.
Posted by: Anarchus at March 2, 2008 09:40 AM
More holistic usually meaning "a broader, even more vaguely applicable, except where convenient, set of measures by which we can say Everything Is Much Worse Than You Think Because You Can't Trust 'Them'."
Posted by: Michael at March 2, 2008 10:28 AM
Household savings rate negative for the past three months:
Posted by: donna at March 2, 2008 10:54 AM
very good article.
Posted by: spencer at March 2, 2008 12:00 PM
'Logical positivism' AND - a perfect bonus in the quest for the purest drivel - 'the reality is in the reality.' Plus 'holistic.'
This topic brings the star thinkers out of the woodwork. Or is out from under a rock?
Posted by: c thomson at March 2, 2008 02:13 PM
As I look at this situation, I wonder whether there is anything to pull us out of this downward spiral.
Once upon a time, manufacturing was a significant fraction of GDP, and the recessions caused by excessive inventory accumulation went away when the inventory got worked off. The other recessions -- those caused by the Fed raising interest rates high enough to send residential construction into the tank -- ended when the Fed took its foot off the mortgage lending air hose.
But, not only is this recession due to an inventory glut in housing, it's due to a housing supply glut on top of record-high home ownership levels due in turn to a lending environment so insanely loose that no amount of Fed rate-cutting is going to call forth enough demand to work it off. The bubble pulled forward so much demand -- especially among young people -- that there are many fewer people in the future first-time buyer pipeline, and without first-time buyers to sell to, move-up buyers can't move up.
On top of this, not only do we have little manufacturing left, much of what is left is construction-related -- the heavy, bulky, small-volume high-value stuff that goes into new homes and stores.
On top of that, much of the service and financial industry employment was either directly housing-related, or being paid for with money from mortgage equity withdrawal.
Meanwhile, over in China, the source both of much of the funding for our massive buildup, the inflation arising inevitably from their mercantilistic manipulation of their exchange rate, and the pollution due to the unnaturally large export manufacturing sector that mercantilism supports, are already threatening to blow their system apart. What will happen as the stress of collapsing US consumer spending on imported goods builds?
As US consumer spending on imported goods collapses due to the combined effects of job loss and surging food and energy costs, it's quite possible that Chinese will disintegrate just as the Soviet bloc did. If it does, who will buy all the Treasury bonds we're going to have to sell to bail out the banking system?
I think it's only just begun.
Posted by: jm at March 2, 2008 05:27 PM
Looking at the situation from a another viewpoint ...
The national savings rate used to above 8%, and probably needed to be higher in these pre-boomer-retirement years. Instead, it has declined to below zero.
A return of the national savings rate to above 8% implies a remarkable reorganization of economic activity, lead by brutal shrinkage in the retail and retail goods distribution sectors.
Posted by: jm at March 2, 2008 05:37 PM
Thanks for the tip, Aaron. I've heard from several others that they didn't have to go through the registration process either, so I've amended the post.
Posted by: JDH at March 2, 2008 05:50 PM
As in late January, the Asian, European, North American and "emerging" equity, non-sovereign fixed-income (and even some sovereign fixed income), currency and commodity markets are poised for the wild ride of a lifetime Monday+.
I wonder if BB will attempt the "Zimbabwe gambit" a second time.
Also, the setup is perfect for a knockout punch to be delivered to the US-centric financial system should a major (or even less-than-major) central bank announce that it is no longer "willing to play" and has exited.
Now the question is who will decide to allow ten year geostrategic interests to trump short term economic ones.
Were this Q3 I would say China.
But we are not quite there yet.
However, a people with eight thousand years of recorded history may just be interested in delivering the greatest "blindsider" ever seen.
In any event, watch carefully.
Posted by: esb at March 2, 2008 08:18 PM
The article provoked some good replies, notably Aaron Krownes'.
I would add to JM's point about China's vulnerability that the Chinese economy is so geared to exporting to US & European consumers that the diminution of that demand will cause a dramatic weakening of their economy. Austrians would say the structure of their production has been seriously distorted & will be exposed as the serious misallocation of resources that it is.
Posted by: algernon at March 2, 2008 08:53 PM
Very succinct analysis there JM and some well phrased words of caution too esb!
How 'bad' is it? Well, today's NY Times post (that nearly even pundit on the blogosphere has picked up on) today spells it out quite clearly, it (as far as the worker/consumer is concerned) couldn't get much worse.
It strikes me as...'illogical' for economists to focus on corporate profitability in a 'consumer-driven' economy...and the consumer is tapped out!
Which is to point out that if the job market is terrible, the consumer has no place to go...so where are future corporate profits to come from?
Will our eventual 'economic recovery' be inflation driven while the job market tanks further as the financial markets remain frozen?
Some may view the situation as a short term glitch but I call 'fubar', no 'fix' is possible.
Posted by: Gegner at March 2, 2008 10:57 PM
As I read these comments I find one BIG problem.
With the current economic situation whether or not a "recession" is underway or is impending is not the question we should be asking. Since most of us agree that the consumer is a big driver of the economy we need to focus on them and how they are doing. Before when we had a large manufacturing base that drove a large portion of the economy, considering how businesses are doing was reasonable. We now need to focus on how the consumer is doing since they are one of the big players now.
With huge consumer debt and negative savings rates and wages that are not keeping up with inflation we need to consider "How can we improve the economic climate with out the consumer?" Is it possible? Probably not due to the fact that the consumer is such a strong force in the economy. We often use the DOW or the NASDAQ indexes as a measure of the health of the business portion of our economy. Similarly we need to pay attention to the consumer confidence index.
I argue that whether or not a "recession" (how ever you define it) is underway is not the question to consider. But how much economic Prozac will it take in order for the consumer to come out of their financial "depression".
Posted by: Ed at March 3, 2008 08:39 AM
Just a minor correction to jm's post: Homeownership rates actually peaked in 2004 (though the decreases in 2005 and 2006 were within the statistical margin of error). The 2007 homeownership rates were comparable to 2003, but clearly headed in the opposite direction:
Historically, they're still very high, of course, but it wouldn't be astonishing if they returned to levels of the late 1990s by the end of 2008. The 1.1 percent drop between q4 2006 and q4 2007 was the largest year-to-year drop since the Census Bureau started tracking this stuff in 1965. Another percent would put us back to 1999 levels.
Posted by: pianoguy at March 4, 2008 01:42 PM
I have been out of a job for 16 months. Times are not the best in the United States right now. So what do you do? Try to use and spend less, volunteer your time and use less energy. As Americans we need to work harder, drink less, use less drugs, be better parents, get in better shape, volunteer more, drive smaller cars and try to make the best out of a hard time. In the end the economy does not matter, you just have to make the best out of each day. Even if your life is falling apart there is no reason to give up or let this get you down. America will come out stronger and better in the end. Maybe we are a bunch of babies in many ways.
Posted by: James S. Klich II at March 22, 2008 06:43 PM