October 09, 2008
Prospects for Output: The WSJ Survey
The WSJ just released its newest survey of economists' views on the course of the economy. From the article:
On average, the 52 economists surveyed now expect gross domestic product to contract in the third and fourth quarters of this year, as well as the first quarter of 2009.
This is the first time that survey forecasts for those periods have turned negative. If those predictions bear out, it would mark the first time U.S. GDP -- the total value of goods and services produced -- has contracted for three consecutive quarters in more than a half century. Economists put the odds of recession in the next 12 months at 89%, up from 60% in last month's survey.
Here's what the data imply for the trajectory of GDP, along with a comparison against the September survey.
Figure 1: GDP in Ch.2000$ SAAR, from 26 Sep release (blue line), from 28 Aug release (red), and implied GDP levels from WSJ survey (October, teal) and (September, green). Potential GDP in dark blue. Source: BEA, WSJ [xls], CBO [xls], and author's calculations.
The next graph depicts the mean forecast against the highest growth projections for the next two quarters (from Mark Nielson of MacroEcon Global Advisers) and the lowest (from Mickey D. Levy from Bank of America).
Figure 2: GDP in Ch.2000$ SAAR, from 26 Sep release (blue line), and implied GDP levels from WSJ survey (October, teal) and highest for 2008H2 (green), and lowest (red). Source: BEA, WSJ [xls], and author's calculations.
Posted by Menzie Chinn at October 9, 2008 12:45 PMdigg this | reddit
89% odds of recession? I'm actually surprised that anyone at this point would doubt a recession is coming (if not already here). Perhaps they submitted their responses early.
Posted by: GWG at October 9, 2008 01:00 PM
After another day with the market down over 600 pts I am about tired of hearing the opinion of anyone. It is time for a revolution. There is often talk of congress taking power from the president or the president taking power from the congress. How about we talk about the government taking power from the people?! How about we talk about the government giving the power back to the people?! Can we shout that?!
We can continue to read our tea leaves while the society crumbles around us or we can begin to demand a real change. Not an Obama change or a McCain change but a real market change.
You want to know how to get out of this mess? The Republican Study Committee has the answer but no one even considered it. It addresses the root causes of the problems; it does not just try to hide the symptoms with white wash.
1. Two-Year Suspension of the Capital Gains:
Actually taxes on capital gains should be eliminated. If you want less of something tax it. Taxes on capital gains are actually taxes on capital created by inflation. If Congress were to pass this the economy would turn on a dime.
2. Schedule the GSEs for Privatization:
Fannie and Freddie have been nationalized but they remain a drag on the government and there are Democrats - Barnie Frank - who still have delisions of using them again to finance unqualified borrowers.
3. Stabilize the Dollar:
Repeal the Humphrey-Hawkins Full Employment Act which diverts the Federal Reserve’s attention from long-term price stability to short-term economic growth. Humphrey-Hawkins actually destabilizes the dollar because it forces the FED to hit two targets with one arrow.
4. Repeal Sarbanes-Oxley (The Republican Study Committee said "Suspend mark-to-market" but I believe this is much more important):
This has been a useless wasteful law. Did it stop men like Franklin Raines from looting Fannie and Freddie? No, and it would not have stopped Fastow from looting ENRON. All it does is raise the cost of doing business.
An immediate cut in corporate and personal income taxes to no higher than 25%.
A moratorium on the Justice Department filing any suit aginst any business for 6 months.
Open oil exploration and drilling to the entire US and offshore.
Eliminate EPA emission standards on automobiles and eliminate special blend gasoline.
I could go on, but you do these and the markets would turn and the economy would improve within 24 hours. Just do the top 4 and you would see recovery.
Posted by: DickF at October 9, 2008 02:22 PM
DickF: Two-Year Suspension of the Capital Gains
No problem. I think its clear we already have that one covered.
Posted by: Joseph at October 9, 2008 03:11 PM
Real GDP measured by GDPC96 at FRED declined for three quarters from 74.2 to 75.1. A long time ago, but less than half a century. By the way, I remember that period and it wasn't pretty.
Posted by: George at October 9, 2008 05:48 PM
Humour me here. I would love to see lower capital gains taxes though I'm probably looking at enough losses to last at least 1/2 a decade.
I understand the theory behind reducing corporate income taxes as well as reducing high marginal income tax rates.
But frankly, I do not understand the social urgency of reducing capital gains taxes. What is the theory?
P.S. Anybody notice oil prices declining in the after hours? Was that US$83/barrel for NYMEX I saw earlier? More to come. I'm talking a little corner of my book here; anybody want to buy US Oil fund (USO) puts?
P.P.S. I've gone from a 70% subjective probability of a short, shallow US recession to a 99% probability of a long, deep US recession. Would love to read wise folks argue the contrary.
Posted by: GNP at October 9, 2008 07:32 PM
Frankly, a value investor with a long time horizon--like W. Buffet--should be buying right now. The liquidity problem will dissipate eventually, and if it doesn't, you can eat the Lucanian apples.
I've put my money were my mouth is by buying S&P 500 index funds. (Wish me luck.)
Posted by: Chris at October 9, 2008 08:52 PM
I guess that as soon we'll have bread lines and 30 % of jobless people some economists will state there's a 91 % probability of recession.
Posted by: Pablo at October 10, 2008 04:23 AM
Thanks your comment made me laugh.
Posted by: DickF at October 10, 2008 05:06 AM
Let me address the question of capital gains from a reverse position. Capital gains basically come from two sources: 1) a successful investment that appreciates in value, 2) inflation.
It should be obvious to see that taxing 2) is actually a tax on real wealth. For example you have an asset the increases in value due to inflation, and let's say because of mark-to-market you have to realize the gain. The asset has actually not changed at all but you now have taxable income. The tax has just eaten into your capital. You either pay it out of your pocket or you sell the asset and on paper realize a gain but lose real value.
With 1) your appreciation is because of good business decisions but once again your real return will be reduced because of inflation.
Realize that before we entered a world of perpetual inflation a capital gains tax was virtually meaningless. It the currency was tied to gold there would be virtually no problem with capital gains taxes, but the government wouldn't think about them much because they would be so small.
Those who realize that the use of capital is what improves productivity will understand the simple answer. A capital gains tax is a tax on inflation inflation, an erosion of value.
Posted by: DickF at October 10, 2008 05:23 AM
Dance with a corpse, anyone?
I'm afraid it is much worse than merely losing one's spectacles. The bankers' ball has admitted a number of putrefying corpses onto the dance floor. They tell us, imploringly, they are just now oh so sure that if only we will believe. Yet I'm afraid all the perfume they have applied so far hasn't done the trick. Why, the erstwhile bon-vivant suitors are perspiring off the dance floor holding their sides and retching. Such a scene is unheard of. Lack-a-day.
Posted by: Thingumbobesq. at October 10, 2008 05:42 AM
What no one in Washington realizes is that the key to pulling out of this crisis is the American people not government intervention. Our nation has been great not because we created a strong effective government, but because we created a limited government that empowered people.
Every move the government has made so far has taken assets and resources away from the people and the producers, and most of this was so that the government could hide its disastrous mistakes, like forcing down lending standards. There will be no recovery until we stop the government intervention. If the government will reverse course and put resources back into the hands of the people and the producers the economic crisis will turn around and we will have recovery. The longer the government resists this the longer the Depression will continue. What will it take, 25% unemployment once again?
Posted by: DickF at October 10, 2008 05:57 AM
DickF, I think you are on the right track (although I'm not sure the economy would turn as fast as you think.)
Monetary policy appears useless until lenders see a major reduction in counterparty risk. My prior view was that swapping cash for toxic securities and infusing FI's with additional cash would unfreeze credit markets and clear the way for monetary policy to steer us out of the recession.
However, it may turn out that once banks are recapitalized that additional FED liquidity aimed at GDP growth will be ineffective. Banks may not want to increase lending to weakened household and business sectors. That will leave the policy makers in the unpleasant position of having to cut taxes and increase spending at a time when they should be doing the opposite in order to solve the problems associated with Social Security, Medicaid and a bloated federal defecit.
If we have to rely on fiscal policy then DickF's proposals are a good starting point because they establish permanent changes to the tax/regulatory system that will induce business growth and ultimately, employment and income growth.
Posted by: tj at October 10, 2008 06:07 AM
Posted by: DickF at October 10, 2008 08:04 AM
The lowering capital gains taxes thing is a red herring. Why would lowering capital gains taxes help when people have capital losses? It's just a GOP talking point without much substance.
Posted by: JimBob Jones at October 10, 2008 10:23 AM
JimBob Jones: That is my impression too.
It has occured to me that Republicans fear that highly productive investors will decide to take western European-level amounts of leisure. You know, spend large amounts of time with family and friends. It has also occured to me that spending more time with your family might be an anti-American thing to do.
Is the objective to privatize wealth quickly, increase the material value of one's family but not spend any time with family members? Puzzling.
Posted by: GNP at October 10, 2008 11:04 AM
Chris - I am with you on the S&P Index Funds. Reallocated over the last two days in to it. The decade-to-date performance is just stupid....I don't see how people arent jumping in on these fire sale prices. Fundamentals have been replaced by an endless cycle of fear. As for the precipitous drop in oil...remember how it was not the hedge funds driving up the price of oil....ummm - who has been forced to sell due to redemptions. A smart investor once told me to be careful once the pension funds get involved because they are usually late to the party.
Posted by: MPA at October 10, 2008 05:55 PM
Jimbob, you are backward looking. A capital gains tax cut is aimed at investors who want to take a stake today. Current investment leads to future business exapansion.
For what it's worth, I shifted funds into equity today with the idea that dow 12,000 is a 50% increase from today's level. I'm thinking in terms of years not months.
Here's some food for thought...
What if the treasury buys up a bunch of asset backed securities that are currently marked to market. The securities would go on the treasury's balance sheet as an asset at fire sale prices. Next, the SEC rolls back FASB 157 so that asset backed securities are priced at face value. (Or as a compromise, the present value of discounted future cash flows.) The treasury's assets would increase several fold. In fact, if played right, the gain would be several tens of T-T-T-rillions of dollars which would be added to the asset side of the gov't balance sheet and make all of the entitlement problems on the liability side go away.
(Warning - run on sentence ahead.) In other words, the U.S. government has an incentive to let the credit markets slide until the U.S. government buys enough distressed assets at market prices so that eliminating mark-to-market will inflate the asset side of the U.S. government balance sheet to the point where it balances the amount owed for future social security and medicare payments.
Posted by: tj at October 10, 2008 09:17 PM
DickF: Thanks for your reply, I must have missed it earlier. I understand your point. Isn't the social policy answer though an inflation targeting or price averaging regime that aims for either zero inflation or a stable price level? That's increasingly possible with todays technology.
Measures to protect the wealthiest members of society from inflation simply shift the burden to those least well prepared to risk manage around beggar-thy-neighbour policies like robust rates of inflation that result from growth-at-any price economic policies.
Posted by: GNP at October 11, 2008 04:28 PM