September 16, 2010
"Is the U.S. heading toward another recession?"
The prospects for a double dip recession, the role of bank and household deleveraging , and the effect of the stimulus package , all came up. So too did the impact of total versus partial extension of EGTRRA/JGTRRA. The broadcast can be heard here
Here's the latest monthly indicators for the broad economy.
Figure 1: Real GDP, 2nd release for 2010Q2, in billions of Ch.2005$ SAAR (blue bars), e-forecasting release of 8 September (red line), and Macroeconomic Advisers release of 15 September (green line). NBER defined recession dates shaded gray, assuming recession ends in 2009M06. Source: BEA, and NBER.
Update: 12:20pm 9/19/2010
Nemesis asserts there's been no recovery in private spending (GDP ex.-government consumption and investment. Here is a time series plot of the relevant data, which contradicts that assertion.
Figure 2: Nominal GDP minus nominal government consumption and investment, in billions of dollars. NBER defined recession dates shaded gray, assuming recession ends in 2009M06. Source: BEA, 2nd release for 2010Q2 GDP, and NBER.
Posted by Menzie Chinn at September 16, 2010 10:35 AMdigg this | reddit
Remove total gov't spending as a share of nominal GDP, and the private sector effectively never recovered, i.e., remains in contraction.
It's like standing on a train track with your back to an oncoming train perceiving that the danger of being hit by a train is unlikely because you are watching the back of the train that just passed moving away in the distance.
A so-called double dip for the housing and associated sectors, along with the onset of the Boomers' phase of life of net drawdown of financial assets and on gov't social transfers, ensures that the private sector will further decelerate hereafter into the implied demographics-induced lows in '16-'18 to as late as the early '20s.
All gov't borrowing and spending can accomplish is to prevent reported nominal GDP from contracting too much, while incrementally keeping the checks perpetually flowing for unemployment, food stamps, Social Security, Medicare/Medicaid, and the imperial war machine.
In the meantime unreal estate and stock prices will continue to decline from high unemployment/underemployment, debt burdens, Boomer drawdowns, causing more mortgage debtors to become underwater, walk away, or squat; defined-contribution plans will become 201(K)'s, then 101(K)'s, and finally NO WAY(OK?!)'s, coinciding with a wholesale exodus from the scam market and mutual frauds by tens of millions of Americans; and pension returns falling to 0% or negative, requiring trillions in benefit cuts over the next two decades.
We will eventually see 5-year ARM rates at 2.25-2.5% (as in Japan), and housing will still be moribund, with half or more of houses with negative equity, and the risk that residential house values will fall to estimated replacement value (fall another 18-20%), effectively removing any incentive for banks to make unreal estate loans hereafter.
No, there will be no double-dip recession, because the private sector never recovered from the onset of the debt-deflationary secular bear market and depression, i.e., the Greater Depression.
Posted by: Nemesis at September 16, 2010 11:07 AM
The recovery to July seems to come from big increases in net exports and inventory, whereas domestic consumption and construction declined. Not a very good basis for expecting solid recovery IMHO.
Posted by: don at September 16, 2010 11:51 AM
Why do we talk about a double dip when the NBER has not said the single dip is over yet?
Posted by: Ricardo at September 16, 2010 11:56 AM
No recession is likely again to the 2nd half of 2011 when the final stages of the RE bust make their way through.
Instead, surprisingly strong growth through Q2 2011 will make its way through.
With the acceleration of capital spending, consumer spending is beginning to rise a bit more as expected.
Q1 2013, we can all breath a sigh of relief though I believe another recession will had passed by then.
Posted by: The Rage at September 16, 2010 12:58 PM
don, and the exports are from US supranational firms shipping capital goods to their subsidiaries in China-Asia for intra-Asian market "trade" of components and intermediate and finished goods to be "exported" from Asia back to the US as "imports".
And guess where the bulk of the inventories come from? Right, those same "imports" (US firms' subsidiaries' "exports") from Asia to flood the Dollar Tree and Wally-Mart shelves for the holiday season (which now starts after Labor Day).
And Obummer wants to double "exports" in 5 years, which he perhaps he doesn't realize (or probably does and is paid not to) means providing gov't giveaways so US firms can more cheaply send their capital goods to themselves in Asia.
IOW, our "export policy" is really a stimulus for investment, production, and employment in China by US supranational firms' subsidiaries and their contract producers.
Ain't Anglo-American empire great?!
Posted by: Nemesis at September 16, 2010 01:03 PM
I think we never left recession back in 2003. We learned to count inflation as productivity.
Posted by: aaron at September 17, 2010 05:15 AM
What is the source for your statement that minus government spending the private sector never recovered? What I've been reading is that private sector employment growth has been positive for most of this year. It has just been offset by layoffs of government workers at the state level and layoff of census workers at the federal level.
Your statement on exports is interesting, but again, what's the source for your statement?
Posted by: DS at September 17, 2010 06:40 AM
DS, go to the Fed's FRED and the NBER databases and perform the necessary analysis.
US gov't officials, the rentier Power Elite, and large supranational firms do not want the public to know that we have a neo-imperial/neo-colonial "trade" regime requiring oil imports of 60-65% of consumption and growing (China's net imports of liquid fossil fuel imports recently exceeded 50% of consumption), as well as spending 10-11% of private GDP on imperial wars to secure oil supplies and shipping lanes.
Canada is an energy colony for Anglo-American oil empire. Mexico and Central America are colonial/imperial slave wage colonies for agribusiness, food processing, construction, hoteliers, and restaurateurs; and China, Vietnam, and Malaysia serve a similar purpose for US and Japanese manufacturing firms in Asia.
If we had to rely solely on our own resources and related productive capital accumulation and domestic production, and we will eventually, our economy would be half its size in per-capita terms.
The Anglo-American, militarist-imperialist rentier-capitalist "trade" regime, i.e., "globalization", and thus what we refer to as "capitalism", cannot continue with Peak Oil, falling net energy, and China and India competing with the US and EU for oil at global peak production; most of us just don't know it yet, including e-CON-omists, and our political officials, corporate leaders, and Wall St. do not want us to know it.
Posted by: Nemesis at September 17, 2010 08:44 AM
Nemesis: I don't know what series you used, but if you construct GDP from the FRED component data and then look at total GDP vs GDP net of government it's clear that both series trend up after 2009Q2, though total GDP levels out first and net GDP looks slightly softer as of September.
Posted by: Anonymous at September 17, 2010 10:56 AM
I think you can safely ignore post by Nemesis as he tries to cull information to suit his bias rather than to provide information that could lead to a fruitful discussion
Posted by: Robert Hurley at September 17, 2010 12:19 PM
As I've said, contrary to economic theory and Nobel Laureate Milton Friedman, monetary lags are not "long & variable". The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically (for the last 97 years), always, fixed in length. However the lag for nominal gDp (the FED’s target?), varies widely.
It’s a scientific fact that economic forecasts are mathematically infallible. Nominal (gDp) will cascade in the 4th qtr (down in every month - Oct, Nov, Dec & bottoming in Jan), without fiscal/monetary, countervailing, intervention/stimulus.
The next money flows (MVt), inflection point is a little after the FOMC's Sept. 21st meeting. The FOMC stated it will decide to ease "incrementally" if either: (1) unemployment increases, (2), the economy weakens, or (3), dis-inflation accelerates, i.e., the FOMC will DEFINITELY "ease" monetary policy.
Posted by: flow5 at September 17, 2010 01:12 PM
I think Q3 2011 will be a recessionary quarter.From there onwards, nothing nice is to be expected , more likely another 4-5 recessionary quarters till Q3 2013.
Posted by: Ivars at September 18, 2010 12:35 AM
Anonymous, look at the growth of NOMINAL private GDP (forget the dubious hedonic deflators for real GDP) since the most recent peak, and then compare the average trend rate from '00 and '07 to the long-term pre-'00 rate. We will be lucky by the mid- to late '10s to have 1% average trend nominal private GDP growth.
Moreover, go the the BEA site and look at personal income. Note private wages vs. gov't + personal transfers + rentier income, and look at the growth rates. How can the private sector grow with gov't wages, transfers, and public and private debt service growing at those rates to private wages and proprietors' income?
Also, post-'00 trend nominal private GDP is averaging less than 3%, whereas total nominal gov't at 36% of nominal GDP is growing at 6% (10% monthly annualized as of May-June to date with the fiscal year coming to a close). How long can that continue before we break out the sake and ouzo and toast to our inner Japanese and Greek? Answer: At the differential trend rate of gov't to private nominal GDP since '00, gov't spending to total nominal GDP will reach 50% by '20-'21. Is that worthy of a toast, or what?
Send me your address and I'll buy a case of ouzo and send it to you so you can be ready to party.
Yes, Robert, I am biased . . . by the facts.
Robert, this one's for you (at least $16 trillion of gross public debt baked into the fiscal cake for '13 or no less than 100% of GDP guaranteed, and probably more; and $23-$24 trillion of unserviceable public debt by '20):
No, the politicians, financial media hotties, academic e-CON-omists, Wall St. parasites, nor corporate plunderers will tell you the truth. Why should they?
Hold your nose, open wide, and prepare to swallow hard.
Posted by: Nemesis at September 18, 2010 01:31 PM
flow5, the Fed has already begun QE II with $13B (give or take) of incremental purchases of Treasuries over the past two weeks, or an annualized growth rate of the SOMA/balance sheet of ~18%; but Bubble Ben Shalom did not include you on the cc: list of the memo, one presumes.
Eventually the Fed will be printing digital fiat debt-money freebucks and buying directly from the Treasury, i.e., overt monetization, albeit via a book-entry conduit at the primary dealers. My guess is that the Fed will double its balance sheet by mid-decade, with the monetary base converging with total bank loans during the period (from ~3.3 today).
Looking at the money supply, all of the net incremental growth of M1 and M2 is attributable to the federal gov't borrowing and spending $1.3 trillion (9% of GDP and 14-15% of private nominal GDP), growing spending 7-8% yoy (1.9% of nominal GDP, 2.9% of private nominal GDP, and 15-16% equivalent of M2).
Along with the contraction in bank lending, had the federal gov't not busted the budget wide open to borrow and spend at 15% of private nominal GDP, money supply and private GDP would be in free fall.
So, yes, QE II is a 100% certainty, because it is already happening, which should give any Keynesian and stock investor nightmares, as the Fed would not be engaging in QE II already if the economy were in "recovery".
Posted by: Nemesis at September 18, 2010 01:49 PM
Nemesis: Those are fundamentally different claims from the one I responded to (I'm Anonymous from up top). I don't know if your prognostications will turn out to be right. I just know that when I checked your original observations about the components of nominal GDP they were wrong according to the FRED data.
I worry about the US Economy for many reasons, but the level of government spending is not one of them. The USA is not Greece and if we go the way of Japan it will be because we have changed our laws to create zombie institutions that trap capital in non-performing loans or shunt it into casino securities markets, and not because we ran fiscal deficits.
Posted by: Rodrigo at September 18, 2010 08:20 PM
Nemesis: Following up on Rodrigo's comment, see Figure 2, added to the original blogpost.
Posted by: Menzie Chinn at September 19, 2010 12:26 PM
Figure 2 clearly contradicts the gloomy bears. Are the democrats stuffed in backrooms gnashing teeth and pulling their hair trying to figure out how to spin that graph for political advantage?
Speaking of popular perception, when doubts about the durability of the global economic recovery--especially the US economy--start to wane, investment capital will flow out of the US into a myriad of other rich and developing countries. The US dollar will weaken. Critics of US policy will point to the weakening dollar as proof of their arguments when, in fact, the weakening US dollar will simply reflect greater confidence in the economic future.
So when will the Obama administration announced a federal value-added sales tax and higher excise taxes for gasoline, etc.? They can be scheduled in starting a few years from now.
Posted by: westslope at September 19, 2010 01:41 PM
Nominal GDP = $14.575 trillion.
Total local, state, and federal gov't expenditures = $5.270 trillion.
Private nominal GDP = $14.575 - $5.27 trillion = $9.3 trillion.
From the Q3 '08 peak, private nominal GDP is down 7.3%.
From the Q2 '09 trough, private GDP is up 3.5% (-1.9%/yr. annualized since Q2 '08), with gov't deficits to private GDP of 30% for fiscal years '09-'10 (and prospectively 40% of private GDP cumulatively for fiscal years '09-'11).
How long can the federal gov't borrow and spend $2.5-$3 trillion over two years to get negative private GDP growth of $367 billion over the period?
From the '00 secular peak, private GDP has averaged just 2.94%/yr. (long-term 6-7%/yr.), whereas total gov't spending has grown 6%/yr. while adding more than $5 trillion in gross public debt in the process (equivalent to 52-53% of GDP today and 100% of total gov't expenditures today).
Were the respective growth patterns to persist for the balance of the decade (I expect private nominal GDP trend growth to decelerate further, however), nominal GDP will be $21 trillion in '20, with total gov't spending to GDP of 45%, and gross public debt approaching $35 trillion, or 160% of nominal GDP, and 250% of private nominal GDP.
But the federal gov't is already on the slippery slope toward insolvency by borrowing 25%+ of total gov't expenditures/yr. and 35-40% of federal gov't spending.
Moreover, when interest payments on the gross federal debt reach 25% (see "This Time is Different" by Reinhart and Rogoff) of receipts (~18% today for gross federal debt and 10% for federal gov't debt held by the public), the tipping point for default/insolvency is not far behind.
And add the structural effects emerging from Peak Oil and China on course to reach oil import and consumption parity with the US in ten years, and the day of reckoning could occur earlier than the foregoing implies.
Posted by: Nemesis at September 19, 2010 05:06 PM
Nemesis: So you are defining government as "transfers" as well as government consumption and investment? Even using that definition, nominal GDP less total government transfers and spending on goods and services is rising.
Posted by: Menzie Chinn at September 19, 2010 05:38 PM
Menzie, yes, transfers are gov't spending funded out of taxes or borrowing (and borrowing today means higher taxes tomorrow and/or insolvency).
But look at the details of the data I posted. How can anyone be satisfied with claiming that the private economy is growing given the amount of gov't borrowing and spending over the past two fiscal years, and that the same scale of deficit spending per private GDP is baked into the fiscal cake for years to come in order to prevent private nominal GDP from contracting further (or the trend rate of growth from '00 and '07-'08 from further decelerating)?
Is there a limit to which Keynesians presume the gov't can borrow and spend to keep private GDP from contracting further, or to "stimulate" the economy? If so, what is the limit? If not, you cannot be serious . . . ?
Japan has experienced a secular debt-deflationary, demographics-induced slow-motion depression and secular bear market for stocks and real estate now entering its third "lost decade". Keyensian borrowing and spending and central bank monetization of the sovereign debt did not work (is not working) in Japan; and it did not work for FDR until the mass-mobilization for WW II and 4-5 years of total war central planning, rationing, conscription, forced savings, etc.
Private nominal GDP had contracted 10% from 1929 to 1940, and averaged just 2.5% from 1929 to 1945, which is the rate at which post-'00 private US GDP is converging today.
Speaking of Japan and the corollary to our situation today:
The historical self-similar debt-deflationary secular bear market pattern is aligning with the Nikkei in '00 and with US stocks in the late 1930s, 1890s, and 1830s.
The worst 5- and 10-year avg. returns for stocks are ahead of us, with the P/E steadily declining to the upper single digits.
As-reported S&P 500 earnings will fall to the very long-term trend line from the early 1930s and mid-1970s around a trend average of $35-$40/share (no higher than today but very likely much lower in the meantime, say, back to $24-$25/share), implying a low range for the secular bear market for the S&P 500 in the 300s-400s over the next 2-3 to 9-11 years.
The average trend S&P 500 level over the coming decade will be the 600s, with a prospective range of the 300s to 800s.
The peak-to-trough loss of total equity market cap will approximate nominal GDP today, with residential house prices falling to replacement costs, implying a 45-550% decline, putting the combined loss to US equity market cap and real estate of $25 trillion.
No one reading this will be able to say they were not warned. Sell stocks now or forever hold your losses.
Posted by: Nemesis at September 19, 2010 09:52 PM
The economy is still in recovery mode. And it's a big ship to quickly turn around to negative again.
That said, poor results in the November elections where government ability to put its considerable shoulder to the commerce wheel is stopped, will probably be enough to, at minimum, stall out the ship.
Every professional knows the drill. Cut portfolio exposure dramatically to almost all asset classes. Short them if you're nimble and bold. But ratchet up cash, if nothing else.
Whatever the market reaction after the elections, if Republicans do manage to take over the House, raise cash and step aside. The recovery will stall domestically. And the export business isn't nearly big enough to pull the ship forward.
Posted by: beezer at September 20, 2010 05:20 AM