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Monday, February 11, 2008

Working Hard

Well, all this crunching of data I am doing has convinced me of two things. The first is that we are not due for a short, shallow recession, no matter what the economists say:
Economists Jan Hatzius at Goldman Sachs Group Inc. and Richard Berner of Morgan Stanley say the U.S. economy is already in a recession, and they predict that action by policy makers will ensure it is short and shallow.
Haw, haw. The parts of the article that are about Europe are more realistic:
December retail sales in the euro region fell the most since 1995 and service industries grew in January at the slowest pace in more than four years. The European Union's statistics office will report Feb. 14 that the economy expanded 0.3 percent in the fourth quarter, less than half the pace of the previous three months, according to the median forecast of economists surveyed by Bloomberg News.

``Euro-zone growth is in trouble, and the risk of recession at some stage should not be underplayed,'' says David Brown, chief European economist at Bear Stearns International in London. He says the region will be ``very lucky'' to expand 1.5 percent this year, which would be the weakest since 2003.
The second is that we are in a long cycle probably mostly determined by demographics. Having a debt hangover at this point is particularly painful. I'm going back and running stats for years and years.

I think what I am going to come up with is that this cycle started in the late 90's when the dot,comers retired, and is due to continue until about 2015-17. And it is a much lower-growth cycle overall, with trend GDP being more in line with 2.3-2.7%. All the bubbles in the world can only shift growth from one point in the cycle to another, so if you take it earlier you just push growth in a later part of the cycle down more below trend. And that, my friends, is where we would be now, paying for the bubbles of recent years.

Of one thing I am sure: the part of the stimulus package that raises the GSE limits (Fannie and FHA, for example) is ill-judged and won't produce much. If it pushes jumbo rates down it will do so by raising current conforming rates.

Also, I think the Fed is not going to be cutting much more than 50 bps the rest of the spring. It has done most of what it could do with rates.

Rail freight is quite disappointing. The first five weeks of 2008 saw carloads up by 0.9%, and intermodal down by 3.4%. Commodities like grains, coals and ag chemicals are doing well. Retail and manufacturing looks to be in an accelerating downward trend.

In the late 70s and early 80s we saw a period in which three recessions were stacked together, and that is the type of thing we are destined to see now.

Comments:
M.O.M.,

Too much debt. Far to many have spent their future earnings. The worst part is that much of the debtor's future earnings are now in the hands of foreigners. Traded for trinkets in many cases.

What wall street couldn't deliver the policians surely will. As if! We are an ignorant lot.
 
Well, this time the Indians get Manhattan, and we get the beads.
 
Ignoring economics for the moment, the leadership of the US seems both clueless and enslaved to ideology.

That is a recipe for disaster.
 
Part of the problem might be that the problems are structural enough that they are mostly afraid to address them, and substitute empty rhetoric.
 
The last time this happened was at the onset of the great depression.

No matter what the tools or the level of knowledge, if the leadership is not capable of using either, well things get bad fast.

Unfortunately, we have no pretty graphs of incompetence or formulas to predict leadership failure. All we can do in watch.

The failure in the great depression was not economics but leadership. We have some rather smart folks trying to apply economic tools that they think will prevent problems. But it is futile as it is only a symptom of the problem.

One example of this is unemployment compensation. In the 20s the leadership felt it was not a good thing to do. Now in the new century, they are repeating the same error.
 
The more I watch this unfold, the more I think the Austrian school of economics has a point.
 
John - I am generally in the Ludwig von Mises camp of economics.
 
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