Wednesday, April 29, 2009
GDP AND Consequences
First, according to hard data such as rail and retail, the economy is getting worse rather than better in the first part of the second quarter. March was worse than Jan/Feb, and April is worse than March.
Second, there was an astounding drop in private domestic investment. Here's the recent history on gross private domestic investment:
06: +2.1%By recent quarter:
08 Q1: -05.8%; chained 2000 dollars: 1,754.7Since this is a fundamental economic driver, there ain't gonna be no real second half recovery. All subcategories were negative.
08 Q2: -11.5%; chained 2000 dollars: 1,702.0
08 Q3: +0.4%; chained 2000 dollars: 1,703.7
08 Q4: -23.0%; chained 2000 dollars: 1,596.0
09 Q1: -51.8%; chained 2000 dollars: 1,329.8
Third, government spending is declining. Total was -3.9% in Q1, and state and local was -3.8%.
To understand the implications, you have to look at three factors - quarterly change in GDP, change in real exports, and change in real domestic private investment compared to earlier downturns:
You should be able to view a larger version of this graph by clicking on the image. The data can be found here.
This constellation of factors has not occurred since WWII. There was a worse collapse in domestic investment during the 75 debacle, but it was produced by an earlier and milder collapse in exports. We were also then a pretty big manufacturing economy. To have a coincident collapse in gross private domestic investment along with such a big collapse in exports implies that there is further weakness in domestic investment to come. Needless to say the global recession is not helping.
Further implications are that the futures price of crude oil is way too high. The stuff is piling up all over. US crude inventories this week are reported as being up YoY 12.3%, and YTD domestic product supplied has dropped 4.4% on a YTD basis. So we are not going to be sucking up the excess.
At this point I would say that a total 7-8% drop in GDP by trough is more likely than not. If we actually implement some of the wackier energy proposals, there could be reiterated downturns over a decade or so, and we could end up in 2019 with GDP over 10% lower than it is now. Seriously.
The stimulus bill never actually stuffed in much traditional stimulus. We are going to have to go back and revisit it. Still, it is too late to prevent the second half debacle for 09.
Other implications: China will have to devalue its currency after buying up all the natural resources it can get. It has no option; it must boost domestic social welfare spending, and it needs exports to sustain that effort. Right now it appears to be in more trouble than India.
The 10 year budget projections by both the White House and the CBO are ridiculously optimistic at this point.