Monday, April 13, 2009
Rumors Of My Demise Were Not Hugely Exaggerated
I've still got a bit of trouble with my eyes, but due to my brother's delivery of a Linux box, which I have set to large print, I should be back with you shortly.
I have spent a few hours catching up today by reading Fed releases and my regular news sources, and I am impressed by the official US ability to spin delusion. The BRIC bloc is in deep trouble, and there is little chance for the US to resume growth with carrying power this year.
For the US to resume real growth, gross private domestic investment would have to shift into the positive territory. Look at these numbers gleaned from recent Treasury Monthly statements:
March Corporate Income Tax (before refunds):The fiscal year started in October.
09: 22,315 (-41%)
FYTD Corporate Income Tax (before refunds)
09: 102,224 (-35.7%)
March Personal Income Tax (before refunds):
09: 92,682 (-7.3%)
FYTD Personal Income Tax(before refunds):
09: 579,139 (-8.7%)
Until corporate profits stabilize, money isn't going to be put into investment. It is at this point that one suspects that the Obama administration placed too much emphasis on talking about the economic downturn as a crisis as a way of passing out money to favored causes while simultaneously not taking the economic downturn seriously. I write this because it would truly have helped to have significant money dumped into infrastructure improvements ASAP, but the stimulus measures that have been passed are heavily weighted toward later years, economically nonessential payments to very narrow interests, and shoring up a feeble financial sector, while doing little to stimulate economic activity now.
The result will be higher unemployment, which will cause significantly higher credit defaults, which will negate at least part of the money being dumped into the larger financials.
This is Gross Private Domestic Investment since 2000, by quarter. As you can see, it fell in 2006, revived slightly in 2007, and has taken another cascade down in 2008.
It defies all reason to expect it to head up substantially until the government throws massive stimulus into the real economy, or until corporate profits revive somewhat. Gross private domestic investment is the real driver of the US economy. Real gross private domestic investment fell 5.4% in 2007 (which was why I was so confident in stating that we were in a recession) and fell another 6.7% in 2008. The best we can hope for is a smaller decline in 2009, but we aren't going to rack up any annual growth.
With falling incomes and our current demographics, you are not going to get major boosts in consumer spending. It will revive somewhat as cars, clothing and appliances wear out, but you can't expect any huge jumps there until the employment situation improves. Unemployment can't improve this year, and no one is suggesting it will.
But with employment declining, and CRE busting so badly, and with corporate profits in a profound swoon, the fundamental economic choices facing a government are:
- The government lets the natural economic cycle run its course (and that natural economic cycle is for a depression-like event), or
- The government intervenes to bring needed infrastructure investments a few years forward, which puts a floor on the drop in economic activity, supports employment, and knocks the bottom off the cycle.
Thus, the claims by people like Roubini and CR that the "stress test" of banks is a farce are well-founded, and observations by industry analysts that rosy profit statements by various banks are often produced by under-reserving for future losses are also quite well-founded.