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Friday, July 31, 2009

GDP Revisions And Our General Situation

With this advance estimate, BEA is incorporating a substantial revision. The pdf (51 pages) release is here. Note: all dollar figures listed here unless otherwise noted are annualized in billions and 2005 dollar-indexed.

In these releases, they are incorporating a current dollar change indexed to 2005 as well as other changes described in the release. Q2 is estimated at -1%. The new trajectory by quarter, beginning in the fourth quarter of 2007 and ending in Q2 2009 is:
+2.1%, -0.7%, +1.5%, -2.7%, -5.4%, -6.4%, -1.0%.
This revision comes closer to my own figures, except I have Q2 at more like -1.8 or -1.9. GDP gets revised and revised, even after the "final" figures come out, so these changes aren't surprising. Nonetheless, I am sure they will spawn a conspiracy theory or two.

As a better index of the depth of this thing, you will see (go to page 28) that real GDP for Q2 (12,892.4)has rolled back to a level between fourth quarter 2005 (12,748.7) and first quarter 2006 (12,915.9). This is a remarkably deep downturn. Consider the situation of the states, which are dealing with revenues even lower than those of 4 years ago, a larger population requiring more in the way of social services, and the beginnings of the retirement budget buster. They are in deep - it is not just CA.

A look at government expenditures tells the tale of rapidly rising federal expenditures as state expenditures continue to drop. Beginning in Q2 2008:
Federal: 961.3; 991.6; 1007.3; 996.3; 1022.4
State & Local: 1,546.6; 1,547.0; 1,539.3; 1,533.3; 1,542.6
Fed/St&Loc ratio: 0.62; 0.64; 0.65; 0.65; 0.66
State and local constraints are going to play an ever larger part in the years going forward. They are raising taxes quite uniformly, and it is mostly a regressive hit in the localities.

Another way to measure the depth of the downturn is to figure percentage decline. From Q4 2007 to Q2 2009, 2005-dollar indexed GDP has declined 3.7%. From the peak, which occurred Q2 2008 (due to the stimulus), GDP has declined about 3.9%.

Gross private domestic investment advance for Q2 2009 is estimated as 1,471.9. That is more than 25% below the averages for 2005, 2006, and 2007. It is also well below the ranges in 2008. In Q2 2008, GPDI was 2026.5. The figures for GPDI (annualized), which is the real forward driver of the US economy, are below the annualized figures going back to 1998. We have a significant problem.

Economies which are heavily weighted toward manufacturing have rapid collapses of GDP during hefty recessions such as this, but economies that are weighted more toward consumption (such as the US, or, to take an extreme example, the UK) show a pattern of smaller declines in the beginning of major international economic downturns, but a more persistent decline later in the cycle as the impacts of the manufacturing slow consumption.

2005 dollar PCE for Q2 2009 (remember, this is an advance estimate) is given as 9,180.5, which is equivalent to PCE for Q4 2006. Thus, our consumption is still out of line with our economic fundamentals.

I really was not all that interested in this GDP release. I am waiting for the July tax receipts, and especially FUT. What happens next in the US economy is going to depend mostly on how the small businesses are holding up.

In the stores, I see havoc. Food prices are steadily rolling back to a degree which would hint at deflation. The combination of this:

Combined with this:

Presents a highly disturbing picture. The Fed has been desperately attempting to redress the situation by reducing the average interest rates that households pay, and thus the percentage of income consumed by debt repayments:

Which looks fine and dandy, until one realizes that most of the compensation has occurred in mortgage payments and extremely low mortgage interest rates, the bulk of which are produced by government guarantees and not the market. Interest rates will rise, and that will leave a large proportion of the homeowner population unable to refinance. With extremely high CLTVs, most of this population will be unable to get second lien home equity loans; ergo, the capacity of the US consumer economy to absorb new debt in the future will be quite constrained. Add into that the movement of large numbers of households into the retiree/near retiree demographic group, and the cautious analyst or loan officer realizes that we need to turn to the production sector for growth.

And that is when one has a heart attack:

Note the amplitude of the dip in comparison to those in former recessions. It will rebound, but it will not rebound in a manner that is going to produce much in the way of gross private domestic investment over the next few years, because of capacity utilization:

Note that we have managed to top the 82 situation, which was truly wretched. And note that after the pits, matters revived quite handily. However, one now must scroll back up and look at household debt loads then versus now, and then also factor in the Reagan tax cuts, which inserted a massive stimulus into the US economy.

We could do that then, and we simply can't now, because of the federal debt load and retiree obligations. Short of whacking the 65 and older crowd, there is no way out but to give them some portion of their retirement benefits, which will require substantially increasing federal personal taxes.

So, now maybe you can understand why I have been desperately trying to get some feeling for one burning question, which surmounts all else in my mind:


I live with this question. I breathe with this question. I ponder this question in my sleep (literally). I have not yet figured out the answer, but it's not looking good. I doubt very much that the US economy can put in a year of growth around 1% without reverting to a decline, and I still have the organic growth rate (the top achievable without creating an inflationary cycle or without creating massive new debt loads) at less than 2% - somewhere around 1.7% to 1.8%.

It would be quite a hat trick to hit a policy range that narrow accurately.

The fact of which the economy can still work exactly if small increase of the honorarium, of that he is demanded. But it has people nowadays aged more insurance, of which it is a machine of the excavator of civilization a small one. In country they do not live much stay so very. Delay, as far as moving, in the beginning of the order of the manufacture to the extremity the morning that one loses, but I made the sweepings of the delegates. Are you real producing for the confidence with these diagrams? Load that the small companies are correct, societies like Wal-Mart that whole his transaction. People are not happy, if the economy gets to be very terrible. Which we do it is more intelligent truth, of a day, also and of me, Abdul
It would be quite a hat trick to hit a policy range that narrow accurately.

Yes, even if they were stating the policy in that way, it would be a hat trick. But they're not even doing that.

To give credit where (minimal) credit is due, both health-care reform and Cap'n Trade are intended to address these issues. They're not going to work, but it looks like the intent of health-care reform is to reduce the cost of care for the aging population through rationing, while Cap'n Trade magically increases the organic growth rate by promoting alternative energy.

The health care bill can't be made to reduce costs, because it has to be larded up with giveaways to favored constituencies in order to pass. Not to mention that people simply won't accept government rationing in any meaningful way.

I think that eventually alternative energy can reduce the cost of energy, but that's years away, if not decades. Until then, it' just a tax on productivity.
Thank you, MOM.

Interesting to see you tracking the the deflation trend.
And note that after the pits, matters revived quite handily.

By overleveraging. Which we're now unwinding.
Abul - the last thing I want to do is create confidence where confidence would be unfounded. That is a recipe for failure. It is better to be realistic and succeed than confident and fail.

As to economies managing to maintain steady slow growth, it is possible. However when the debt load is disproportionate to the size of the economy, it is not possible. We'd be far better off with steady, slow, sustainable growth if it were possible.

To make it possible in the US, we would have to write off a bunch of debt. However, we just nationalized a lot of debt, and that we cannot write off.
Neil - I was thinking in terms of the Fed, which is not pushing for either cap and trade or the other measures.

Certainly you are right. With spending this low, with regressive tax and fee increases occurring in the local and state governments, and with incomes dropping, it is would crazy to raise energy taxes on the people.
Charles - but look at the earlier graphs! The 80s were a time of growth without a disproportionate debt build for companies and households.

Now we are loaded up with public debt and private debt, and we must increase taxes. Clearly we do not have the same range of options.
Shtove - If I were to go just by the stores, I'd throw in a towel and just call this a deflationary depression. However there are other factors at work and that diagnosis may not be correct.

This MAY be a correction with self-limiting features. Or it may not be.
The Gov't needs to get dollars circulating. I look for
more disincentives on savings and devaluation. Wouldn't be surprised if retirement plans are
reworked. The problem now is that every solution
creates an opposite but equal reaction.
I despise using GDP as a measure of the economy -- I'd much rather see something like profits + private sector wages. But we're stuck with GDP for the time being.

Which brings us to cash-for-clunkers. It appears to have been a roaring success (from Washington's point of view.) The irony may be that dealer inventories will be drastically reduced without any attempt to rebuild them (given that the program will end.) That will drop the silly GDP figure.

I'd love to hear Obama have to 'splain that.
We knew it was bad. In fact we knew it was the worst recession since the depression. These charts all confirm it. But what really frightens me is that Obama and the democratic controlled Congress are, with their tax and spend policies (Cap and Tax, Universal Healthcare, budgets in defict as far as the eye can see), doing nothing to allevaite the problems. Only a voters revolt can change the course.apsycom
When I was young and local garment factories were being put out of business by foreign competition, people were saying, "How do they expect us to be able to buy anything if they send all the jobs overseas?"

Since back then we still had growing industries with higher value added, most of those people soon had better jobs and were able to buy even more.

But now that's not the case. With Asian nations -- esp. the Chinese and Japanese -- having positioned themselves through exchange rate manipulation so as to be able to under-price US competition in most manufacturing, a significant fraction of US personal consumption dollars end up in Asian hands. And so do the jobs they would have funded, so the Americans who would have held those jobs can buy things only if they can find other work -- but they can find such other work only if the dollars sent to Asia get lent back to us in such a way as fund it.

During the housing bubble era, the mechanism for that was Asian purchases of US securities that directly or indirectly funded mortgage borrowing, and the funded jobs were in residential construction and activities supported by that construction.

But there was a limit to how long the people who would normally have been working in manufacturing could be so employed, because we finally built so many homes that everyone who could possibly afford one already had at least one, and then continued on to build so many more the market couldn't be cleared even by selling them to people who couldn't even begin to afford them.

Since no one has yet to come up with an alternative way to employ those people whose jobs were sent overseas, the mechanisms for recycling the dollars back from Asia are breaking down, and "How do they expect us to be able to buy anything if they send all the jobs overseas?" is a quite fundamental issue. Since we can't pay those people to do anything for use the Asians are in a position to do, and we are already paying out all we want to for things and services the Asians aren't in a position to do, we need to find some way to borrow more money from the Asians to pay those people to do other things -- which are likely to be mostly things we really don't care all that much about having done. This has a great many interesting implications.
Craig, or whoever: Regarding the "cash for clunkers" program, did US car dealers REALLY sell 200,000 new cars in one week? (I'm calculating the 1 billion dollars we supposedly went through in one week, divided by roughly $5000 per car.) If this is the case, obviously this Administration didn't need to go to all the fuss and bother of multi-billion-dollar auto bailouts then takeovers, they should have just subsidized auto sales early on and GM and Chrysler would be healthy by now!!
Some people are decrying the Cash for Clunkers program. However, this is the only part of the stimulus program that has worked so far. The idea behind the stimulus program was to get money circulating. A car inventory sitting on a dealer's lot is dead money that is costing the dealer and the auto company money. Selling those cars frees up that money to be circulated again. That is what the stimulus is all about -get money circulating again to bring back confidence and stir the pot of commerce.

If the government would cancel the rest of the Porkulus Bill and cut payroll taxes significantly, give real estate investors incentives to buy up defaults for rentals, declare the opening of our closed offshore areas and ANWR for oil drilling, encourage utilities to go ahead with nuclear power plants, reform healthcare by reforming malpractice tort practices, drop wholesale healthcare reform, and drop the Cap and Tax; it would get money moving in this country much faster than what they are doing.

Thanks for a great post! It is an example of the type of original analysis you only find, IMO, on your blog.

One thing I wonder about is how long incomes will hold up. One way of thinking about "deflation" is an asset/debt dynamic, where asset sales lead to lower prices lead to defaults lead to asset sales.

The other one, the one the Fed seems to ignore, is the unemployment/income dynamic: unemployment leads to falling incomes leads to falling demand leads to unemployment.

So the Fed, with its bail outs, increased its balance sheet by $1.2tr or so and interrupted asset/debt deflation. However, this did nothing to spur demand (the money is all parked in excess reserves). So we still have a problem with incomes.

I think we may see falling incomes in the second half, and no one seems to be talking about this possibility. It would be truly scary. What do you think?
Say hello to the Kobiasi Maru.

Greetings from Spain. Economy sucks here, too, but the women wear less clothes, which is nice.
Sorry, that was from cf
We have excess reserves now. We won't have excess reserves after the Alt-A and Option ARM resets finish in two years.
David - I think incomes are already falling. I think the BEA has it wrong. I think the effect of local tax and fee increases and the higher gas prices, plus higher insurance, cuts in wages, unemployment, major cuts in income to service businesses, etc have combined to reduce incomes rather sharply.

I mean, just look at income tax receipt patterns over the last few months.
CF - buying a few airports? I hear there are a few cheap in some areas over there....

Kobayashi Maru indeed. Very hard indeed to reprogram this one.
John - I don't think we have excess reserves. Credit losses always peak after a recession ends - they follow a similar trend to employment. The worst is just coming around the bend.
MoM, I agree ... you put it more elegantly. What we have here is an attempt by banks to shore up their balance sheets in preparation for a predictable wave of additional defaults. The reserves are only "excess" by comparison to those during a boom.
I'm not sure what "reserves" you guys are alluding to. I don't think banks have reserved enough about loan losses. The reserves I mentioned were those parked at the Fed.

My point is that monetary policy has not impacted aggregate demand. The Fed grew its balance sheet by roughly $900b, and that same amount went into the banking system's "cash" deposits at the Fed. None of it -- none of it - reached the economy. So to the extent that we have a deflationary dynamic of falling incomes/rising unemployment, the Fed has done nothing to stop that. Instead it has bailed out the banks. A true Wall Street over Main Street, trickle down policy. (BTW, I'm against using money policy to stimulate the economy, but if you're going to do it, do it right!).
if this is the Koboyashi Maru then I expect some cheating from my elected officials damnit!

If they can just change the way CPI and unemployment is calculated we can win! yes we can!

JM, there is a way to employ people's whos jobs went overseas. We have to equalize the standard of living for identical workers here and there. We can trade them some escalades, boats and $8 coffees and they can trade us some rice paddys, grueling work, long hours and high savings rate. win win right?
David - oh, I agree with your point. To a considerable extent, the massive amounts of money that went into TARPish endeavors were a transaction that was tightly contained. In effect, we bailed out the shareholders, and we prevented a massive retraction of money from the economy, which otherwise would have occurred as the largest banks called and failed to renew lending in order to win back the cash they needed to cover their losses.

So the actions prevented a catastrophe, but they haven't prevented a slow trickling away of our economic lifeblood. Only shutting down these big banks would have done it, but we couldn't shut them down because we had allowed them to grow so big that we couldn't do anything except nationalize them.

Plus, going back to points you made more than a year before, we are now back in a cycle of low rates and exporting inflation. This is not going to end well.

The only way out is to Volcker it and raise rates, which will cut the flow of money into speculative stuff, but which will require taking our lumps up front.
It's my usual report on trends I see here at work. Still the same "people trying to cut costs". VOIP seems to be selling well. I would imagine that any utility company that can bundle services is doing pretty well. Even the cell phone companies are starting to offer voip.

What interests me is a rise in calls from women that have left their husbands and moved out. I guess it's to be expected when times get tough. It doesn't seem like it's triggered by job loss. I just wondered if anyone else is noticing more marriages than normal falling apart.
The only way out is to Volcker it and raise rates

Won't that cause more banking problems, especially community banks, ala the S&L crash of Volcker's time?

I'm not saying it's the wrong idea, but we have to be prepared to the consequences of any decision.
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