Friday, July 31, 2009
GDP Revisions And Our General Situation
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; 1022.4State 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.
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
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:
HOW LOW A GROWTH RATE CAN THIS ECONOMY SUSTAIN WITHOUT REVERTING TO ANOTHER CYCLE OF DECLINE?
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.
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.
By overleveraging. Which we're now unwinding.
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.
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.
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.
This MAY be a correction with self-limiting features. Or it may not be.
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.
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.
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.
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?
Greetings from Spain. Economy sucks here, too, but the women wear less clothes, which is nice.
I mean, just look at income tax receipt patterns over the last few months.
Kobayashi Maru indeed. Very hard indeed to reprogram this one.
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 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?
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.
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.
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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