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Wednesday, December 21, 2011

About Disaggregation

But in the meantime, and tragically akin to my last:

This is a long time series of interval changes in the growth of US real personal disposable income per capita.

As you can see, we have a problem. The problem is also not heading the right way.

Here's the same sequence broken into two graphs so that it is easier to see the detail. The 60s-80s:

It was quite rare to go below 0%. It occurred in the extremely harsh mid-70s recession.

After that, due largely to high inflation, real income growth remained below trend until the early 80s downturn, after which it rebounded.

Our current malaise is rather easily understood. We're poor.

Far worse is that US per capita disposable real incomes are dropping again. The latest data is that per capita disposable income is lower than it was last year, and indeed lower than it was in Q2 2010.

The two year change is above zero because we did rebound for a while after Q3 2009.

It is important to keep in mind that this includes the 2% cut in FICA taxes, which raises nominal disposable per capita incomes about 2%. Until we can get personal incomes back up, the economy will be in recession territory. Indeed, by this measure we have already doomed ourselves to recession - the one year change has never fallen like this before without precipitating a recession, except in '05, when recession was prevented by massive credit spending, which did, in fact, delay the recession but produced a more intense recession two years down the road.

And that, by the way, is the choice we are facing once more. We can either goose this by maxing out our federal credit, and then take a much more serious downturn a few years down the road, or we can try to bounce around recession in 2012.

Following the disaggregation principle, it would be much better to let the FICA tax cut expire now. The reason is that we have two strong positive impulses next year. Neither is huge, but both now seem very certain. The first positive impulse is the increase in SS benefits. That will boost personal incomes somewhat. The second positive impulse is the rebound in housing, which is really happening. That rebound is going to turn in some very strong positive feedback. Those two ought to be enough to keep us in skipping or mild recession territory.

Nothing has really changed since the wretched fried-eggonomy graph - the more we try to boost now, the worse the shock in 2014/2015. If we are stupid now, we are likely to go into a frank depression in 2015, not that we'll notice until 2017.

We began 2011 with US Debt Held By The Public at 9.39 trillion. It is currently 10.44 trillion, and will go up more before the end of the year. We do not need to raise our structural deficit any more. Extending unemployment for six months would be a good idea. An MWP tax credit would be an even better idea, with a more rapid phaseout ending at 50K. Both of those moves stand a decent chance of helping more than they hurt. The FICA tax cut will hurt more than it will help.

I am reasonably certain that real personal per capita incomes rose this quarter, not that it has ended yet. This leaves us with enough strength to flounder through necessary adjustments next year without the FICA tax cut. Ending the FICA tax cut, which was a very poor stimulus anyway, will help curb inflation. (The FICA tax cut was acutely inflationary because it increased real higher end incomes far more than it did lower end incomes. The MWP was not.) Curbing inflation will cause more strength in real incomes, which will tend to reinforce the SS/housing positives.

We have been out of good solutions for some time, so now we ought to shoot for least-bad solutions. Next year we ought to try to cut our real borrowing to about 800-825 billion, and the year after that, 700 billion, and then the year after that we'll have to shoot for 600 billion, although we probably can't get there. By 2015 we need to be at about 500 billion. There will be a lot of fireworks.

Tomorrow we get GDP and CFNAI. Since Q3 2010, real GDP as currently calculated has increased only about 200 billion dollars. Eventually, as in by 2016, we are going to have cut average annual deficits down to about 300 billion dollars to control our debt increase. This will require considerable austerity, which will show up in the economy. Spreading this austerity out should be our essential goal.

If you check the archives of this blog, last year in December I was making dire statements about the inflationary effect of the Congressional and Fed moves. I predicted that they would tank the economy. Sad as it is to write, that was probably true, with the only thing really helping us being the disaster in Japan. The disaster in Japan shifted the real pain forward by months, and that pushed a little big of discontinuity into the economy so that we are now in a weak upswing. But we are in a very weak position now, and we shouldn't hide from it.

I am also appalled by what a theoretically Democratic administration has brought to the table. Under Bush, most economic stimulus measures were at least distributed equally, and some were distributed to the bottom rung of incomes. Thus they worked a lot better. Obama's administration has shifted, economically speaking, into hyper-Republicanism. It's dire.

When you have little money to spend, spending it pushing up lower end incomes (esp. economic casualty incomes) provides far more economic stimulus per dollar than pushing up all incomes by the same dollar amount. But the Obama administration isn't even trying for that. The Obama administration keeps trying to give more money to higher-income people. This appears to have converted big hunks of economic stimulus into economic drags. There is a Republican/Democratic Axis of Economic Idiocy which is almost leveling this country, and it must end.

To my mind, the Obama administration has been a tragic failure. However Republicans in Congress haven't managed to do any better. We are still smoking ganja and hanging out in margarita land. What the prospects are for real change next year I don't know. We are running out of time and money quite quickly.

Crude Inventories:
Total products supplied over the last four-week period have averaged nearly 18.5 million barrels per day, down by 5.8 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged 8.7 million barrels per day, down by 4.7 percent from the same period last year. Distillate fuel product supplied has averaged nearly 3.9 million barrels per day over the last four weeks, up by 2.4 percent from the same period last year. Jet fuel product supplied is 0.5 percent lower over the last four weeks compared to the same four-week period last year.
It seems we are close to another economic ledge down. I don't think it is a collapse into total recession, but first quarter is going to be raw and nasty. Trucking is still holding out. Rail is showing that carloads have recently rebounded slightly. The YTD YoY for carloads is 1.9%; last week's, for example, was 3.7%. Autos is a big reason for that, and construction-related is another big reason. So we have something to carry us through a bad first quarter.

Businesses managed inventories very, very carefully this year - we don't seem to have any backlog at all in industry that would produce a synchronized downturn. Services are hurting far more. I think autos is getting close to max, but I'm not sure that any significant downturn is really in the works.

"The second positive impulse is the rebound in housing, which is really happening. That rebound is going to turn in some very strong positive feedback."

Not sure what you are referencing. In Calif a rebound in housing might be in sight due to some statistical data action but in real time years away from an actual rebound.
The building/refurbishing bit is off the bottom.

The bubbly markets (previously bubbly) won't see much of this for some years, but the nation as a whole will.

We've reached the bottom and are climbing out on new housing. It's going to add to the economy next year.

Prices on the higher end stuff will continue to drop in many markets, but activity will rise. It is the activity which matters for the economy.
We need to fix this chart. I see no evidence that anyone in DC is willing to address this, or likely to before we hit the wall.
Yup, that's it, John. And the relationship between the two guarantees that you cannot do it solely or even chiefly by raising taxes.
Banks are lending on housing again?
FHA sure is.

New homes have cleared very substantially, with more new building picking up in the less overbuilt areas.
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