At the beginning of the year, the general economic consensus was for growth to start picking up. However, the EU crisis and the Japanese earthquake hammered growth in ways not anticipated. This was evidenced by the large downward revision to the first two quarters of 2011 growth, which printed two sub 2% quarters. This is a very discouraging sign.
Now, we have Washington focused on the need for "deficit reduction." Yet their solution -- which is disproportionately focused on cutting spending instead of a balanced approach between raising revenue and cutting spending -- is occurring at exactly the wrong time. This is born out by recent market events. Consider this chart:
The debt deal was signed on August 2. Since then, the stock market has tanked hard. Notice the massive volume on the sell-off and the incredibly strong downward sloping bars. Where is the euphoria? Where is the, "they got it right, the economy will now grow at strong rates so we should start buying shares" rally? Nowhere. In other words, the deal accomplished just the opposite of what the market wanted.
"But Bonddad! The economy is heading towards a double dip recession! We're doomed" As I've shown, there is little possibility of a double dip without recent events because there isn't much lower the economy can go. It's hard to see the economy dropping without a commensurate drop in housing. Yet housing is already bouncing along a bottom. And from an employment standpoint, it's hard to see how companies could cut any more employment fat from their budgets. The recent initial unemployment claims reading shows that companies are nowhere near the record lay-offs that occurred during the recession. Gas prices have dropped sharply, which is a boon to consumers. And consumer spending is moving sideways, not crashing. In short, the underlying data point to a 0%-2% GDP growth situation.
The problem with the debt deal is it took government action off the table at a time when governmental action is needed. Instead of borrowing at insanely low rates, investing massively in a degrading US physical and intellectual infrastructure, Congress is taking action off the table. Remember that governmental spending is a component in the GDP equation -- a fact lost in Washington policy debates, as is the different between consumption and investment. In short, Washington is focused on exactly the wrong thing at exactly the wrong time and as such should bear the brunt of any economic slowdown we face.
16 comments:
To play contrarian, I think we could have another recession and may even already be in one (once we see revisions to GDP). First, the decline in growth can come from both the government component of GDP as well as the balance of imports/exports. Second, the job losses, while likely not to be large like the last recession could still come, as government continues to lay off workers and the potential loss of those jobs gained during this "expansion". I am not sure if this is likely with the recent downward trend in claims, but I could see it playing out (especially if the markets move further downward).
"However, the EU crisis and the Japanese earthquake hammered growth in ways not anticipated."
True but not the key. The big problem was the sudden explosion of oil prices after we got a couple of good employment reports. Oil went to >$114/barrel and killed the recovery. Lest we forget, only 5 months ago, the idiocracy was worrying about inflation due to QE2 blabla. Now they're worried about deflation? How many times in a row can they be wrong?
A good start would be to roll back the last stimulus enacted in December. Most of it was the Bush tax cuts, special tax breaks, and the unemployment extension. Use some of the savings toward a different jobs program. After all, the Household Survey indicates that only 250K jobs were created in the past 12 months under QE and the 2010 Stimulus.
http://www.bls.gov/news.release/empsit.t01.htm
The intelligent thing would be to change directions as job growth has stalled for over a year.
The S&P500 reached a high of 1370for 2011 on May 2nd, the very day the US announced Osama Bin Laden had been killed. At the time, I thought the market would go higher in the 3Q & 4Q, ending the year around the 1430 level. Nobody called a top at the time, except for the usual "Sell in May, and go away" crowd. I see support at 1100, and we recently have seen 1120. The next level of support is at 850, so the market could move significantly lower if we punch through 1100.
The S&P 500 reached its low target on several levels.
1) The head-and-shoulders top of 1370 to 1250 projected a target of 1130.
2) A 20% decline would bring out the bear market cry from the media. A decline that would breach 1096 would be defended. Several widely quoted market averages came within a fractional percentage of reaching this level.
3) 1092 was a 15% variation from the 50-day moving average.
If the market is to move lower, there are other targets based on the head-and-shoulders pattern. 1050 and 1010 would be the next potential levels.
I think SilverOZ and Bonddad make good points. My biggest worry is that GDP data for the first two quarters of 2011 get revised downward, into contraction. Not sure how likely it is, but it's a concern. That said, RIGHT NOW, I dont see a lot to worry about in the third quarter. Job growth was better than expected in July, retails sales were up, jobless claims have been trending lower, oil prices are down significantly. No, it's not spectacular, but it doesnt suggest contraction either in the 3Q GDP. Yet.
So the US Government should keep right on spending? I would agree if they would "create" money rather than borrow it with interest. Fuck the Feds... Congress should create money and stop "borrowing" it. That is ultimately what the fed has done with QE* only they get to collect interest on what they print... stupid, stupid, stupid.
Actually, housing is not "bouncing along a bottom (unless you want to parse words). It stands to reason that a median wage should be able to afford a median house since it is jobs wages that pay most mortgages. In many communities, a median wage can only buy a fixer. House prices needs to stabilize at a level in sync with wages.
However, I completely agree that since the government is going to borrow anyway, they might as well borrow at these "insanely low rates" and invest "massively in a degrading US physical and intellectual infrastructure."
Washington is "focused on exactly the wrong thing," that is increasing political polarization and scoring political points for the team (party), instead of making the welfare of the country as a whole the priority even if it means not pursuing at all costs one's own special interest.
I am probably asking too much since I am asking everyone, Wall Street, Main Street, Next-Door Neighbor, and You to eschew greed and selfishness. It'll never happen.
I don't think we are in a recession now. While Q1 and Q2 growth were low, and could be revised negatively, this strikes me as unlikely. In fact, job growth for the last two months of Q2 were recently revised upward, but a bit, Suggesting Q2 might be revised upwardly, not down. And Q1 got slammed by horrid weather and the start of the Japanese tsunami and nuclear disaster and the beginning of middle east/N.Africa turmoil and rise in oli prices, so I wouln't read too much into the low or non-existent growth then. And even at that we did create jobs.
Only in America can they get retail sales up when household spending has been falling for three months. Anybody think to look in the Commerce Dept report to notice that retail sales have also been down and that the increase is all due to seasonal adjustment. If not for lack of inflation adjustment, it would look even worse.
Great piece. One thing no one is talking about is restructuring the way the fed govt budgets. States, localities and corps generally have an operating budget and a capital expenditure budget. Borrowing for operating expenses is generally considered bad (although not always) while borrowing for capital expenditures is considered fine. The Feds should be borrowing now at low rates for cap expenditures to rebuild and expand our infrastructure. But that would make too much sense especially with the crazy tea party.
I think the panic we've seen in the last week is essentially the "ripple" running through the crowd after Little Johnny (S&P) pointed out that The Emperor is "clothing challenged."
There's no way to back off on that now. DC is clearly locked up, both in Congress and in terms of considering anything other than the austerian *spit* conventional wisdom. The European Union is in bad shape and unless they fix their structural problems we will eventually see multiple economies looted much worse than they already have been, or possibly just watch the whole EU fall into the crapper. The media is also screwed up; they won't talk about control fraud, regulatory capture, looting, or kleptocracy... In other words, none of the emperors are wearing any clothes!
The market panic in this last week essentially communicates the following: "We don't trust you anymore. Fix all this crap right now or else."
Unfortunately, I don't think anyone with any power is going to fix the problems, and we will all live through the "or else."
A relative (and their colleagues) employed at a major pharmaceutical company are going to be laid off and then rehired as a contractor before Christmas. At least they think they might get rehired. Unemployment in my city has spiked upward 1%. I also don't think you can call the difference between $3.95/gallon and $3.75/gallon for gas (at least in my city) a "sharp" drop in gas prices. If the economy is truly growing, there are a significant number of us who don't see it from our limited perspective.
The only reason I have been spending more the past two months is that I had deferred necessary spending over the past year and a half. These were planned purchases which included maintenance items for the house.
My cost of living increase this year (and I'm thankful to get one) is swamped by a factor of 5 by the other expenses that were increased or will be this year. If anything, I will be cutting monthly spending again from this point forward. I believe that the short term spending increases here and there are simply blips related to people spending saved money for planned purchases. I think for a lot of people that is the new normal.
The market was swamped with too much supply of treasuries once the debt ceiling was lifted. The treasury debt increased by 240 billion dollars in the four days following Bush's signing ceremony.
In a comment here on March 14th, I wrote:
"Seeing as how I'm usually the one around here to be harping qualitatively on the risk of shocks, let me add this: If the global economy should weather this recent storm of insults successfully, I will finally come to trust in the resilience of the recovery, but I think it'll be three to six months before I come to that conclusion."
Well, it's been five months so far, and while I'm willing to wait another month before coming to a firm conclusion about "the resilience of the recovery", I have to say that with the latest chaos in the markets and in politics, both here and in Europe, I'm very much leaning against a meaningful recovery now.
Although, it seems like the economy has reached a temporary low, it is possible that the economy could do worse. We just can't believe it because we've never really experienced a depression in our lifetimes. The Long Depression of the late 1800s and the Great Depression were much worse than we ever experienced.
How can things get worse? The GOP can threaten to shutdown the government or next year they could once again threaten default if FDIC insurance is not repealed. Once repealed, we could have massive bank runs and failures, which in turn could lead to the Second Great Depression.
Another possibility is nuclear war. Although war is often associated with a stronger economy, the last three wars didn't result in a better economy because they caused oil prices to spike upwards. In addition, a nuclear war would devastate the economy. Alot of people talk about how WWII lifted the economy out of the Great Depression. But people in Russia, Germany, Britain and Japan would disagree that WWII helped their economies. In fact, Europe as a world power became insignificant as a result of the war.
But the above events mentioned are highly unlikely any time soon. I say this just to brighten everyone's day.
Cheers.
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