Question: when we say that severe recessions have unemployment rates above 8%, is this using the CURRENT unemployment definition, or the one that was used in the past? My understanding is that the new methodology for computing unemployment changed, resulting in a lower number. Is this true?
Comment: I feel we may see a severe recession without going to 8% unemployment given the 2000-2002 time period. In those years businesses shed jobs. the recovery of 2003-2006, did not produce as many jobs as would be typical for a recovery IMO. This would lead to a "lean" workforce. if this is true, then we may not shed as many jobs as with a typical recession.
That said, globalization could mean that we see more US layoffs with higher foreign outsourcing... if so then we may get to 8%.
My first take was mild and short, my thoughts today are recession beginning at the latest Q1 as before, "false" recovery end of 08, early 09, followed by a more prolonged downturn beginning second half of 09 lasting more than 18-24 months.
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BTW, the household net worth peaked in June 2007 because both the home prices and the Scam Market are down AND household debt is up. It would be only the second time since the WW II that this would happen (first time was in early 2000s). We will have to wait few months to see the YoY decline.
Just imagine home prices down 30% and Scam Market down 50%. You wouldn't have to a year from now.
A mild recession is one in which you lose your job. A severe recession is one in which I lose my job.
Sarcasm aside, I'm not sure we've had business conditions anything like this in the past.
George Bush needs to go out and demand that all the rich who got a tax cut in 2001 buy the homes of anyone with trouble making the payments. Then they should let the former owners live there rent free.
Sounds like Goldman Sachs is waffling a bit. If you'll recall:
The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a ``substantial recession'' in the U.S., according to Goldman Sachs Group Inc.
In not sure on which days GS is being forthright or not, but to me "substantial recession" doesn't translate into "almost recession" or "mild recession" for that matter.
What about financial services? The loss of financial services jobs will surely be more than the 0.5 million "elsewhere" jobs that you noted... especially when you think about residential RE, commercial RE, realtors, mortgage brokers, and of course S&Ls, hedge funds (front and back office), and investment banks.
I have to believe the financial job losses will exceed the losses in construction and retail put together.
Severe recession in '82? Never would've guessed. One of the things that was good about growing up with no money is that recessions looked a lot like every other day or year. However, now that i have money and investments that i live off of this recession chatter is a bit unnerving. Make it stop.
If we assume the loss of 1 million construction jobs, 0.5 million retail jobs, and another 0.5 million jobs elsewhere, the unemployment rate would only rise to 6.3% (probably less because the participation rate would fall). And under most definitions that probably isn't a severe recession.
BTW, CR, it seems to me almost as if you are implicitly arguing that the decline in housing wealth won't have much secondary impact on consumption.
As I see it, if we get a combination of a housing depression and a secondary decline in consumption due to falling housing wealth, a mild recession would be a very optimistic scenario.
Nevermind if falling equities and the surge in oil prices further depress consumption.
Of course if the conviction that the recession will be mild keeps the Fed from overreacting and handing out money like candy on Halloween, maybe I'll start making that argument myself.
Hi CR,
Re your comment, "Back in the '40s and '50s, it was common for the YoY total employment to decline by significantly more than 2%. This was because of the large swings in manufacturing employment..."
Could this also haved anything to do with the way things were measured back then? Ie did the birth/death adjustmet exist? Was data a little more accurate back then?
I consider the unemployment rate to be a joke, I pay no attention to it now. I personally have spent about 30% of the past two years either unemployed or significantly under-employed and I don't show up in those statistics at all.
I know several other men like myself, in their 40s and 50s, making significantly less money or working less hours and no, we don't show up in the stats.
It has already been managed to death. Unmanageable.
I am sure that you have solutions for 20-30% decline in home prices and 30-50% decline in Scams.
Central Planning (managing), American-Style, will blow in the face of the managers. It is quite amusing to see widespread faith in interventions from the USG and the Fed among Americans. Interventions are what led us to the current juncture. So, the answer is more interventions?
I also wonder if the secondary impact of a sharp decline in housing might be greater: spreading to home furnishings, appliances, HVAC, heavy equipment, and beyond that to travel, hospitality and dining, entertainment, and all the way down to how many lattes people buy in a week.
Moreover, if MEW falls off, that'll be in a way as bad as hiking taxes in the teeth of a downturn.
CR do you realise you used the D word (last sentence)? Intentional? Or were you just being provocative for fun? Can we have the D word in everything housing related without the rest of the economy in deep horrible recession?
I suppose the question is this: how does a mild recession call square with the potential for delevering in the economy?
There are so many facets of leverage to discuss...but let's take consumer balance sheets as a starting point.
The savings rate could arguably go back to historical norms under the normal (ex-cap gains) definition. What number you use depends on the time period, so let's just use a nice round number of 5%. That's a reasonable, even conservative number. There's two ways to get debt-to-income levels back to even post-1980 norms: one is to pay off debt, and the other is to increase incomes. Clearly, we're headed for the first option, and a high savings rate is needed for that.
So, to get to the point, if the savings rate rose to 5% in a few years, would we have a mild recession, or a deep one?
The tech bubble started to burst in March 2000, but home prices, CRE, Private Employment, etc., in Silly.con Valley, all peaked in early 2001 coincident with the onset of the recession.
Whether people agree with my forecast of depression in Silly.con Valley materializing during 2001-03 or not, Private Employment fell 19.92% and I believe that it was the housing bubble that made the depression last only for a short period.
BTW, I can't help but being reminded of John Mauldin here who's always saying "don't worry, things aren't going to be too bad" but then constantly referencing Gary Shilling who is far more pessimistic.
It's almost like Mauldin's playing a game and saying "It's my job to be optimistic, but watch out for what might be coming".
I am a bit curious over the fact that Challenger reported a big fall-off in layoffs in December. They are at very low levels historically. Does this mean anything inview of the weak employment #s?
Broward Hornes remarks are valid.A great many people are now "independent contractors" or "consultants",their income may drop by 90%,but they are still "self employed".This would cover every Real estate agent,loan broker,appraiser and licensed contractor in california.All of these jobs were high income,and the people in these jobs are notoriously free spending,with the exception of Appraisers.A lot of IT people are also "self employed"...it is different this time.
CR,
I read in the past year w/ GM layoffs coming that 1 GM job creates 5 jobs in the economy. considering this i have to ask what kind of impact will 1 lost construction job have? of course manufacturing and retail too
A lot of IT people are also "self employed"...it is different this time.
I've done a lot of work at companies with a large IT presence, and I saw a large number of salaried IT positions being converted to contract positions that paid similar hourly rates except without benefits.
Basically the companies would not hire full-time IT personnel any more -- everybody was brought in as a contractor and a few key people were made permanent.
I'm not sure if this still characterizes the industry however.
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"Severe recession in '82? Never would've guessed."
The Double Dip of 1980-82 would have been called depression before the WW II, but dishonest economists decided to not use the term depression.
But the depression beginning during 2008-10 would be inescapable. 40M Americans are currently employed in unnecessary, or not necessary, products and services. At least 20M will lose their jobs during 2008-10. This is on top of some 10M out of work. Would that be that a depression?
Regarding the depth of the recession: How to factor in the consumed (that is, non saved, non invested) portion of the cumulative MEW over the last 5-10 years?
There is also a "wealth effect" in which dropping property values should reduce consumption, but that effect should be transient, replaced by future consumption.
The spent (e.g. Hummers, granite countertops) portion of the MEW is a true economic effect that must be repaid. If repaid by U.S. consumers, the effect would be drastic, especially considering it would come a good deal faster than the MEW originally did.
I think you will see localized unemployment numbers a lot higher.
Autos
Do you think Ford will be here in 2 years? GM - layoffs? There is a lot of people who don't work for them directly but never the less make a living off them.
Retail - CLothing, accesories,
How much was equity driven?
Housing
Construction - all the Mom and Pop eateries. Tool sales. Construction equipment. Skilled trades who made real money v. unskilled.
Resturants
Electronics - computer, TV, the big box people.
Vacation & Travel industry
County and State Governments
Computers and Contractors.
The training schools who sell 3 day training classes
Realtors an everyone associated
Service industry - car detailers, landscappers, lifestyle coaches, personal trainors, etc.
It'll either be repaid or defaulted upon. The latter is likely preferable, given that payback would depress consumption for a long time. "Beating a dead horse", as they say.
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" am a bit curious over the fact that Challenger reported a big fall-off in layoffs in December."
Don't they just include large businesses? Aren't 80% employed by small businesses? Most of my accountant sons clients (in SoCal) are small businesses and he says that they are all hurting.
When I look at the obvious signs of wealth all around me and hear statistics that make things appear dismal, I start to wonder. I grew up in a middle middle class area. Houses were tiny and completely lacking in amenities as compared with today. Families ate out once or twice a month, whereas today almost half the everage family's food budget is spent eating out.
Is there simply a whole lot of income that isn't showing up in the statistics? Where do income statistics come from?
Whether we have a deep or mild recession depends on how much fiscal stimulus we get from Congress. If exports sag because of a slowdown in the rest of the world (caused by coupling with US consumer retrenchment), then we will need massive fiscal stimulus. A huge temporary refund of payroll taxes on the first X of income, on the order of $500billion or about 2% of GDP, would probably be sufficient. I can't see the president or congress increasing spending by that amount, so it will have to be a tax cut, and given the Democrat majority, I suspect any tax cut will have to be targeted at the lower middle class.
Much of the unemployment of the 1973-75 and 1980-82 recessions was structural rather than due to a shortfall of aggregate demand. Remember, that was the baby boom coming of age and nobody likes to hire young people with no experience or training. Also, that was when the country was rapidly transforming from a energy-guzzling industrial economy to a much more energy-efficient service economy (the Rust Belt term originated in this period) and many of the laid-off factory workers were in the wrong places with the wrong skills. We could certainly use a similar economic transformation now, away from this absurd finance economy we have now to something oriented towards scientific R&D, but that would take leadership and p*ssing off a lot of powerful special interests, so I don't see that happening. There is no baby boom coming of age, indeed they are starting to retire, so that rules out structural unemployment due to inexperience and excessive youth. So any unemployment in the next year or two will be due to a shortfall of aggregate demand, and that is easy to fix with fiscal stimulus.
Severe recession in '82? Never would've guessed. One of the things that was good about growing up with no money is that recessions looked a lot like every other day or year. However, now that i have money and investments that i live off of this recession chatter is a bit unnerving. Make it stop.
Now that you've got money you should be glad that a recession is coming so you can buy stuff cheap, cheap, cheap. I recall the '81 recession when completely sound Virginia banks were selling at PE ratios of 4. I bought some; not nearly nearly enough.
You certainly must know the expression "the first thing to do when you find yourself in a hole is stop digging". Well, this hole was dug with "financial stimulus", and yet you suggest we dig faster???
BTW, regarding my post above on the savings rate rising to 5% during a recession:
Isn't it ironic that the government's "Job 1" is to hold down the savings rate?
Bernanke cannot allow such an increase. He will lower real interest rates as much as he can (i.e. to negative levels) to discourage saving.
Any occupant of the White House will also strive, with all his or her might, to hold down savings by increasing government dis-saving. The only argument between the two parties will be over the means of dis-saving (tax cuts vs. spending), not the need for it.
In the above two efforts, government will be aided, abetted, and cheered on by the vast majority of economists, be they on Wall Street, in academia, or in think tanks.
The U.S. shares its overwhelming consensus for avoiding savings with such economic success stories as Brazil in the 1980's.
When I look at the obvious signs of wealth all around me and hear statistics that make things appear dismal, I start to wonder.
The problem in the US is not that we aren't fabulously wealthy -- we are.
The problem is that these market illusions have convinced the average person in the US that they're far wealthier than they actually are (super-fabulously wealthy instead of just fabulously wealthy).
The real danger comes from the anger, fear, and disillusionment that occurs when a lot of people find out that they're maybe half as wealthy as they thought they were and that they're not going to have a retirement anything like they expected and so on.
Those kind of shocks can create a breakdown of cooperation in the economy (e.g. a decline in credit availability), fear and lethargy in business (e.g. a decline in investment and new business creation) etc.
The end result being that we become somewhat less fabulously wealthy than we were before.
Having been so used to feeling super fabulously wealthy, anything else is going to seem like the end of the world to a lot of people.
It's not, however, and people will rapidly get over it in the end, and will probably be better off for having spent some time in the real world.
Does anyone have access to data concerning the huge numbers of self-employed people who do not register in unemployment numbers? I would have to guess in the last decade they have become statistically significant. Shall we start a new category - self-unemployed?
This seems like an opportune time to bring up the Levy/Kalecki profits equation. Take particular note of the last two items (not that the others are necessarily comforting):
Profits before taxes =
+ Investment in inventory
+ Fixed investment
+ Corporate dividends
+ Corporate profit taxes
+ Net foreign investment
- Personal saving
- Public sector surplus
ac-"The retirement they expected". I'm not sure what people's retirement expectations are. Most surveys I've read say people expect there will be no Social Security (that's actually untrue) and they expect to work at least part-time (not necessarily the end of the world). If your house in SoCal was your entire retirement plan, then you are in trouble. If you have a diversified portfolio and aren't retiring tomorrow, you will do fine.
Rest of what you said, I agree with.
I'm still convinced there is a lot of income that "falls through the cracks' of government statistics. All those self-employed are not simple to track.
Isn't it ironic that the government's "Job 1" is to hold down the savings rate?
Bernanke cannot allow such an increase. He will lower real interest rates as much as he can (i.e. to negative levels) to discourage saving.
Any occupant of the White House will also strive, with all his or her might, to hold down savings by increasing government dis-saving. The only argument between the two parties will be over the means of dis-saving (tax cuts vs. spending), not the need for it.
It's absolutely true in a perversely amusing way.
At every turn the Federal Reserve attempts to "make the economy" better by finding more and more unique ways to punish saving.
Now economists talk seriously about destroying savings outright and punishing savers with a complete loss of wealth via inflationary measures as a "magical cure".
It would be hard to imagine a more perverse form of economic management.
I think it just illustrates that the Fed ultimately cannot do what it claims to be able to.
I have the same question as Yearning to Learn. Are the measures the same as in the past or quite different?
They are different. In particular, Clinton introduced the notion of "discouraged workers" that was not used in those numbers from the 1980s. Ignoring the issue of which method is better (my impression is that it depends on the economic climate and what you are trying to use the measurement for), it is still mathematically irresponsible to compare numbers from two different measurement systems.
The permabears all refer to John William's Shadow Stats if you want older measurements. Regardless of what you think of John's economic philosophy, his numbers appear valid and he is recommended by Barry Ritholtz (of Big Picture). John devotes most of his nice graphs for CPI comparions, but he does talk about the various employment measurements, as shown in this newsletter.
ac-"The retirement they expected". I'm not sure what people's retirement expectations are. Most surveys I've read say people expect there will be no Social Security (that's actually untrue) and they expect to work at least part-time (not necessarily the end of the world). If your house in SoCal was your entire retirement plan, then you are in trouble. If you have a diversified portfolio and aren't retiring tomorrow, you will do fine.
Do you live in a housing bubble zone?
I know a lot of people just a year ago who were saying they would be able to retire 10-15 years sooner than they thought because of their house price appreciation.
tj-And you think if the market goes down it won't come back? Buffett says you should be happy if stocks are cheap because you can buy more for your money. But you are certainly a smater investor than him...
ac-I have never counted home equity in my retirement calculations. Not a penny. At best I assume living here with a paid-up mortgage. But I'm a weirdo...
Feldstein Says Recession Odds Now Higher Than 50% (Update1)
By Steve Matthews
Jan. 6 (Bloomberg) -- Harvard University economist Martin Feldstein, head of the group that dates economic cycles in the U.S., said the odds of a recession are more than 50 percent after a report showing the unemployment rate jumped.
Yes, U-1 is like "core" inflation, a number to lull you into complacency. The better number is U-6, currently running 8.8%. The other major consideration is "workforce participation", which has been a major factor these past few years in holding the unemployment rate down.
The Recession of '81-'82! Dad lost his job then. My parents' marriage never did recover, although it took a decade to finally die. Memories, sweet memories...
ac-I have never counted home equity in my retirement calculations. Not a penny. At best I assume living here with a paid-up mortgage. But I'm a weirdo...
You're definitely the exception.
But I wouldn't even go that far.
I think the only thing that's likely to help the average person survive retirment is having superior Kung Fu skills.
That's the only thing they can't take away from you.
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I juts realized what is so wrong with the debate here obsession with Employment.
Noting that Employment is the laggiest of the lagging indicators, cant we wait for the Employment decline to begin in a year from now (assuming that we are in a recession now)?
The biggest MSM propaganda is to focus on Employment. Unwittingly, CR is a victim of the same ploy.
Small Businesses DO NOT start shedding jobs until after one year of the beginning of the recession. And how many are employed by Small Businesses?
How often CR talks about the SBET index or reports? It IS in recessionary zone already. The next report is due next week I believe. It is quite important and CRs should start to pay attention, IMO.
"Risk Capital - I don't believe what you're saying here jibes at all with what you decreed about a month ago."
what has changed-
added "but manageable", added the outlook for end of 08 and 09.
rates going much lower, my belief is 3% or lower on the fed funds rate, leaning lower. I had said we would have a 3 handle on the 10 year, we are there. I correctly called the end to the pe and lbo craze, the crisis of confidence (albeit, even I did not foresee the extent of the credit crisis, but, it is my belief that it is manageable), correctly called the transition from debt issuance to equity/equity like vehicles to raise capital (this will continue going forward in my opinion), my recession call was Q3 07 and at the latest Q1 08. I also think the fed would like to move mortgage rates significantly lower, ie 5%, high 4's (30's), I am not convinced due to the current state of the credit markets that this is possible.
Where I was wrong was the reinversion of the 2's and 10's.
How can something that only lasts 4 quarters be severe and painful?
From my understanding the US has been spending 130% of income for the past 5 years. That means on average households are more in debt by 1.5 times income.
It also means that in order to live within their means Americans must cut back their household budgets by about 25%. Serving 1.5 times household income debt at say 8% interest means that Americans on average require an extra 12% of their income to go to debt servicing.
I agree with Brian, ac, Nova, heck even Jas that the posts' analysis way underestimates the impact of the housing price decline and credit squeeze. I've tried looking at it not by building it up from the bottom as NOVA does, but by looking at ratio of real estate wealth creation to the number of actual wealth creating industries we have in this country, and dividing the ancillary services by that ratio. What do we have? Aircraft Manufacturing, the movie/ entertainment business, some high tech, some residual heavy manufacturing like Deere and Cat, agriculture, autos, a few others. Surely real estate construction, brokerage, furnishing etc. is a large percentage of that total (20-25% maybe because its nationwide, not just Seattle or Moline). Then take all the TJ Fridays, Jas's girlie bars, Wall Street, government and allocate them by the real estate/ rest of productive industry ratio. You end up with a big number of people who could get hurt.
"I suspect any tax cut will have to be targeted at the lower middle class. "
This is called the triumph of hope over experience.
Lower middle class don't surf, or buy trips on private jets to fancy golf clubs. Expect more trickle-down theory, you know that warm yellow liquid rolling down your head after you hear the unzipping of pants.
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Deborah: "From my understanding the US has been spending 130% of income for the past 5 years. That means on average households are more in debt by 1.5 times income. It also means that in order to live within their means Americans must cut back their household budgets by about 25%."
Nice to have someone here who can do the math.
Did you know that but for Pushing Debt, at a rate much greater than historical norm as % of GDP, the economy would already be in depression since 1997 and deflation since 2003? Once the Debt Push on households ends, and it must always do, the depression will be automatic.
It will be caused by depressed aggregate demand. Do we need more homes, more cars, more to eat, more TVs, more clothes, more shoes,.. ?
Only a mentally lazy person has problem is seeing how easy it would be for the US economy to slip into a depression. Looks like risk capital has problem with arithmetic.
due to the fact that you are counting, I recently said HY deafult rates would go to 10%+ and agreed with CR on the "over" concerning the estimates of the IB's/econ's he cited.
"Go ahead and invest your money like's it's 1929. Should get back to even in a coupla decades."
tj- This is simply nonsense. Yes, of course if you took a huge chunk of money and invested it all in stocks on the day before the crash, it would have taken you 20 years to get back to even. But real world people don't invest like that. They put in small amounts at regularintervals. If you had done that staring in 1929 you would have actually domne well, because the shares you bought in 1929 would have been more than compensated for by the cheap shares you picked up in 1930, 31, 32, etc. I have seen the numbers on this.
You will see that both before and after the last two severe recessions, civilian employment averaged about 3-4% growth over several years. These were the years when millions of women were joining the workforce, and when population growth was stronger than today. Employment growth helped to pull the country out of recession.
Both before and after this recession, employment growth will be in the 1-2% range. The number of employed people in this country has peaked and will stay fairly stagnant over the next decade as Boomers start to retire. More people will be forced into early retirement or part-time work. So, the recession may last longer.
Obviously, you have heard of a guy named Bill Gross and his bond fund Pimco.
And since the bond guys are generally the smartest guys in the room, in addition to having that fraudster Greenspan as their paid consultant, it is safe to say that a portfolio centered around the premise of drastically lower interest rates will more than likely be the right side of the trade.
Greater Depression, by very name, means worse than the Great Depression. What it means is that it will last longer and will be deeper than the Greater Depression.
The minimum requirement would be 20% drop in the real GDP from the peak to trough and minimum 20% drop in Private Employment from the peak number.
The real problem would be the length of the depression. Most people on this blog are ignorant of the abuse of credit. I dont understand why, but that seems to be the case. Fed is the culprit and it will solve, or manage, the problem?!
Popper introduced the mechanism of conjectures and refutations, which works as follows: you formulate a (bold) conjecture and you start looking for the observation that would prove you wrong. This is the alternative to our search for confirmatory instances.
My "bold conjecture" is that a depression is virtually unavoidable. I come here (and other blogs) looking for someone to prove me wrong -- and I desperately want to be proven wrong -- yet such proof has not been forthcoming. Instead, the progression towards the Greater Depression continues unabated.
It all comes down to sustainability, and the American economy is wholly unsustainable as currently configured.
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" it is safe to say that a portfolio centered around the premise of drastically lower interest rates will more than likely be the right side of the trade."
I probably have a better record than risk capital in the US bond market, but I don't want to get into the pissing contest here.
Deflation is more or less guaranteed as soon as we are in depression some time during 2008Q4. This will take rates way down -- below 2% on most of the curve.
You just need to ask one question: Can Fed Push more Debt on households during 2008Q2-Q3? If not, game (fighting deflation) over.
China is the country that should be worried by those charts. If the large up-and-down pattern of unemployment in the US years ago was a characteristic of a manufacturing-based economy, then that pitfall of a recession has now been moved to them.
Americans have overconsumed, and have a big hangover to work out. The work out has the potential to be of depression magnitude (greater than 10% drop in GDP).
Using data from the Federal Reserve Z-1s, personal consumption over '46-'80 averaged 62.7%. Personal consumption over '81-'05 averaged 66.8%, an increase of 4.1%. Applying that 4.1% "overconsumption" to GDP over '81-'05 yields overconsumption of $7.2 trillion.
Let's assume that historic consumption levels were rational (i.e., that they provided for optimal consumption and savings), and that we need to offset future consumption (i.e., save), to work off the $7.2T of overconsumption. If we work off the $7.2T over five years, given '05 GDP of $12.5T, that's a 12% hit to GDP in each of the next five years. If we work off the $7.2T over 10 years, that's a 6% hit to GDP annually over the next 10 years.
Then, one has to consider the spillover effects, i.e., reduced U.S. consumption results, ultimately, in reduced U.S. exports.
Data concurrence check: over '81-'05, total household debt increased from $1.5T to $11.5T, $10T.
The $10 trillion increase in household debt over '81-'05 was all consumed, per my amateur economist calculation, and is arrayed around us in the form of Hummers, A-Rod's salary, sky-high college tuition and health insurance, and smoky, hazy memories from last year's overpriced Rolling Stones concert.
The recession talk, or the occurrence of the term recession, in MSM.
Here is how it works:
Several months before the recession only hardcore bears and cranks talk about it; so, it is at a low level. Juts before the onset of the recession it goes up noticeably. Then, after the beginning of the recession (way before it is dated or recognized) it goes up exponentially.
Something that I've not seen anyone comment upon...
If the recession is deep enough, you may find individuals (those with savings) having to draw down those savings/investments just to get along. That would be tilting the savings number a bit more negative that others have postulated.
jg - I have also seen mention that household/private holdings of equities have dropped considerably over the past five years. They were sold to somebody (the company itself, private equity, lbo) that was using leverage. Add that into your hangover calculation and the headache looks even worse.
And without any basis or evidence, I might add, if I could be impolite.
Neither CR, nor Tanta, understand Consumption Debt and how it plays out -- it takes consumption away from the future consumption. Mortgage Debt for personal residence is consumption debt.
Consume now and pay later! Payback time is coming for Americas Consumed!! It has already begun and people are seriously cutting back.
Heck with Goldman Sachs predication. When did these guys predict anything right. They should not be in the business of prediction, they should be in the business of selling shares. They think people are dumb. How can GDP fall exactly between feel of recession but not recession and feel of academic recession but not recession. These immoral bankers take other for a ride.
Conjure Bag, although he considers a depression possible, does not consider it likely.
There are several dynamics currently at work, and the only dynamic that would produce a depression involves a Fed policy failure in dealing with the current credit crisis.
In conclusion, CR, mp, and Conjure Bag seem to agree that the odds are against a depression. Whew! Thank God for that! HOWEVER, a Fed policy blunder, or failure to act, could change those odds quickly and significantly.
Conjure Clock: 11:58:59
PS-
If you should happen to see a guy on 1st Avenue in Yorktown (NYC), wearing a dark blue overcoat and grey homburg, accompanied by a hairy thing about two feet tall smoking a cigar, you'll know who it is.
risk capital: the only thing that is safe to say is that nobody can accurately predict the future consistently.
Well, there was an article on Angry Bear way back about how economists generally tend to undershoot the outcome. i.e. Reality has much more variance than mainstream predictions. Which makes sense because it is better to be conservatively wrong (CR) than extremismly wrong (Roubini). People should be reading all along the spectrum and splitting the differences. The only thing that is safe to say is that much more can be said about something, but I digress.
Are there statistics that measure dollars of jobs lost instead of number or percentage of jobs lost? I am asking because I think the jobs lost are skewed towards relatively high paying jobs and therefore the recession will be worse than the percentages suggest.
Thanks, and sorry if I missed some already published data.
Jas. "Most of my accountant sons clients"... Really? You have a son, and he talks to you? What do you talk about at Thanksgiving? Plucking the feathers off the turkey and the decay of the remains?
ac said
"constantly referencing Gary Shilling who is far more pessimistic."
I wouldn't call him pessimistic, merely an Uber-Bear.
I've read Shillings newsletter for years now, he gives the evidence for everything he says (each page has about 3-4 charts, about 40 pages each month). All I will say is, yes, the republic will survive, but this will probably be eventually known as the Great De-Leveraging.
With the whole discussion of the impact on the savings rate on the economy, growth of debt fueling things etc. it is probably worth reminding a few folks about Keynsian Economics 101. Namely the multiplier effect. The idea is that if one new dollar is injected into the economy, the person who gets it saves some of it then spends the rest. What he spends becomes income for someone else, who in tern saves some and spends some. This continues until the dollar is completly saved. in other words the multiplier is 1/(1-MPC) where MPC is the marginal propensity to consume and ranges normally between 0 and 1. The can be restated as 1/MPS or the marginal propesity to save which is the complement of the marginal propesity to conume. The really amazing thing is given the extraordinarrilly low savings rates of recent years that the economy is not growing faster than that of China. Of course elsewhere in the text I seem to recall something about Savings = investment. However, to invest at all we have had to borrow from abroad (again I dont have a textbook in front of me, and its been about 25 years since I took Econ 101, I seem to recall that the multiplier effect was in a closed economy, one of those simplifying assumptions that academic economics likes to make). An awful lot of the "investment" we have made in recent years has been in areas that do not generate future income, this is most glaringly obvious in residential investment. After all if the MPS is zero, then a single new dollar added to the economy should generate an infinite amount of income. the limiting factor of course is the velocity of that money. Even though you may go out and spend the whole new marginal dollar you get at the bar that night, and the bartender you tip with the dollar may spend all of it, he might not do it for a few days. In any case, even if the MPC were .99 and thus the savings rate were 1% a move to 0.95 and a savings rate of 5% would have a devistating impact through the multiplier effect.
Does anyone, perhaps with a more recent aquantence with Econ 101 have any more insight into this.
If the key driver is housing inventory -- a short but painful recession is likely as MEW returns to historical norms and construction activity drops to near zero.
But, to the degree consumers compensate for lost retirement savings, i.e., decreased home equity, by decreasing consumption and increasing savings, the recession could become very long and very painful.
Posed differently, how long will it take to consumers to rebuild their balance sheet in light of huge write-downs of their major asset -- their homes?
First time poster... long time reader... sup... feel like responding...
I think one thing most of you overlook (and this may answer Dirk's query) is the fact that the so-called "savings rate" may be misleading. Does anyone truly know what the savings rate reflects? Once upon a time, a household typically had most of its savings in cash, money market, or real estate. Right now, a huge chunk of household assets is in stocks and bonds. Is this being properly counted? Does anyone even know how much someone has invested in some stock in, say, Canada? Is that being measured properly? Simply looking at money-market accounts, chequing accounts, etc, would have yielded a good picture of hte US savings rate a few decades ago; but that's not the case anymore IMO...
Corporations in USA have also changed. Once upon a time, the biggest US corporations (say the top 100 in S&P 500--which probably account for 20% to 30% of total US market cap) lived and died off the US ecnonmy. Right now, a big chunk of their earnings comes from overseas and is fairly diversified. So, huge sums of money, through profit, is flowing back to Americans (and the US government via taxes). It is quite plausible to see US companies posting decent profits--perhaps not enough to satisfy stock market expectations but enough to avoid laying off workers en masse--even if the US economy slows.
Jas, above, says that anyone who doesn't see a depression is dumber than a single-celled amoeba (ok I made that up but you know what I mean ). But is that really so? If anything, I think anyone who sees a depression is the dumb one (no offense). The only way USA is going to get a depression is if the government intervenes (or if there is a war or disease or something). I'm just a newbie but it's hard for me to see how you can have a depression, let along a GREATER depression...
One other thing... I suspect a lot of people here who are doom & gloom are playing the inflation trade (eg. gold, commodities, etc). Has anyone considered what would happen if commodity prices decline? I know that is less likely, according to some, than aliens invading earth but assume oil prices drop, say, 30%. That should cushion the situation somewhat.
I'm not saying that Americans and Canadians (I'm Canadian and its similar) are not overleveraged or that people are not going to have to cut back some of their consumption. But what if capital market innovations allow citizens to carry greater debt than the past? The fact that most jobs are in service, and that the service sector is not cyclical, means that people should be able to carry greater debt than 50 years ago (mostly manufacturing) or even more than 150 years ago (mostly agricultural).
traces the early realizations by hedge fund managers and the IBs that things had gotten more complex than the quants, who built the models could understand.
the debt engine was "off the hook".
ok, so now I'm just an aging social worker type... who minored in econ many years ago and i have been reading all the posts here at CR for 2 years and several other blogs plus research at wiki, frb, fdic, etc and boy is my head spinning, trying to figure out what i should do to protect my family.
Conclusion! the entire mess is so complex that few people have a handle on what is going on becuse there are so many variables.
i worked behind the walls as a juvenile correctional counselor and guard, with gang members,and other JDs for 28 years but this scares me worse.
i got the feeling about a year ago that there was a small, but significant chance that the financial system comes unraveled...as in 15% unemployment and 2-5% negative CPI numbers for more than 2 or 3 years.
But then again I am probably wrong and so are many others who are better educated and experienced than me.
DirK: This continues until the dollar is completly saved. in other words the multiplier is 1/(1-MPC) where MPC is the marginal propensity to consume .........After all if the MPS is zero, then a single new dollar added to the economy should generate an infinite amount of income.......Does anyone, perhaps with a more recent aquantence with Econ 101 have any more insight into this.
Jesus! Conjure and I just finished an excellent dinner with surf and turf action. My cardiologist would not be pleased, but to hell with him. We've been enjoying cigars, some Grand Marnier, espresso, then we come here for some late night enlightenment.
Seriously, some of you people need to find a warm beach and lie down until the feeling goes away. We've never seen you so, so, NEGATIVE.
Look, if you want to talk about something truly cataclysmic, talk about the asteroid that's headed towards our planet--and possibly your backyard.
Is there one out there headed towards us? Sure there is, it's a no-shit mathematical certainty.
Will it hit Jas Jain's backyard? Jesus, I hope so.
Yah, well, the Sun could barf out a flare one day and fry the atmosphere off in a flash, too. I've always wondered whether or not the human race will make it off this planet (i.e., colonize elsewhere) before the cataclysm we know is coming actually hits.
Quesion: Is the unemployment rate crap? In other words, hase the government drastically changed its method of calculating unemployment, since 1982? Do they now use the birth/death estimate(s) differently than before?
hdude,
That assumes that gov't is a complete dead weight loss to the economy. If after it goes to the bartender, he spends it at a store and part of that goes for sales tax, that sales tax would say be used by the local govt to pay a teacher, who would in turn go out and spend it. Really no difference than if it were spendt at a pvt college and used to pay a professor.
How does one classify a recession as severe is an interesting question. I don't think the unemployment rate reported paints the correct picture. For example, looking at CR's graph, the unemployment rate was close to 4% in Jan-00 as well as Jan-07. However, if you look at the employment to population ratio, the ratio was close to 64.5% in Jan-00 but was 63.5% in Jan-07 (look at the graph on Krugman's blog). If you assume a working population of about 150M that by itself is a difference of 1.5M people which is a significant number because unemployment rate going from 6% to 8% simply takes the unemployed from 9M to 12M, a difference fo 3M.
If you take into account the people that never reentered the workforce, this recession is indeed going to be severe.
I'm not sure what's more disturbing, the fact that no one is looking down (at the folks who do the actual 'heavy lifting' around here) or the bizarre confidence that the Fed cutting rates will help rather than destroy the dollar's purchasing power?
Whose going to do all of those nasty but necessary jobs when they aren't being paid enough to put gas in their cars?
Worse, what are those people going to do when they can no longer afford to buy food?
What do you suppose will become of the 2 million households that have already had their homes foreclosed upon?
Add to the the nearly 80 million working aged adults who can't find work? What will they do when their government stipend no longer puts food on their table?
Which is to suggest that it is very likely we will have more to deal with than just 'tight' money.
Can you say widespread civil unrest...which could potentially result in social collapse?
"Severe recession in '82? Never would've guessed. One of the things that was good about growing up with no money is that recessions looked a lot like every other day or year."
I was poor and in the south near houston in 82. The poor catch hell in a recession. I was a kid, but it seemed like everyones dad was unemployed. Several of my friends who had jobs bagging groceries were the only ones bringing cash into the home. A new Delchamps grocery opened up one day and over 1500 people showed up looking for job applications; there was a near riot.
Is a "recession/depression that may never end" an option?
Let's see:
Scam-driven economy based upon Ponzi-style exponential increase of debt and useless "services" and other things of marginal value or no value at all (CDO's, Mortgage-based securities, etc.)
Attempts to substitute real income with debt until the average person can't afford to live here anymore.
Debt system breaks down, people don't have the incomes to pay off their debt (and can't take on new debt to keep the Ponzi-scheme going), whole system starts to deleverage and grind to a halt.
Corporations would sooner go out of business with bonuses to management than pay honest workers an honest wage.
Politicians would sooner destroy all savers and productive members of society than get tough on the crooks.
Given all of the above, how does this not end in disaster with vastly lower living standards, high crime rates, lots of false recoveries in a steady downward trend, and so on?
If the US has a severe recession, what will happen to the economies of Europe, China, and other major exporters to the US? Is it likely that these places will also have a housing bubble burst? The UK is already experiencing that.
What is this "recession" that you're talking about....
From ThinkProgress.org
Today aboard Air Force One, a reporter asked presidential spokesman Tony Fratto if the Bush administration was at all worried about a recession, given that on Friday, Sen. Hillary Clinton (D-NY) said she think[s] the economy is slipping toward recession. Fratto brushed aside such concerns:
QUESTION: Senator Clinton said on Saturday that the U.S. economy was slipping towards a recession. Is that a view the White House shares; why or why not?
FRATTO: I dont know of anyone predicting a recession.
My economic model in my head says to me China does not even need the US to a large degree.Let us briefly look at why in a hypothetical basis.
We buy billions of dollars of consumer products from them. We send them US currency or IOUs. We really do not sell them much. It is one sided. OK so what now?
I set up my new personal banking system next to my beer refrigerator. I will now step in and purchase all those billions of dollars of consumer products destined for American markets. I send them my personal IOUs.
China keeps my IOUs and buys my bonds.
However, there is another change. I request that the consumer products that are coming over by freighters stop on the middle of the ocean.
What now? I simply ask them to dump all their cargo into the ocean and go back to port.
Wow. What happens then?
Well, China would continue to stock pile my currency that I issued to them and buy my bonds. All Chinese employment would stay about the same. They build stuff, get paid for it and them dump it in the ocean. Economy is about the same.
What about us in America? Well we would have to set up new manufacturing plants that would hire people at a couple of hundred bucks a month. Wow, those guys working at Walmart have it good.
First a question then a comment
Question: when we say that severe recessions have unemployment rates above 8%, is this using the CURRENT unemployment definition, or the one that was used in the past? My understanding is that the new methodology for computing unemployment changed, resulting in a lower number. Is this true?
Comment: I feel we may see a severe recession without going to 8% unemployment given the 2000-2002 time period. In those years businesses shed jobs. the recovery of 2003-2006, did not produce as many jobs as would be typical for a recovery IMO. This would lead to a "lean" workforce. if this is true, then we may not shed as many jobs as with a typical recession.
That said, globalization could mean that we see more US layoffs with higher foreign outsourcing... if so then we may get to 8%.
--
The recession will slide into a depression by 2008Q4. How severe a depression? The Greater Depression.
It has all been carefully baked in the cake by power hungry Greenspan-Bush-Bernanke.
Isnt Roubini an economist? That makes him incapable of seeing depressions.
Jas
I have the same question as Yearning to Learn. Are the measures the same as in the past or quite different?
cr-
My first take was mild and short, my thoughts today are recession beginning at the latest Q1 as before, "false" recovery end of 08, early 09, followed by a more prolonged downturn beginning second half of 09 lasting more than 18-24 months.
Tough period ahead, but manageable.
--
BTW, the household net worth peaked in June 2007 because both the home prices and the Scam Market are down AND household debt is up. It would be only the second time since the WW II that this would happen (first time was in early 2000s). We will have to wait few months to see the YoY decline.
Just imagine home prices down 30% and Scam Market down 50%. You wouldn't have to a year from now.
Jas
A mild recession is one in which you lose your job. A severe recession is one in which I lose my job.
Sarcasm aside, I'm not sure we've had business conditions anything like this in the past.
George Bush needs to go out and demand that all the rich who got a tax cut in 2001 buy the homes of anyone with trouble making the payments. Then they should let the former owners live there rent free.
PS - the rich should have to pay 2006 prices so they mortgage gets paid off.
Sounds like Goldman Sachs is waffling a bit. If you'll recall:
The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a ``substantial recession'' in the U.S., according to Goldman Sachs Group Inc.
In not sure on which days GS is being forthright or not, but to me "substantial recession" doesn't translate into "almost recession" or "mild recession" for that matter.
Goldman Sees Subprime Cutting $2 Trillion in Lending (Update5) - Bloomberg.com
What about financial services? The loss of financial services jobs will surely be more than the 0.5 million "elsewhere" jobs that you noted... especially when you think about residential RE, commercial RE, realtors, mortgage brokers, and of course S&Ls, hedge funds (front and back office), and investment banks.
I have to believe the financial job losses will exceed the losses in construction and retail put together.
Severe recession in '82? Never would've guessed. One of the things that was good about growing up with no money is that recessions looked a lot like every other day or year. However, now that i have money and investments that i live off of this recession chatter is a bit unnerving. Make it stop.
conjure bag isn't so cute and endearing any more.
If we assume the loss of 1 million construction jobs, 0.5 million retail jobs, and another 0.5 million jobs elsewhere, the unemployment rate would only rise to 6.3% (probably less because the participation rate would fall). And under most definitions that probably isn't a severe recession.
BTW, CR, it seems to me almost as if you are implicitly arguing that the decline in housing wealth won't have much secondary impact on consumption.
As I see it, if we get a combination of a housing depression and a secondary decline in consumption due to falling housing wealth, a mild recession would be a very optimistic scenario.
Nevermind if falling equities and the surge in oil prices further depress consumption.
Of course if the conviction that the recession will be mild keeps the Fed from overreacting and handing out money like candy on Halloween, maybe I'll start making that argument myself.
Hi CR,
Re your comment, "Back in the '40s and '50s, it was common for the YoY total employment to decline by significantly more than 2%. This was because of the large swings in manufacturing employment..."
Could this also haved anything to do with the way things were measured back then? Ie did the birth/death adjustmet exist? Was data a little more accurate back then?
I consider the unemployment rate to be a joke, I pay no attention to it now. I personally have spent about 30% of the past two years either unemployed or significantly under-employed and I don't show up in those statistics at all.
I know several other men like myself, in their 40s and 50s, making significantly less money or working less hours and no, we don't show up in the stats.
--
"Tough period ahead, but manageable."
It has already been managed to death. Unmanageable.
I am sure that you have solutions for 20-30% decline in home prices and 30-50% decline in Scams.
Central Planning (managing), American-Style, will blow in the face of the managers. It is quite amusing to see widespread faith in interventions from the USG and the Fed among Americans. Interventions are what led us to the current juncture. So, the answer is more interventions?
Jas
I also wonder if the secondary impact of a sharp decline in housing might be greater: spreading to home furnishings, appliances, HVAC, heavy equipment, and beyond that to travel, hospitality and dining, entertainment, and all the way down to how many lattes people buy in a week.
Moreover, if MEW falls off, that'll be in a way as bad as hiking taxes in the teeth of a downturn.
How about all those public servants hired since 2001? I'd expect a large number of them to go bye-bye, too.
Furthermore, a consumer led recession would devastate retail & services, so half-a-mil seems rather optimistic to me.
--
Does "financial services" include hard and soft (nudie bars)prostitution?
Seriously, are RE agents part of the financial services?
Jas
Anonymous (if you're out there),
If you won't type a handle into the "name:" box, why not just sign your missives? Is that too hard???
CR do you realise you used the D word (last sentence)? Intentional? Or were you just being provocative for fun? Can we have the D word in everything housing related without the rest of the economy in deep horrible recession?
CR,
I suppose the question is this: how does a mild recession call square with the potential for delevering in the economy?
There are so many facets of leverage to discuss...but let's take consumer balance sheets as a starting point.
The savings rate could arguably go back to historical norms under the normal (ex-cap gains) definition. What number you use depends on the time period, so let's just use a nice round number of 5%. That's a reasonable, even conservative number. There's two ways to get debt-to-income levels back to even post-1980 norms: one is to pay off debt, and the other is to increase incomes. Clearly, we're headed for the first option, and a high savings rate is needed for that.
So, to get to the point, if the savings rate rose to 5% in a few years, would we have a mild recession, or a deep one?
--
An instructuive example on the subject...
The tech bubble started to burst in March 2000, but home prices, CRE, Private Employment, etc., in Silly.con Valley, all peaked in early 2001 coincident with the onset of the recession.
Whether people agree with my forecast of depression in Silly.con Valley materializing during 2001-03 or not, Private Employment fell 19.92% and I believe that it was the housing bubble that made the depression last only for a short period.
Jas
BTW, I can't help but being reminded of John Mauldin here who's always saying "don't worry, things aren't going to be too bad" but then constantly referencing Gary Shilling who is far more pessimistic.
It's almost like Mauldin's playing a game and saying "It's my job to be optimistic, but watch out for what might be coming".
I am a bit curious over the fact that Challenger reported a big fall-off in layoffs in December. They are at very low levels historically. Does this mean anything inview of the weak employment #s?
Broward Hornes remarks are valid.A great many people are now "independent contractors" or "consultants",their income may drop by 90%,but they are still "self employed".This would cover every Real estate agent,loan broker,appraiser and licensed contractor in california.All of these jobs were high income,and the people in these jobs are notoriously free spending,with the exception of Appraisers.A lot of IT people are also "self employed"...it is different this time.
CR,
I read in the past year w/ GM layoffs coming that 1 GM job creates 5 jobs in the economy. considering this i have to ask what kind of impact will 1 lost construction job have? of course manufacturing and retail too
also how many financial layoffs are coming?
A lot of IT people are also "self employed"...it is different this time.
I've done a lot of work at companies with a large IT presence, and I saw a large number of salaried IT positions being converted to contract positions that paid similar hourly rates except without benefits.
Basically the companies would not hire full-time IT personnel any more -- everybody was brought in as a contractor and a few key people were made permanent.
I'm not sure if this still characterizes the industry however.
--
"Severe recession in '82? Never would've guessed."
The Double Dip of 1980-82 would have been called depression before the WW II, but dishonest economists decided to not use the term depression.
But the depression beginning during 2008-10 would be inescapable. 40M Americans are currently employed in unnecessary, or not necessary, products and services. At least 20M will lose their jobs during 2008-10. This is on top of some 10M out of work. Would that be that a depression?
Jas
Regarding the depth of the recession: How to factor in the consumed (that is, non saved, non invested) portion of the cumulative MEW over the last 5-10 years?
There is also a "wealth effect" in which dropping property values should reduce consumption, but that effect should be transient, replaced by future consumption.
The spent (e.g. Hummers, granite countertops) portion of the MEW is a true economic effect that must be repaid. If repaid by U.S. consumers, the effect would be drastic, especially considering it would come a good deal faster than the MEW originally did.
if the savings rate rose to 5% in a few years, would we have a mild recession, or a deep one?
5% savings & no MEW in a consumer-driven economy? Yeah, that's manageable!
p.s.: Sorry, rc -- couldn't resist.
I think you will see localized unemployment numbers a lot higher.
Autos
Do you think Ford will be here in 2 years? GM - layoffs? There is a lot of people who don't work for them directly but never the less make a living off them.
Retail - CLothing, accesories,
How much was equity driven?
Housing
Construction - all the Mom and Pop eateries. Tool sales. Construction equipment. Skilled trades who made real money v. unskilled.
Resturants
Electronics - computer, TV, the big box people.
Vacation & Travel industry
County and State Governments
Computers and Contractors.
The training schools who sell 3 day training classes
Realtors an everyone associated
Service industry - car detailers, landscappers, lifestyle coaches, personal trainors, etc.
Eric,
It'll either be repaid or defaulted upon. The latter is likely preferable, given that payback would depress consumption for a long time. "Beating a dead horse", as they say.
Jas-
"It has already been managed to death. Unmanageable."
Thus far, ain't nobody here been as accurate as me and you are the furthest cry from accurate.
You wish to hate the world, sobeit, just leave me out of your sorry state.
--
" am a bit curious over the fact that Challenger reported a big fall-off in layoffs in December."
Don't they just include large businesses? Aren't 80% employed by small businesses? Most of my accountant sons clients (in SoCal) are small businesses and he says that they are all hurting.
Jas
Again, I think this graph sums up the argument for a Japan-style scenario.
When I look at the obvious signs of wealth all around me and hear statistics that make things appear dismal, I start to wonder. I grew up in a middle middle class area. Houses were tiny and completely lacking in amenities as compared with today. Families ate out once or twice a month, whereas today almost half the everage family's food budget is spent eating out.
Is there simply a whole lot of income that isn't showing up in the statistics? Where do income statistics come from?
--
"Thus far, ain't nobody here been as accurate as me and you are the furthest cry from accurate."
It is nice to be in company of geniuses.
"You wish to hate the world, sobeit, just leave me out of your sorry state. -- risk capital"
This qualifies you as an idiot. Sorry, if your feeling are hurt.
Jas
Whether we have a deep or mild recession depends on how much fiscal stimulus we get from Congress. If exports sag because of a slowdown in the rest of the world (caused by coupling with US consumer retrenchment), then we will need massive fiscal stimulus. A huge temporary refund of payroll taxes on the first X of income, on the order of $500billion or about 2% of GDP, would probably be sufficient. I can't see the president or congress increasing spending by that amount, so it will have to be a tax cut, and given the Democrat majority, I suspect any tax cut will have to be targeted at the lower middle class.
Much of the unemployment of the 1973-75 and 1980-82 recessions was structural rather than due to a shortfall of aggregate demand. Remember, that was the baby boom coming of age and nobody likes to hire young people with no experience or training. Also, that was when the country was rapidly transforming from a energy-guzzling industrial economy to a much more energy-efficient service economy (the Rust Belt term originated in this period) and many of the laid-off factory workers were in the wrong places with the wrong skills. We could certainly use a similar economic transformation now, away from this absurd finance economy we have now to something oriented towards scientific R&D, but that would take leadership and p*ssing off a lot of powerful special interests, so I don't see that happening. There is no baby boom coming of age, indeed they are starting to retire, so that rules out structural unemployment due to inexperience and excessive youth. So any unemployment in the next year or two will be due to a shortfall of aggregate demand, and that is easy to fix with fiscal stimulus.
Severe recession in '82? Never would've guessed. One of the things that was good about growing up with no money is that recessions looked a lot like every other day or year. However, now that i have money and investments that i live off of this recession chatter is a bit unnerving. Make it stop.
Now that you've got money you should be glad that a recession is coming so you can buy stuff cheap, cheap, cheap. I recall the '81 recession when completely sound Virginia banks were selling at PE ratios of 4. I bought some; not nearly nearly enough.
Economists say 2008 will be a year to forget / Analysts at American Economic Association now see recession as a given gathered in New Orleans...
Economists say 2008 will be year to forget - MarketWatch
Fred,
You certainly must know the expression "the first thing to do when you find yourself in a hole is stop digging". Well, this hole was dug with "financial stimulus", and yet you suggest we dig faster???
Heh, heh, I thought my arithmetic was wrong... Make that $500 billion or 3.6% of GDP.
When I look at the obvious signs of wealth all around me...
Don't you mean "obvious signs of debt"?
BTW, regarding my post above on the savings rate rising to 5% during a recession:
Isn't it ironic that the government's "Job 1" is to hold down the savings rate?
Bernanke cannot allow such an increase. He will lower real interest rates as much as he can (i.e. to negative levels) to discourage saving.
Any occupant of the White House will also strive, with all his or her might, to hold down savings by increasing government dis-saving. The only argument between the two parties will be over the means of dis-saving (tax cuts vs. spending), not the need for it.
In the above two efforts, government will be aided, abetted, and cheered on by the vast majority of economists, be they on Wall Street, in academia, or in think tanks.
The U.S. shares its overwhelming consensus for avoiding savings with such economic success stories as Brazil in the 1980's.
When I look at the obvious signs of wealth all around me and hear statistics that make things appear dismal, I start to wonder.
The problem in the US is not that we aren't fabulously wealthy -- we are.
The problem is that these market illusions have convinced the average person in the US that they're far wealthier than they actually are (super-fabulously wealthy instead of just fabulously wealthy).
The real danger comes from the anger, fear, and disillusionment that occurs when a lot of people find out that they're maybe half as wealthy as they thought they were and that they're not going to have a retirement anything like they expected and so on.
Those kind of shocks can create a breakdown of cooperation in the economy (e.g. a decline in credit availability), fear and lethargy in business (e.g. a decline in investment and new business creation) etc.
The end result being that we become somewhat less fabulously wealthy than we were before.
Having been so used to feeling super fabulously wealthy, anything else is going to seem like the end of the world to a lot of people.
It's not, however, and people will rapidly get over it in the end, and will probably be better off for having spent some time in the real world.
Does anyone have access to data concerning the huge numbers of self-employed people who do not register in unemployment numbers? I would have to guess in the last decade they have become statistically significant. Shall we start a new category - self-unemployed?
This seems like an opportune time to bring up the Levy/Kalecki profits equation. Take particular note of the last two items (not that the others are necessarily comforting):
Profits before taxes =
+ Investment in inventory
+ Fixed investment
+ Corporate dividends
+ Corporate profit taxes
+ Net foreign investment
- Personal saving
- Public sector surplus
More at http://econwpa.wustl.edu/eps/mac/papers/0004/0004056.pdf
readerx,
No worries. The BLS just assumes they're all eBay vendors.
oops, should be "aren't" necessarily comforting
David-
" He will lower real interest rates as much as he can (i.e. to negative levels) to discourage saving."
Right again.
ac-"The retirement they expected". I'm not sure what people's retirement expectations are. Most surveys I've read say people expect there will be no Social Security (that's actually untrue) and they expect to work at least part-time (not necessarily the end of the world). If your house in SoCal was your entire retirement plan, then you are in trouble. If you have a diversified portfolio and aren't retiring tomorrow, you will do fine.
Rest of what you said, I agree with.
I'm still convinced there is a lot of income that "falls through the cracks' of government statistics. All those self-employed are not simple to track.
Isn't it ironic that the government's "Job 1" is to hold down the savings rate?
Bernanke cannot allow such an increase. He will lower real interest rates as much as he can (i.e. to negative levels) to discourage saving.
Any occupant of the White House will also strive, with all his or her might, to hold down savings by increasing government dis-saving. The only argument between the two parties will be over the means of dis-saving (tax cuts vs. spending), not the need for it.
It's absolutely true in a perversely amusing way.
At every turn the Federal Reserve attempts to "make the economy" better by finding more and more unique ways to punish saving.
Now economists talk seriously about destroying savings outright and punishing savers with a complete loss of wealth via inflationary measures as a "magical cure".
It would be hard to imagine a more perverse form of economic management.
I think it just illustrates that the Fed ultimately cannot do what it claims to be able to.
If you have a diversified portfolio and aren't retiring tomorrow, you will do fine.
Define "diversified". If that means real estate, stocks, bonds & cash, they might as well start stockpiling Ramen recipes.
I have the same question as Yearning to Learn. Are the measures the same as in the past or quite different?
They are different. In particular, Clinton introduced the notion of "discouraged workers" that was not used in those numbers from the 1980s. Ignoring the issue of which method is better (my impression is that it depends on the economic climate and what you are trying to use the measurement for), it is still mathematically irresponsible to compare numbers from two different measurement systems.
The permabears all refer to John William's Shadow Stats
if you want older measurements. Regardless of what you think of John's economic philosophy, his numbers appear valid and he is recommended by Barry Ritholtz (of Big Picture). John devotes most of his nice graphs for CPI comparions, but he does talk about the various employment measurements, as shown in this newsletter.
ac-"The retirement they expected". I'm not sure what people's retirement expectations are. Most surveys I've read say people expect there will be no Social Security (that's actually untrue) and they expect to work at least part-time (not necessarily the end of the world). If your house in SoCal was your entire retirement plan, then you are in trouble. If you have a diversified portfolio and aren't retiring tomorrow, you will do fine.
Do you live in a housing bubble zone?
I know a lot of people just a year ago who were saying they would be able to retire 10-15 years sooner than they thought because of their house price appreciation.
Now they're not saying that so much.
tj-And you think if the market goes down it won't come back? Buffett says you should be happy if stocks are cheap because you can buy more for your money. But you are certainly a smater investor than him...
ac-I have never counted home equity in my retirement calculations. Not a penny. At best I assume living here with a paid-up mortgage. But I'm a weirdo...
Feldstein Says Recession Odds Now Higher Than 50% (Update1)
By Steve Matthews
Jan. 6 (Bloomberg) -- Harvard University economist Martin Feldstein, head of the group that dates economic cycles in the U.S., said the odds of a recession are more than 50 percent after a report showing the unemployment rate jumped.
Feldstein Says Recession Odds Now Higher Than 50% (Update1) - Bloomberg.com
Thanks Walker,
Yes, U-1 is like "core" inflation, a number to lull you into complacency. The better number is U-6, currently running 8.8%. The other major consideration is "workforce participation", which has been a major factor these past few years in holding the unemployment rate down.
Risk Capital - I don't believe what you're saying here jibes at all with what you decreed about a month ago.
Not always right, but never in doubt.
aotc,
Go ahead and invest your money like's it's 1929. Should get back to even in a coupla decades.
The Recession of '81-'82! Dad lost his job then. My parents' marriage never did recover, although it took a decade to finally die. Memories, sweet memories...
ac-I have never counted home equity in my retirement calculations. Not a penny. At best I assume living here with a paid-up mortgage. But I'm a weirdo...
You're definitely the exception.
But I wouldn't even go that far.
I think the only thing that's likely to help the average person survive retirment is having superior Kung Fu skills.
That's the only thing they can't take away from you.
--
I juts realized what is so wrong with the debate here obsession with Employment.
Noting that Employment is the laggiest of the lagging indicators, cant we wait for the Employment decline to begin in a year from now (assuming that we are in a recession now)?
The biggest MSM propaganda is to focus on Employment. Unwittingly, CR is a victim of the same ploy.
Small Businesses DO NOT start shedding jobs until after one year of the beginning of the recession. And how many are employed by Small Businesses?
How often CR talks about the SBET index or reports? It IS in recessionary zone already. The next report is due next week I believe. It is quite important and CRs should start to pay attention, IMO.
Jas
--
"Feldstein Says Recession Odds Now Higher Than 50%"
Let me translate that for you all from e-con-speak to the truth-telling -- recession odds are 100%.
Jas
bum-
"Risk Capital - I don't believe what you're saying here jibes at all with what you decreed about a month ago."
what has changed-
added "but manageable", added the outlook for end of 08 and 09.
rates going much lower, my belief is 3% or lower on the fed funds rate, leaning lower. I had said we would have a 3 handle on the 10 year, we are there. I correctly called the end to the pe and lbo craze, the crisis of confidence (albeit, even I did not foresee the extent of the credit crisis, but, it is my belief that it is manageable), correctly called the transition from debt issuance to equity/equity like vehicles to raise capital (this will continue going forward in my opinion), my recession call was Q3 07 and at the latest Q1 08. I also think the fed would like to move mortgage rates significantly lower, ie 5%, high 4's (30's), I am not convinced due to the current state of the credit markets that this is possible.
Where I was wrong was the reinversion of the 2's and 10's.
How can something that only lasts 4 quarters be severe and painful?
From my understanding the US has been spending 130% of income for the past 5 years. That means on average households are more in debt by 1.5 times income.
It also means that in order to live within their means Americans must cut back their household budgets by about 25%. Serving 1.5 times household income debt at say 8% interest means that Americans on average require an extra 12% of their income to go to debt servicing.
This ends far more than ugly.
Severe recession - Unemployment at 9-10%, with 24 months of negative to zero GDP
I agree with Brian, ac, Nova, heck even Jas that the posts' analysis way underestimates the impact of the housing price decline and credit squeeze. I've tried looking at it not by building it up from the bottom as NOVA does, but by looking at ratio of real estate wealth creation to the number of actual wealth creating industries we have in this country, and dividing the ancillary services by that ratio. What do we have? Aircraft Manufacturing, the movie/ entertainment business, some high tech, some residual heavy manufacturing like Deere and Cat, agriculture, autos, a few others. Surely real estate construction, brokerage, furnishing etc. is a large percentage of that total (20-25% maybe because its nationwide, not just Seattle or Moline). Then take all the TJ Fridays, Jas's girlie bars, Wall Street, government and allocate them by the real estate/ rest of productive industry ratio. You end up with a big number of people who could get hurt.
bum (cont)-
I also correctly called the blow-out of spreads in HY and the unprecedented "flight to quality".
as to HY spreads, more coming in my opinion.
I love how we can remind the Regan lovers how severe the recession was during his "great" Presidency.
"I suspect any tax cut will have to be targeted at the lower middle class. "
This is called the triumph of hope over experience.
Lower middle class don't surf, or buy trips on private jets to fancy golf clubs. Expect more trickle-down theory, you know that warm yellow liquid rolling down your head after you hear the unzipping of pants.
--
Deborah: "From my understanding the US has been spending 130% of income for the past 5 years. That means on average households are more in debt by 1.5 times income. It also means that in order to live within their means Americans must cut back their household budgets by about 25%."
Nice to have someone here who can do the math.
Did you know that but for Pushing Debt, at a rate much greater than historical norm as % of GDP, the economy would already be in depression since 1997 and deflation since 2003? Once the Debt Push on households ends, and it must always do, the depression will be automatic.
It will be caused by depressed aggregate demand. Do we need more homes, more cars, more to eat, more TVs, more clothes, more shoes,.. ?
Only a mentally lazy person has problem is seeing how easy it would be for the US economy to slip into a depression. Looks like risk capital has problem with arithmetic.
Jas
Housing, Autos and Manufacturing are already in recession, soon CRE and Retail will join this party...
Jas -
Please define your Greater Depression in terms of GDP and Employment.
Thanks
bum (cont)-
due to the fact that you are counting, I recently said HY deafult rates would go to 10%+ and agreed with CR on the "over" concerning the estimates of the IB's/econ's he cited.
Economists ... now see recession as a given gathered in New Orleans...
FFDIC
makes me nervous to hear about such consensus. Either we will have no recession, or it will be much worse.
"Go ahead and invest your money like's it's 1929. Should get back to even in a coupla decades."
tj- This is simply nonsense. Yes, of course if you took a huge chunk of money and invested it all in stocks on the day before the crash, it would have taken you 20 years to get back to even. But real world people don't invest like that. They put in small amounts at regularintervals. If you had done that staring in 1929 you would have actually domne well, because the shares you bought in 1929 would have been more than compensated for by the cheap shares you picked up in 1930, 31, 32, etc. I have seen the numbers on this.
"From my understanding the US has been spending 130% of income for the past 5 years." Source for this??
I believe the savings rate over the last year is -0.5 %, thus spending is 100.5% of income. That's bad, but let's not get carried away.
CR,
I think you're missing something. Expansions aren't driven by the lack of unemployment. They're driven by more people employed. Go to this link:
St. Louis Fed: Series: CE16OV, Civilian Employment
Under the graph, click on % Chg. from Yr. Ago.
You will see that both before and after the last two severe recessions, civilian employment averaged about 3-4% growth over several years. These were the years when millions of women were joining the workforce, and when population growth was stronger than today. Employment growth helped to pull the country out of recession.
Both before and after this recession, employment growth will be in the 1-2% range. The number of employed people in this country has peaked and will stay fairly stagnant over the next decade as Boomers start to retire. More people will be forced into early retirement or part-time work. So, the recession may last longer.
sterlingerl, housing is already in a depression. I don't think using that word is controversial.
The odds of an overall depression are very low.
Jas, please be polite to other posters.
Best to all.
Re definition of Greater Depression: The breakup of my parents' marriage made me very Depressed, but that's not easy to chart.
aotc,
Nonsense. Human nature never changes, and J6P doesn't buy declining assets.
rich, I do think we are in for a period of sluggishness after the probable recession - but I doubt it will last a decade.
Best to all.
The odds of an overall depression are very low.
CR, respectfully, that's your opinion.
Just tell me where to stand when the whirly bird is whizzing to catch it's cargo.
risk capital-
Obviously, you have heard of a guy named Bill Gross and his bond fund Pimco.
And since the bond guys are generally the smartest guys in the room, in addition to having that fraudster Greenspan as their paid consultant, it is safe to say that a portfolio centered around the premise of drastically lower interest rates will more than likely be the right side of the trade.
Please define your Greater Depression in terms of GDP and Employment.
Triple digit unemployment rates.
--
Cruspy&Cole,
Greater Depression, by very name, means worse than the Great Depression. What it means is that it will last longer and will be deeper than the Greater Depression.
The minimum requirement would be 20% drop in the real GDP from the peak to trough and minimum 20% drop in Private Employment from the peak number.
The real problem would be the length of the depression. Most people on this blog are ignorant of the abuse of credit. I dont understand why, but that seems to be the case. Fed is the culprit and it will solve, or manage, the problem?!
Jas
LOL!!!!
FYI - The LOL was to ac
Quincey-
" it is safe to say "
the only thing that is safe to say is that nobody can accurately predict the future consistently.
As the consensus leans towards recession, it is still quite possible that we are in for a period of sluggish growth and no official recession.
It is also possible that inflation rises significantly and interest rates move much higher.
Remember one thing, the markets can make fools out of anyone.
Thanks Jas
From "The Black Swan":
Popper introduced the mechanism of conjectures and refutations, which works as follows: you formulate a (bold) conjecture and you start looking for the observation that would prove you wrong. This is the alternative to our search for confirmatory instances.
My "bold conjecture" is that a depression is virtually unavoidable. I come here (and other blogs) looking for someone to prove me wrong -- and I desperately want to be proven wrong -- yet such proof has not been forthcoming. Instead, the progression towards the Greater Depression continues unabated.
It all comes down to sustainability, and the American economy is wholly unsustainable as currently configured.
Triple digit unemployment rates.
LMAO! Thanks ac, needed that.
--
" it is safe to say that a portfolio centered around the premise of drastically lower interest rates will more than likely be the right side of the trade."
I probably have a better record than risk capital in the US bond market, but I don't want to get into the pissing contest here.
Deflation is more or less guaranteed as soon as we are in depression some time during 2008Q4. This will take rates way down -- below 2% on most of the curve.
You just need to ask one question: Can Fed Push more Debt on households during 2008Q2-Q3? If not, game (fighting deflation) over.
Jas
Most people on this blog are ignorant of the abuse of credit.
Far worse; some people underestimate their audience.
FYI: New thread, same basic topic.
China is the country that should be worried by those charts. If the large up-and-down pattern of unemployment in the US years ago was a characteristic of a manufacturing-based economy, then that pitfall of a recession has now been moved to them.
Jas and tj are right.
Here's an analysis that I did 1 1/2 years ago (Page not found | Piggington's Econo-Almanac | San Diego Housing Bubble News and Analysis.
Americans have overconsumed, and have a big hangover to work out. The work out has the potential to be of depression magnitude (greater than 10% drop in GDP).
Using data from the Federal Reserve Z-1s, personal consumption over '46-'80 averaged 62.7%. Personal consumption over '81-'05 averaged 66.8%, an increase of 4.1%. Applying that 4.1% "overconsumption" to GDP over '81-'05 yields overconsumption of $7.2 trillion.
Let's assume that historic consumption levels were rational (i.e., that they provided for optimal consumption and savings), and that we need to offset future consumption (i.e., save), to work off the $7.2T of overconsumption. If we work off the $7.2T over five years, given '05 GDP of $12.5T, that's a 12% hit to GDP in each of the next five years. If we work off the $7.2T over 10 years, that's a 6% hit to GDP annually over the next 10 years.
Then, one has to consider the spillover effects, i.e., reduced U.S. consumption results, ultimately, in reduced U.S. exports.
Data concurrence check: over '81-'05, total household debt increased from $1.5T to $11.5T, $10T.
The $10 trillion increase in household debt over '81-'05 was all consumed, per my amateur economist calculation, and is arrayed around us in the form of Hummers, A-Rod's salary, sky-high college tuition and health insurance, and smoky, hazy memories from last year's overpriced Rolling Stones concert.
--
ONE OF THE BEST CONFIRMATIONS OF RECESSION
The recession talk, or the occurrence of the term recession, in MSM.
Here is how it works:
Several months before the recession only hardcore bears and cranks talk about it; so, it is at a low level. Juts before the onset of the recession it goes up noticeably. Then, after the beginning of the recession (way before it is dated or recognized) it goes up exponentially.
You decide where we are.
Just the facts, Mam
Jas
Something that I've not seen anyone comment upon...
If the recession is deep enough, you may find individuals (those with savings) having to draw down those savings/investments just to get along. That would be tilting the savings number a bit more negative that others have postulated.
Treatment of Depression has improved greatly in recent years. There are a wide variety of SSRIs available.
jg - I have also seen mention that household/private holdings of equities have dropped considerably over the past five years. They were sold to somebody (the company itself, private equity, lbo) that was using leverage. Add that into your hangover calculation and the headache looks even worse.
--
"CR, respectfully, that's your opinion."
And without any basis or evidence, I might add, if I could be impolite.
Neither CR, nor Tanta, understand Consumption Debt and how it plays out -- it takes consumption away from the future consumption. Mortgage Debt for personal residence is consumption debt.
Consume now and pay later! Payback time is coming for Americas Consumed!! It has already begun and people are seriously cutting back.
Jas
"Triple digit unemployment rates"
Are you taking into consideration the Birth/Death ratio?
"My "bold conjecture" is that a depression is virtually unavoidable. I come here (and other blogs) looking for someone to prove me wrong"
How could anyone prove this wrong, or right for that matter? It's like any prediction-only time can PROVE it right or wrong.
Heck with Goldman Sachs predication. When did these guys predict anything right. They should not be in the business of prediction, they should be in the business of selling shares. They think people are dumb. How can GDP fall exactly between feel of recession but not recession and feel of academic recession but not recession. These immoral bankers take other for a ride.
ac: It would be hard to imagine a more perverse form of economic management.
Outright slavery is just a hair worse.
Conjure Bag, although he considers a depression possible, does not consider it likely.
There are several dynamics currently at work, and the only dynamic that would produce a depression involves a Fed policy failure in dealing with the current credit crisis.
In conclusion, CR, mp, and Conjure Bag seem to agree that the odds are against a depression. Whew! Thank God for that! HOWEVER, a Fed policy blunder, or failure to act, could change those odds quickly and significantly.
Conjure Clock: 11:58:59
PS-
If you should happen to see a guy on 1st Avenue in Yorktown (NYC), wearing a dark blue overcoat and grey homburg, accompanied by a hairy thing about two feet tall smoking a cigar, you'll know who it is.
mp sounds like Charles McCabe reincarnated.
(Although I don't recall Mr. McCabe's hairy friend.)
risk capital: the only thing that is safe to say is that nobody can accurately predict the future consistently.
Well, there was an article on Angry Bear way back about how economists generally tend to undershoot the outcome. i.e. Reality has much more variance than mainstream predictions. Which makes sense because it is better to be conservatively wrong (CR) than extremismly wrong (Roubini). People should be reading all along the spectrum and splitting the differences. The only thing that is safe to say is that much more can be said about something, but I digress.
CR,
Are there statistics that measure dollars of jobs lost instead of number or percentage of jobs lost? I am asking because I think the jobs lost are skewed towards relatively high paying jobs and therefore the recession will be worse than the percentages suggest.
Thanks, and sorry if I missed some already published data.
Jas. "Most of my accountant sons clients"... Really? You have a son, and he talks to you? What do you talk about at Thanksgiving? Plucking the feathers off the turkey and the decay of the remains?
ac said
"constantly referencing Gary Shilling who is far more pessimistic."
I wouldn't call him pessimistic, merely an Uber-Bear.
I've read Shillings newsletter for years now, he gives the evidence for everything he says (each page has about 3-4 charts, about 40 pages each month). All I will say is, yes, the republic will survive, but this will probably be eventually known as the Great De-Leveraging.
Take care of yourselves, folks.
With the whole discussion of the impact on the savings rate on the economy, growth of debt fueling things etc. it is probably worth reminding a few folks about Keynsian Economics 101. Namely the multiplier effect. The idea is that if one new dollar is injected into the economy, the person who gets it saves some of it then spends the rest. What he spends becomes income for someone else, who in tern saves some and spends some. This continues until the dollar is completly saved. in other words the multiplier is 1/(1-MPC) where MPC is the marginal propensity to consume and ranges normally between 0 and 1. The can be restated as 1/MPS or the marginal propesity to save which is the complement of the marginal propesity to conume. The really amazing thing is given the extraordinarrilly low savings rates of recent years that the economy is not growing faster than that of China. Of course elsewhere in the text I seem to recall something about Savings = investment. However, to invest at all we have had to borrow from abroad (again I dont have a textbook in front of me, and its been about 25 years since I took Econ 101, I seem to recall that the multiplier effect was in a closed economy, one of those simplifying assumptions that academic economics likes to make). An awful lot of the "investment" we have made in recent years has been in areas that do not generate future income, this is most glaringly obvious in residential investment. After all if the MPS is zero, then a single new dollar added to the economy should generate an infinite amount of income. the limiting factor of course is the velocity of that money. Even though you may go out and spend the whole new marginal dollar you get at the bar that night, and the bartender you tip with the dollar may spend all of it, he might not do it for a few days. In any case, even if the MPC were .99 and thus the savings rate were 1% a move to 0.95 and a savings rate of 5% would have a devistating impact through the multiplier effect.
Does anyone, perhaps with a more recent aquantence with Econ 101 have any more insight into this.
What Kind of Recession?
If the key driver is housing inventory -- a short but painful recession is likely as MEW returns to historical norms and construction activity drops to near zero.
But, to the degree consumers compensate for lost retirement savings, i.e., decreased home equity, by decreasing consumption and increasing savings, the recession could become very long and very painful.
Posed differently, how long will it take to consumers to rebuild their balance sheet in light of huge write-downs of their major asset -- their homes?
Jas is cranky tonight
Asian stocks crumble on Wall Street sell off
Most of Asia declines in wake of Wall Street's Friday sell-off - MarketWatch
Asian stocks Fall on U.S. Economic Outlook; Samsung, BHP Drop
- Bloomberg.com
Not even a Bush New Deal can hold back the post bubble tide/by: Ambrose Evans-Pritchard
Bush convenes Plunge Protection Team - Telegraph
First time poster... long time reader... sup... feel like responding...
I think one thing most of you overlook (and this may answer Dirk's query) is the fact that the so-called "savings rate" may be misleading. Does anyone truly know what the savings rate reflects? Once upon a time, a household typically had most of its savings in cash, money market, or real estate. Right now, a huge chunk of household assets is in stocks and bonds. Is this being properly counted? Does anyone even know how much someone has invested in some stock in, say, Canada? Is that being measured properly? Simply looking at money-market accounts, chequing accounts, etc, would have yielded a good picture of hte US savings rate a few decades ago; but that's not the case anymore IMO...
Corporations in USA have also changed. Once upon a time, the biggest US corporations (say the top 100 in S&P 500--which probably account for 20% to 30% of total US market cap) lived and died off the US ecnonmy. Right now, a big chunk of their earnings comes from overseas and is fairly diversified. So, huge sums of money, through profit, is flowing back to Americans (and the US government via taxes). It is quite plausible to see US companies posting decent profits--perhaps not enough to satisfy stock market expectations but enough to avoid laying off workers en masse--even if the US economy slows.
Jas, above, says that anyone who doesn't see a depression is dumber than a single-celled amoeba (ok I made that up but you know what I mean
). But is that really so? If anything, I think anyone who sees a depression is the dumb one (no offense). The only way USA is going to get a depression is if the government intervenes (or if there is a war or disease or something). I'm just a newbie but it's hard for me to see how you can have a depression, let along a GREATER depression...
Washington Post
The Stress Is Just Beginning
The Stress Is Just Beginning - washingtonpost.com
One other thing... I suspect a lot of people here who are doom & gloom are playing the inflation trade (eg. gold, commodities, etc). Has anyone considered what would happen if commodity prices decline? I know that is less likely, according to some, than aliens invading earth but assume oil prices drop, say, 30%. That should cushion the situation somewhat.
I'm not saying that Americans and Canadians (I'm Canadian and its similar) are not overleveraged or that people are not going to have to cut back some of their consumption. But what if capital market innovations allow citizens to carry greater debt than the past? The fact that most jobs are in service, and that the service sector is not cyclical, means that people should be able to carry greater debt than 50 years ago (mostly manufacturing) or even more than 150 years ago (mostly agricultural).
Let's define Depression and Recession by two economic situations that many of us are old enough to recall:
Depression: Texas in the late 1980s.
Recession: Silicon Valley after the DotCom bust.
In the MIT periodical
"technology Review",
the article "blow-up"
Technology Review...
traces the early realizations by hedge fund managers and the IBs that things had gotten more complex than the quants, who built the models could understand.
the debt engine was "off the hook".
ok, so now I'm just an aging social worker type... who minored in econ many years ago and i have been reading all the posts here at CR for 2 years and several other blogs plus research at wiki, frb, fdic, etc and boy is my head spinning, trying to figure out what i should do to protect my family.
Conclusion! the entire mess is so complex that few people have a handle on what is going on becuse there are so many variables.
i worked behind the walls as a juvenile correctional counselor and guard, with gang members,and other JDs for 28 years but this scares me worse.
i got the feeling about a year ago that there was a small, but significant chance that the financial system comes unraveled...as in 15% unemployment and 2-5% negative CPI numbers for more than 2 or 3 years.
But then again I am probably wrong and so are many others who are better educated and experienced than me.
worry.
i mistakenly wrote 2-5 % negative PCI...I meant PCE..sorry
actually i wrote CPI not PCI but hey I'm stickin to my story i really did mean PCE...personal consumption expenditures
Yikes..gotta lay off the dewars
DirK:
This continues until the dollar is completly saved. in other words the multiplier is 1/(1-MPC) where MPC is the marginal propensity to consume .........After all if the MPS is zero, then a single new dollar added to the economy should generate an infinite amount of income.......Does anyone, perhaps with a more recent aquantence with Econ 101 have any more insight into this.
1/(1-MPC+TAXES)
Jesus! Conjure and I just finished an excellent dinner with surf and turf action. My cardiologist would not be pleased, but to hell with him. We've been enjoying cigars, some Grand Marnier, espresso, then we come here for some late night enlightenment.
Seriously, some of you people need to find a warm beach and lie down until the feeling goes away. We've never seen you so, so, NEGATIVE.
Look, if you want to talk about something truly cataclysmic, talk about the asteroid that's headed towards our planet--and possibly your backyard.
Is there one out there headed towards us? Sure there is, it's a no-shit mathematical certainty.
Will it hit Jas Jain's backyard? Jesus, I hope so.
mp,
Yah, well, the Sun could barf out a flare one day and fry the atmosphere off in a flash, too. I've always wondered whether or not the human race will make it off this planet (i.e., colonize elsewhere) before the cataclysm we know is coming actually hits.
You guys really should be on the newer thread.
Quesion: Is the unemployment rate crap? In other words, hase the government drastically changed its method of calculating unemployment, since 1982? Do they now use the birth/death estimate(s) differently than before?
hdude,
That assumes that gov't is a complete dead weight loss to the economy. If after it goes to the bartender, he spends it at a store and part of that goes for sales tax, that sales tax would say be used by the local govt to pay a teacher, who would in turn go out and spend it. Really no difference than if it were spendt at a pvt college and used to pay a professor.
Roubini correct? Come on, the guy's like a stopped clock.
How does one classify a recession as severe is an interesting question. I don't think the unemployment rate reported paints the correct picture. For example, looking at CR's graph, the unemployment rate was close to 4% in Jan-00 as well as Jan-07. However, if you look at the employment to population ratio, the ratio was close to 64.5% in Jan-00 but was 63.5% in Jan-07 (look at the graph on Krugman's blog). If you assume a working population of about 150M that by itself is a difference of 1.5M people which is a significant number because unemployment rate going from 6% to 8% simply takes the unemployed from 9M to 12M, a difference fo 3M.
If you take into account the people that never reentered the workforce, this recession is indeed going to be severe.
Bernanke cannot allow such an increase. He will lower real interest rates as much as he can (i.e. to negative levels) to discourage saving.
Do you think that China et al are going to keep lending money to the US, or even hold the debt they now own, at negative real rates?
Just where is that 6% of GDP that the US borrows from abroad going to come from?
I'm not sure what's more disturbing, the fact that no one is looking down (at the folks who do the actual 'heavy lifting' around here) or the bizarre confidence that the Fed cutting rates will help rather than destroy the dollar's purchasing power?
Whose going to do all of those nasty but necessary jobs when they aren't being paid enough to put gas in their cars?
Worse, what are those people going to do when they can no longer afford to buy food?
What do you suppose will become of the 2 million households that have already had their homes foreclosed upon?
Add to the the nearly 80 million working aged adults who can't find work? What will they do when their government stipend no longer puts food on their table?
Which is to suggest that it is very likely we will have more to deal with than just 'tight' money.
Can you say widespread civil unrest...which could potentially result in social collapse?
"Can you say widespread civil unrest...which could potentially result in social collapse."
I'll tell you exactly what I think they'd do if the economy collapsed. Nothing. Absolutely nothing.
They'd go hungry and burn their furniture to stay warm. They'd eat their pets and lick the wallpaper paste off the walls to fill their bellies.
Do you want that?
12th percentile said,
"Severe recession in '82? Never would've guessed. One of the things that was good about growing up with no money is that recessions looked a lot like every other day or year."
I was poor and in the south near houston in 82. The poor catch hell in a recession. I was a kid, but it seemed like everyones dad was unemployed. Several of my friends who had jobs bagging groceries were the only ones bringing cash into the home. A new Delchamps grocery opened up one day and over 1500 people showed up looking for job applications; there was a near riot.
Is a "recession/depression that may never end" an option?
Let's see:
Given all of the above, how does this not end in disaster with vastly lower living standards, high crime rates, lots of false recoveries in a steady downward trend, and so on?
If the US has a severe recession, what will happen to the economies of Europe, China, and other major exporters to the US? Is it likely that these places will also have a housing bubble burst? The UK is already experiencing that.
What is this "recession" that you're talking about....
From ThinkProgress.org
Today aboard Air Force One, a reporter asked presidential spokesman Tony Fratto if the Bush administration was at all worried about a recession, given that on Friday, Sen. Hillary Clinton (D-NY) said she think[s] the economy is slipping toward recession. Fratto brushed aside such concerns:
QUESTION: Senator Clinton said on Saturday that the U.S. economy was slipping towards a recession. Is that a view the White House shares; why or why not?
FRATTO: I dont know of anyone predicting a recession.
(end quote)
A new potted plant promoted to a speaking role...
My economic model in my head says to me China does not even need the US to a large degree.Let us briefly look at why in a hypothetical basis.
We buy billions of dollars of consumer products from them. We send them US currency or IOUs. We really do not sell them much. It is one sided. OK so what now?
I set up my new personal banking system next to my beer refrigerator. I will now step in and purchase all those billions of dollars of consumer products destined for American markets. I send them my personal IOUs.
China keeps my IOUs and buys my bonds.
However, there is another change. I request that the consumer products that are coming over by freighters stop on the middle of the ocean.
What now? I simply ask them to dump all their cargo into the ocean and go back to port.
Wow. What happens then?
Well, China would continue to stock pile my currency that I issued to them and buy my bonds. All Chinese employment would stay about the same. They build stuff, get paid for it and them dump it in the ocean. Economy is about the same.
What about us in America? Well we would have to set up new manufacturing plants that would hire people at a couple of hundred bucks a month. Wow, those guys working at Walmart have it good.
1 07 08 recession or depression ? i say follow dr. roubini (spelling ? ) on this one.