GDP is largely a measure of consumption...how much Americans spend on good & services each year.
Americans are spending more than they take home currently, so cutting back on spending (and causing the GDP to fall) would seem to be a good thing for them to do.
But then the businesses that employ Americans would see the GDP falling...and start to cut back on production...and start firing Americans.
It seems like the past 2 recessions were cut short by the twin bubbles of dotcoms and housing...we might be fresh out of bubbles.
And the government isn't exactly in any shape to jack up spending to help out this time.
And then there's China, where workers are saving 30-40% of their income and yet their economy is still growing at 11% a year.
Looks like a real puzzler...
Economists have well documented the portents of a U.S. economic downturn...
Do they have a plan to get us out of a recession this time?
Is there a consensus on what we should do among economists if a recession hits?
Many of us have been pooh poohed by main mainstream economists, CEOs of home building companies and last but not least David Lereah who told us that there was NO bubble. We where called doom and gloomers, naysayers, anti American et al...Now when the shi* hits the fan, these same people who said there was no bubble haul out the same pleasant goo..Soft landing....buyers market, etc etc and their economic predictions remain benign.Slowdown....and NO recession.
Should we believe them now?
Hmmm, considering the ongoing meltdown, I would not place my bets on a wonderfully easy cushy outcome.
In todays world slowing demand at home is more likely to show up as an improving trade deficit.
Now, when finals sales are weak it leads to weak imports as much are more then weak orders to domestic producers. So now we export much of the pressure for recession and this actually reduces the probability of a recession. It is a significant reason the economy has been more stable over the last 20 years.
"a recession could occur if households made a 'decision to start saving again'"
I hope Feldstein is right and all of you are wrong, BUT... In the meantime my wife and me are working two jobs each and we are saving. By Jan 1, we want a minimum of two years of mortgage payments in short-term savings. (And I hope its enough.) And if Feldstein is right, we can instead go back to attending to long-term savings goals for stuff like retirement in 15 years or so.
this post from paul kedrosky should amuse people here. An advertisement for mortgage refinancing tells listeners to do a cash out refi now before housing prices drop:
Renterfornow - he's not exactly saying saving is a bad thing. On an individual household basis, it's a good idea, since you can no longer count on house price appreciation to fund your retirement, and if that is your nest egg, you might see it shrink quite a bit in the next few years. His point, is that if many or most consumers all choose to shore up their savings, they have to do it by paring back consumption. Now, if consumption is 75% of GDP, all that paring back at the same time is counterproductive to overall growth, business investment, etc, and inevitably comes back to bite through job losses. But only SOME of the savers lose thier jobs, so the collective decision is a gamble by each - I can risk this behavior if I think I'll be one of the lucky ones in a recession. If you dont lose your job in a recession you actually win, as rates fall, prices slump, etc. If you lose your job, you get the pain that others and you induced. Tough luck.
This is game theory 101 stuff - where individual optimal choice does not necessarily lead to optimal outcome for the group. The big unknown is, who suffers? Id say if you are working in construction, mortgage lending, retail, consulting, at least, you should be thinking of saving all you can, and then praying everyone else doesnt. There are ways of knowing who is more likely to be the loser, given existing trends. Let's just hope it isn't too many of us.
For what it's worth may I offer up a little data preceeded by some obs on the nature of econ cycles ?
Most business cycles post-WW2 were consumer-driven but the late 90s boom was investment-led. Normally in such cases there is a severe decline in the economy which was avoided this time by fiscal policy(tax cuts) and money stimulas(rates). In all cases there is a constant set of structural relationships which form repeated patterns where Consumption drives GDP which, with a 6-12Mo. lag, drives ind. production, investment and new hiring. Normally these all move together but by avoiding the severe downturn Consumption was maintained at the expense of borrowing from future demand and leading to lowered business spending. Note that employment and investment are very much lagged data so one has to look beneath the headline numbers or even the typical MtM reportage. Rather YoY% changes show these relationships and patterns.
Following that rule actual GDP,et.al. weren't as bad Q404 as said nor as good Q106. Consider (& forgive my technical ineptnesses for a badly formatted table)the following YOY% changes by quarter for key data.
Investment is still growing as one would expect but will start declining. Notice that employment has not and at 1.5% is loosing ground. In good times it grows at 2.5-3% and in real recoveries above that. Also notice that real wages & earnings show negative growth - OOPS !
But in any case Consumption (the driver) is slowing as is GDP. Now the 'natural' rate of growth (the fundamental constant or speed limit of the US economy) is approx. 3.3-3.5%. It's based on the deepest structure of the economy and reflects labor force/population growth and productivit - multi-decade variables. So economists can't do much to get it far above that limit. What policy can do is keep it from dropping to far (stimulas) or growing too fast (rate restrains vs inflation). We did that and when you look at Japan it seems the better alternative. But GDP slowed in '98, if you wonder why the Dow and SP500 have been flat since then. We avoided that recession and the bust in '01, as discussed. But in the great circle of economic life what comes round goes round and it's coming round. The real risk is with all latent demand used up that a bust in housing makes it worse and we discover another investment-led bust.
If you'd like to see some good graphic depictions of all these check out Joseph Ellis's "Ahead of the Curve" graphs on-line particular consumption vs investment (404 Not Found and/or consumption vs markets (404 Not Found
Running on the treadmill, was watching CNBC on the tube. They had Dean Baker & Dirk Van Dijk on, arguing about recession and stuff. And what do I see! CR's "New Home Sales and Recessions" chart. With the right credit given and all. Way to go CR!! You are hitting MSM now.
If Steven Roach has any hair left, it's going to be gone soon.
The liquidity bubble and global imbalances are coming home to roost and trying to bar the door is just a recipe for a broken down door.
Inertia and momentum are powerful but but keep in mind that they can work against you as well as for you. Forces that used to be fighting the momentum are now pushed by it (think housing in 04 and now).
Without attaching another bubble to fight the momentum, the downward swing of the pendulum will pull down even stronger than it pulled up because now it has gravity on its side.
It's funny you mention Steve Roach - as soon as he capitulated a few months back and said everything would be ok, I KNEW we were in trouble. Why he did this I still cannot understand. He had been spot on for a long time, and then he goes and throws in the towel with the permabulls, just in time to be wrong. Gotta wonder sometimes...
DaveL wrote:
For what it's worth may I offer up a little data preceeded by some obs on the nature of econ cycles ?
For me it is worthy. Thanks a lot. I understand that besides taking a look to housing leading indicators (specially MBA applications, new home sales and MEW), it is very important to watch closely consumption data, such as same store sales and so on.
Nice discussions in this and the previous CR post.
"The U.S. economy should dodge recession, said Harvard Professor Martin Feldstein, who heads the panel of economists which dates U.S. business cycles." Bloomberg 8/24/06
Some investors may take comfort in the fact that the man in charge of determining peaks and troughs in the US business cycle said yesterday that he doesn't expect the US economy to fall into recession. Before we lower our expectations for a recession however, let's recall that in 2001, the NBER waited until November 26 to officially say the economy was in a recession. This announcement came over five months after the economy peaked, and four days before the economy officially bottomed.
BR, good point. I was mostly interested in Feldstein's logic. It wasn't that long ago that almost every analyst was predicting 3.5% growth for the rest of '06 and '07. I think those estimates are coming down fast.
spencer - nice subtle point about how we now export our recessions. If that were it, I'd say the global savings glut could ride out the exported recession - but this time around, consumption may not chug along like it did in the last recession....how low would rates have to go to reinforce consumption this time around? I'm not sure there is enough room....
during the dotcom boom, we spent our pensions. during the housing boom, we spent our home equity. now, we are spending our credit cards. when that is over, there will be nothing left to spend. when other countries figure out that there is no money left, in the largest debtor nation in the world, to spend on their exports, they will stop lending to us. we could then end up with the 'd' word instead of the 'r' word.
"...when other countries figure out that there is no money left, in the largest debtor nation in the world, to spend on their exports, they will stop lending to us...."
Not necessarily. The people channeling the lending to us are the power elites of Asia and the Middle East. In the case of Asia, it's not their money that's being lent; it's the savings of the common people, and Asian power elites care even less than ours about the common people's welfare. Up in the ranks of the elite, they make money hand over fist by manipulating their currencies to sell the workers' labor at less than what it would fetch at free market prices. Imagine how much profit GM and Ford could make if they could take Michigan and the surrounding states out of the Union, and deal in a "MidWest Dollar" valued at one-tenth the US Dollar! And imagine what bonuses Lucent and Nortel management would still be pulling down if there had been no external agencies to force them to stop their "vendor financing" of sales to insolvent customers, and they could force the whole country to fund their loans!
Consider that although the Japanese high command in WWII knew by late 1943 that the best they could hope for was a negotiated surrender, they went on to expend more than a million lives trying to find some way to deal the US a setback sufficiently bloody as to get terms that would leave the emperor's nearly absolute power undiminished, and in 1945 were feverishly preparing to send millions more to their deaths as "Special Attack" squads in a last-ditch "defense of the homeland" (in fact a defense only of their own power). Today Japan is controlled by their lineal descendants, who have expended to date nearly a trillion dollars in suppresssing the yen/dollar exchange rate to subsidize their exporters.
And they can't stop now -- since the artificially low prices have artificially stimulated US consumers' demand for Japanese products, and the exporters have expanded capacity and employment to meet that demand, withdrawing the subsidies would bring severe recession. The same situation exists in China. They are riding the tiger, and can't step off.
Halting subsidies to US consumers would be political suicide for those now in power, so the probability that they'd do it is near zero. Only if they lose power due to other factors might the policies ever change. The economic "Special Attack" forces stand ready for action, armed with the nation's savings rather than bamboo spears and satchel charges.
Roach had said in an article lat October that the Indian consumer can help in bailing out world demand....aided by the Chinese consumer I guess. Below is one link to his article. I am not able to find another article where he says the global economy is running on one engine and needs the Chinese to help.
He has since changed his tune and now says that when US goes into a slowdown so does the rest of the world.
Just want to bring this to the notice of readers as to how he has finally got it. Since both India and China are heavily dependent on the US market. When IT budgets get frozen in the US, watch Indian orders to Dell and the rest evaporate.
realist: Don't underestimate the aggregate power of existing dynamics and inertia. Worldwide there are a lot of people at all levels of society who have a stake in this game and would very much like it to continue. But of course that doesn't prove anything, and neither does it help with predictions.
Regarding people like Roach, the impression that I get with even the better economic analysis that often economists are focused too much on fiscal phenomena and neglect the significance of physical, social, and individual psychology limitations. In the absence of fundamental factors, you cannot make things happen just by writing checks or deregulating the supply side, and somehow expect the market to sort it out. That's not to say that fiscal phenomena and market mechnisms are in any way unimportant.
Feldstein is incorrect in his argument that the U.S. will escape a recession unless households "make a decison to start saving again". In their own minds at least, households did not stop saving despite the fact that National Accounts based measures of savings declined to 0 or negative- they shifted "saving" from income based saving to asset-based (i.e. housing) savings. With house prices stagnating at the very best, households are faced with the choice of: 1) realising that they have stopped "saving"; or 2) making some major changes to household budgets so that they can begin to save from income again. So the real issue facing households is the realisation that with the end of the housing boom they are no longer saving when they thought that they were. If house prices decline then households will be facing declining net worth. My guess is that they will react strongly to this situation. By the way I am not arguing that asset inflation represents savings - unless households hold more housing than they would like - otherwise house price appreciation in no sense represents savings - it is more of a money illusion.
I'm finding all this hard to get my brain around.
GDP is largely a measure of consumption...how much Americans spend on good & services each year.
Americans are spending more than they take home currently, so cutting back on spending (and causing the GDP to fall) would seem to be a good thing for them to do.
But then the businesses that employ Americans would see the GDP falling...and start to cut back on production...and start firing Americans.
It seems like the past 2 recessions were cut short by the twin bubbles of dotcoms and housing...we might be fresh out of bubbles.
And the government isn't exactly in any shape to jack up spending to help out this time.
And then there's China, where workers are saving 30-40% of their income and yet their economy is still growing at 11% a year.
Looks like a real puzzler...
Economists have well documented the portents of a U.S. economic downturn...
Do they have a plan to get us out of a recession this time?
Is there a consensus on what we should do among economists if a recession hits?
Yes Virginia My Dear,We are fresh out of bubbles.
Many of us have been pooh poohed by main mainstream economists, CEOs of home building companies and last but not least David Lereah who told us that there was NO bubble. We where called doom and gloomers, naysayers, anti American et al...Now when the shi* hits the fan, these same people who said there was no bubble haul out the same pleasant goo..Soft landing....buyers market, etc etc and their economic predictions remain benign.Slowdown....and NO recession.
Should we believe them now?
Hmmm, considering the ongoing meltdown, I would not place my bets on a wonderfully easy cushy outcome.
Monkyboy,
No, they don't and there isn't.
While a falling trade deficit does help in computations of GDP, it signals something else: slowing demand at home.
That's not a good sign, either.
In todays world slowing demand at home is more likely to show up as an improving trade deficit.
Now, when finals sales are weak it leads to weak imports as much are more then weak orders to domestic producers. So now we export much of the pressure for recession and this actually reduces the probability of a recession. It is a significant reason the economy has been more stable over the last 20 years.
"a recession could occur if households made a 'decision to start saving again'"
I hope Feldstein is right and all of you are wrong, BUT... In the meantime my wife and me are working two jobs each and we are saving. By Jan 1, we want a minimum of two years of mortgage payments in short-term savings. (And I hope its enough.) And if Feldstein is right, we can instead go back to attending to long-term savings goals for stuff like retirement in 15 years or so.
This clown makes it sound like saving money is a bad idea. This new paradign mentality is killing us.
this post from paul kedrosky should amuse people here. An advertisement for mortgage refinancing tells listeners to do a cash out refi now before housing prices drop:
Paul Kedrosky: Fun From the Homes Sales Front
Renterfornow - he's not exactly saying saving is a bad thing. On an individual household basis, it's a good idea, since you can no longer count on house price appreciation to fund your retirement, and if that is your nest egg, you might see it shrink quite a bit in the next few years. His point, is that if many or most consumers all choose to shore up their savings, they have to do it by paring back consumption. Now, if consumption is 75% of GDP, all that paring back at the same time is counterproductive to overall growth, business investment, etc, and inevitably comes back to bite through job losses. But only SOME of the savers lose thier jobs, so the collective decision is a gamble by each - I can risk this behavior if I think I'll be one of the lucky ones in a recession. If you dont lose your job in a recession you actually win, as rates fall, prices slump, etc. If you lose your job, you get the pain that others and you induced. Tough luck.
This is game theory 101 stuff - where individual optimal choice does not necessarily lead to optimal outcome for the group. The big unknown is, who suffers? Id say if you are working in construction, mortgage lending, retail, consulting, at least, you should be thinking of saving all you can, and then praying everyone else doesnt. There are ways of knowing who is more likely to be the loser, given existing trends. Let's just hope it isn't too many of us.
For what it's worth may I offer up a little data preceeded by some obs on the nature of econ cycles ?
Most business cycles post-WW2 were consumer-driven but the late 90s boom was investment-led. Normally in such cases there is a severe decline in the economy which was avoided this time by fiscal policy(tax cuts) and money stimulas(rates). In all cases there is a constant set of structural relationships which form repeated patterns where Consumption drives GDP which, with a 6-12Mo. lag, drives ind. production, investment and new hiring. Normally these all move together but by avoiding the severe downturn Consumption was maintained at the expense of borrowing from future demand and leading to lowered business spending. Note that employment and investment are very much lagged data so one has to look beneath the headline numbers or even the typical MtM reportage. Rather YoY% changes show these relationships and patterns.
Following that rule actual GDP,et.al. weren't as bad Q404 as said nor as good Q106. Consider (& forgive my technical ineptnesses for a badly formatted table)the following YOY% changes by quarter for key data.
\t 2005-III \t 2005-IV \t 2006-I\t 2006-II
GDP\t3.64%\t3.22%\t3.69%\t3.49%
PCE\t3.81%\t3.01%\t3.42%\t2.98%
Investment\t4.15%\t6.03%\t6.16%\t7.59%
RealWages\t-1.37%\t-0.23%\t0.03%\t0.43%
IndProd\t2.74%\t3.10%\t3.36%\t4.58%
Retail Sales\t4.40%\t2.33%\t2.75%\t0.64%
SP500\t10.93%\t5.37%\t7.95%\t8.82%
Employment\t1.63%\t1.45%\t1.53%\t1.42%
Investment is still growing as one would expect but will start declining. Notice that employment has not and at 1.5% is loosing ground. In good times it grows at 2.5-3% and in real recoveries above that. Also notice that real wages & earnings show negative growth - OOPS !
But in any case Consumption (the driver) is slowing as is GDP. Now the 'natural' rate of growth (the fundamental constant or speed limit of the US economy) is approx. 3.3-3.5%. It's based on the deepest structure of the economy and reflects labor force/population growth and productivit - multi-decade variables. So economists can't do much to get it far above that limit. What policy can do is keep it from dropping to far (stimulas) or growing too fast (rate restrains vs inflation). We did that and when you look at Japan it seems the better alternative. But GDP slowed in '98, if you wonder why the Dow and SP500 have been flat since then. We avoided that recession and the bust in '01, as discussed. But in the great circle of economic life what comes round goes round and it's coming round. The real risk is with all latent demand used up that a bust in housing makes it worse and we discover another investment-led bust.
If you'd like to see some good graphic depictions of all these check out Joseph Ellis's "Ahead of the Curve" graphs on-line particular consumption vs investment (404 Not Found and/or consumption vs markets (404 Not Found
Hope that's useful and
Running on the treadmill, was watching CNBC on the tube. They had Dean Baker & Dirk Van Dijk on, arguing about recession and stuff. And what do I see! CR's "New Home Sales and Recessions" chart. With the right credit given and all. Way to go CR!! You are hitting MSM now.
If Steven Roach has any hair left, it's going to be gone soon.
The liquidity bubble and global imbalances are coming home to roost and trying to bar the door is just a recipe for a broken down door.
Inertia and momentum are powerful but but keep in mind that they can work against you as well as for you. Forces that used to be fighting the momentum are now pushed by it (think housing in 04 and now).
Without attaching another bubble to fight the momentum, the downward swing of the pendulum will pull down even stronger than it pulled up because now it has gravity on its side.
It's funny you mention Steve Roach - as soon as he capitulated a few months back and said everything would be ok, I KNEW we were in trouble. Why he did this I still cannot understand. He had been spot on for a long time, and then he goes and throws in the towel with the permabulls, just in time to be wrong. Gotta wonder sometimes...
DaveL wrote:
For what it's worth may I offer up a little data preceeded by some obs on the nature of econ cycles ?
For me it is worthy. Thanks a lot. I understand that besides taking a look to housing leading indicators (specially MBA applications, new home sales and MEW), it is very important to watch closely consumption data, such as same store sales and so on.
Nice discussions in this and the previous CR post.
From tickersense.typepad.com
Ticker Sense: NBER Says US Likely To Dodge Recession
"The U.S. economy should dodge recession, said Harvard Professor Martin Feldstein, who heads the panel of economists which dates U.S. business cycles." Bloomberg 8/24/06
Some investors may take comfort in the fact that the man in charge of determining peaks and troughs in the US business cycle said yesterday that he doesn't expect the US economy to fall into recession. Before we lower our expectations for a recession however, let's recall that in 2001, the NBER waited until November 26 to officially say the economy was in a recession. This announcement came over five months after the economy peaked, and four days before the economy officially bottomed.
DaveL, great discussion. Thanks for your efforts.
A Devoted Reader, cool! Too bad I missed the segment. Thanks for pointing it out to me.
IM, here is an AP article on retail sales: Housing and fuel strain shoppers. Note the URL = "tapped-out". ROFLOL!
BR, good point. I was mostly interested in Feldstein's logic. It wasn't that long ago that almost every analyst was predicting 3.5% growth for the rest of '06 and '07. I think those estimates are coming down fast.
Best to all.
spencer - nice subtle point about how we now export our recessions. If that were it, I'd say the global savings glut could ride out the exported recession - but this time around, consumption may not chug along like it did in the last recession....how low would rates have to go to reinforce consumption this time around? I'm not sure there is enough room....
during the dotcom boom, we spent our pensions. during the housing boom, we spent our home equity. now, we are spending our credit cards. when that is over, there will be nothing left to spend. when other countries figure out that there is no money left, in the largest debtor nation in the world, to spend on their exports, they will stop lending to us. we could then end up with the 'd' word instead of the 'r' word.
"...when other countries figure out that there is no money left, in the largest debtor nation in the world, to spend on their exports, they will stop lending to us...."
Not necessarily. The people channeling the lending to us are the power elites of Asia and the Middle East. In the case of Asia, it's not their money that's being lent; it's the savings of the common people, and Asian power elites care even less than ours about the common people's welfare. Up in the ranks of the elite, they make money hand over fist by manipulating their currencies to sell the workers' labor at less than what it would fetch at free market prices. Imagine how much profit GM and Ford could make if they could take Michigan and the surrounding states out of the Union, and deal in a "MidWest Dollar" valued at one-tenth the US Dollar! And imagine what bonuses Lucent and Nortel management would still be pulling down if there had been no external agencies to force them to stop their "vendor financing" of sales to insolvent customers, and they could force the whole country to fund their loans!
Consider that although the Japanese high command in WWII knew by late 1943 that the best they could hope for was a negotiated surrender, they went on to expend more than a million lives trying to find some way to deal the US a setback sufficiently bloody as to get terms that would leave the emperor's nearly absolute power undiminished, and in 1945 were feverishly preparing to send millions more to their deaths as "Special Attack" squads in a last-ditch "defense of the homeland" (in fact a defense only of their own power). Today Japan is controlled by their lineal descendants, who have expended to date nearly a trillion dollars in suppresssing the yen/dollar exchange rate to subsidize their exporters.
And they can't stop now -- since the artificially low prices have artificially stimulated US consumers' demand for Japanese products, and the exporters have expanded capacity and employment to meet that demand, withdrawing the subsidies would bring severe recession. The same situation exists in China. They are riding the tiger, and can't step off.
Halting subsidies to US consumers would be political suicide for those now in power, so the probability that they'd do it is near zero. Only if they lose power due to other factors might the policies ever change. The economic "Special Attack" forces stand ready for action, armed with the nation's savings rather than bamboo spears and satchel charges.
hmmm ...
who heads the organization that dates business cycles.
The NBER perhaps? Oh .... right we needs to be tol when we is in a recession cause we wouldnt know it even if we stepped in it.
His job is to put a positive spin on any recession should there be one -- so as to minimize political impact.
Roach had said in an article lat October that the Indian consumer can help in bailing out world demand....aided by the Chinese consumer I guess. Below is one link to his article. I am not able to find another article where he says the global economy is running on one engine and needs the Chinese to help.
He has since changed his tune and now says that when US goes into a slowdown so does the rest of the world.
Just want to bring this to the notice of readers as to how he has finally got it. Since both India and China are heavily dependent on the US market. When IT budgets get frozen in the US, watch Indian orders to Dell and the rest evaporate.
Morgan Stanley
realist: Don't underestimate the aggregate power of existing dynamics and inertia. Worldwide there are a lot of people at all levels of society who have a stake in this game and would very much like it to continue. But of course that doesn't prove anything, and neither does it help with predictions.
Regarding people like Roach, the impression that I get with even the better economic analysis that often economists are focused too much on fiscal phenomena and neglect the significance of physical, social, and individual psychology limitations. In the absence of fundamental factors, you cannot make things happen just by writing checks or deregulating the supply side, and somehow expect the market to sort it out. That's not to say that fiscal phenomena and market mechnisms are in any way unimportant.
Feldstein is incorrect in his argument that the U.S. will escape a recession unless households "make a decison to start saving again". In their own minds at least, households did not stop saving despite the fact that National Accounts based measures of savings declined to 0 or negative- they shifted "saving" from income based saving to asset-based (i.e. housing) savings. With house prices stagnating at the very best, households are faced with the choice of: 1) realising that they have stopped "saving"; or 2) making some major changes to household budgets so that they can begin to save from income again. So the real issue facing households is the realisation that with the end of the housing boom they are no longer saving when they thought that they were. If house prices decline then households will be facing declining net worth. My guess is that they will react strongly to this situation. By the way I am not arguing that asset inflation represents savings - unless households hold more housing than they would like - otherwise house price appreciation in no sense represents savings - it is more of a money illusion.
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