If our nation's numero uno economic guru, senior presidential advisor Larry Summers, echoes the administration's economic "conventional wisdom," then it would appear that our country's economy may have "officially" changed course for points unknown based upon his comments over the weekend. Essentially, the President's top economic advisor is no longer certain we're in a recovery. We 'probably' are, but it's no longer a done deal. As a byproduct of this, IMHO, if you read between the lines of Summers' most recent statements--and include basic economic reporting of late into the equation--the inevitable conclusion would certainly indicate the chances of a
significant economic recovery occurring anytime soon (let alone before November) are next to nil.
In fact, the writing may already be on the wall for a double-dip recession playing out before us as we read.
On Friday, we learned that Summers has just significantly downgraded his optimistic tune about our recovery being a sure thing via his latest public comments in Boston: "Summers cites recovery, risks."
(This is a rather glaring and noticeable change in Summers' tone, to say the least. It begs the question: If we're not in a recovery, where are we?)
Summers cites recovery, risks
He offers cautious view of conditions
By Robert Gavin
The Boston Globe
June 19, 2010
The US economy has probably begun a lasting recovery, but the outlook has become more uncertain in recent weeks in the face of the European debt crisis, gyrating stock markets, and weaker-than-expected job growth, said Lawrence Summers, President Obama's top economic adviser.
Summers, in an interview with Globe editors and reporters this week, cited progress made during the 18 months of the Obama administration, but acknowledged that the recovery still faces risks, from the premature withdrawal of federal spending aimed at stimulating the US economy to a financial meltdown in Europe to increased tensions in Korea.
Summers, the former Harvard University president and Treasury secretary under President Clinton, presented a cautious, measured view of economic conditions. For example, after expressing confidence that European policy makers would contain the government debt crisis and avoid another global financial crisis, he added that the assessment was "my best guess, and I could be wrong.''
Or, when asked if the nation had achieved a self-sustaining recovery, Summers responded, "I think that's the right presumption and my expectation. I wouldn't be foolish enough to be certain.''
Bold type is diarist's emphasis.
The Boston Globe article continues on to remind us that most economists believe the US economy emerged from a recession late last summer. The story claims that "we've expanded at a solid pace since then, and created jobs in each of the past five months."
The reality, IMHO, is that much--if not most--of that recovery has been extremely weak, at best, short-lived and based upon many short-term government supports that are being withdrawn (or, have already been withdrawn) from the marketplace as I write this. (Put another way, Summers is virtually contradicting himself in the article, above, since he knows that many federal supports of our nation's economy are--or already have--gone by the wayside in recent weeks.)
While the federal spin machine attempts to preempt the past four to six weeks of negative economic reports--telling us to not jump to conclusions about a few weeks of bad numbers--the truth is that most projections for the balance of the year are either quite underwhelming, or downright abysmal. And, frankly, the reality these days, with economic globalization being the name of the game, is that our country, at least as a whole, really doesn't maintain the control over its own economic well-being that it has in past recessions/depressions (unlike the 1930's: along with a lengthy list of other factors which I'm not even mentioning herein, we now import most of our oil; we're a net importer of goods, in general; our well-being is comprehensively intertwined with the well-being of other countries around the globe; international dollar hegemony is, even under the most generous of projections, only going to be around for three to ten more years, placing far more inflationary pressures on the next generation; and, the gap between the haves and the have-nots in our society is roughly equal to or exceeding the greatest disparity that ever existed for this metric, which was in the run-up to the Great Depression, in 1928).
The Globe article continues on to note that:
--most of the job creation over the past couple of months has been due to short-term hiring by the US Census Bureau
--housing starts--a critical driver of our nation's past economic recoveries--have "plunged" since the federal home buyer tax credit ended in April
--first time unemployment insurance claims have remained quite uncomfortably high for the past six months, escalating by a significant 12,000 over the past week, alone, to 472,000
Yes, it's right about here in the story where Summers enters into commentary which derails his intention to allay fears of a double-dip recession, IMHO. In the Globe piece, Summers starts talking about how "housing markets should regain traction this summer." He then reminds us that the administration's stimulus spending has worked. He also talks of consumer confidence and retail spending as remaining steady and positive. And, at that point, he "goes there," and he gets into deficit-hawk pandering, while hedging his comments as the article points out that he then said, "If spending is cut too much or too quickly, it could derail the recovery."
Apart from the fact that the administration's stimulus program was--emphasis on past/present tense--effective, at least for the short-term preventing the worst recession in our nation's recent history from morphing into a full-blown depression, the reality is that almost everything else Summers is referencing in the last paragraph, above, is completely bogus!
Summers also cited "other risks"--"none super-high"--as having a potentially negative impact upon our ability to declare our economic recovery as being factual, including:
--the investment community perceiving that our country's situation was similar to that of Japan in the early 90's where, just as the economy was showing signs of improvement, policymakers "withdrew stimulative policies too soon, leading to "false dawns'' and economic stagnation"
--another sweeping, widespread aversion to risk among the financial services industry, thus causing investors to pull out of financial markets, causing a "rush to cash"
--political events around the globe: "...such as a new conflict in Korea, another terrorist attack in the United States, or events that would drive a spike in oil prices."
Summers adds an insult to our review of current events at the end of the Globe story by trivializing the travesty in the Gulf of Mexico as a "local" event. (I won't cite all the quotes here; read the article and then decide for yourself.)
# # #
LET'S INJECT A LITTLE MORE REALITY INTO THIS SUMMERS' STORY, SHALL WE?
Most of Larry Summers' "concerns" are, in reality, already playing out (see farther down, below, for details on most of these topics).
--A European debt crisis of historic proportions.
--The negative effects of a waning federal stimulus.
--Prolonged (many years) periods of high unemployment.
--Gyrating stock markets.
--A very weak housing market.
--Commercial real estate's ongoing decline.
--Cratering consumer confidence.
--Diminished consumer spending.
--Insufficient regulatory reform; we're doing very little to prevent the next crisis (which may already be upon us).
--Concerns that we're running on a course (to nowhere) similar to Japan during the past 20 years.
--Another spike in oil prices.
# # #
THE EUROPEAN DEBT CRISIS...
That '30s Feeling
By PAUL KRUGMAN
New York Times
June 18, 2010
BERLIN--...In America, many self-described deficit hawks are hypocrites, pure and simple: They're eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can't afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.
German deficit hawkery seems more sincere. But it still has nothing to do with fiscal realism. Instead, it's about moralizing and posturing....
--SNIP--
...There will, of course, be a price for this posturing. Only part of that price will fall on Germany: German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover. Europe's troubles are also leading to a weak euro, which perversely helps German manufacturing, but also exports the consequences of German austerity to the rest of the world, including the United States.
But German politicians seem determined to prove their strength by imposing suffering -- and politicians around the world are following their lead.
How bad will it be? Will it really be 1937 all over again? I don't know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.
Kossack gjohnsit has posted a couple of great, back-to-back diaries on this over the past few days: "Krugman: That '30s Feeling," and, "The Black Swans of Europe."
# # #
THE WANING STIMULUS...
Economy in U.S. Slows as States Lose Federal Stimulus Funds
By Rich Miller and Anthony Feld
Bloomberg Media
June 13, 2010, 7:12 PM EDT
June 14 (Bloomberg) -- Spending cuts by state and local governments from New York to California may act as a drag on the economy into 2011, only the second time in more than a half century that such reductions have restricted growth for three consecutive years.
States face a cumulative budget gap of $127.4 billion as 46 prepare for the start of their fiscal year on July 1, according to a report this month by the National Governors Association and the National Association of State Budget Officers. They will have to fill that hole largely on their own, as aid from the federal government under programs including President Barack Obama's $787 billion stimulus package starts to wind down.
State and local cutbacks may trim growth by about a quarter percentage point in 2010 and 2011 after shaving it by 0.02 point in 2010, said Mark Zandi, chief economist at Moody's Analytics Inc. He also sees the governments lopping payrolls by 200,000 during the next year after reducing them by 190,000 in the 12 months through May.
"The budget cutting that is dead ahead will be a significant impediment to economic growth later this year into 2011," he said in an interview...
And, here's Gillian Tett, over at the Financial Times...
Reality of America's fiscal mess starting to bite
By Gillian Tett
Financial Times
Published: June 17 2010 16:15
...Investors would do well to take note. In recent months, America's fiscal mess has assumed a rather surreal air. On paper, the country's federal-level deficit and debt numbers certainly look very scary. But in practical terms, the impact of those ever-swelling zeroes still seems distinctly abstract.
--SNIP--
...there is one place where reality is already starting to bite in America and that is in terms of state finances. Just look at the statistics. A report from the US Center on Budget and Policy Priorities issued last month estimates that in fiscal 2010 the US states collectively posted a $200bn-odd budget shortfall, equivalent to 30 per cent of all state budgets.
Last year, that pain was partly eased by Barack Obama's stimulus package(s). But that spending splurge is now fading away. And in fiscal 2011 and 2012, the states are expected to face another combined budget deficit of $260bn, with the 2011 shortfall in places such as New Jersey, Illinois, Nevada and Arizona projected to be more than 35 per cent of last year's budget.
# # #
A PROLONGED PERIOD OF HIGH UNEMPLOYMENT...
Job Data Casts Pall Over Economic Recovery
By MICHAEL POWELL
New York Times
June 5, 2010
A shadow fell across America's economic recovery on Friday, as the Labor Department's monthly report showed that job growth was weak in the private sector, provoking a precipitous sell-off in the stock market.
The headline numbers for May suggested reason for optimism -- employers added 431,000 jobs and the jobless rate fell to 9.7 percent, from 9.9 percent in April. But the underlying numbers showed that almost all of the growth came from the 411,000 workers hired by the federal government to help with the Census. Most of those jobs will end in a few months.
By contrast, the private sector created 41,000 positions, far short of expectations for 150,000 to 180,000 jobs. And the number of long-term unemployed, those Americans out of work for 27 or more weeks, remained at its highest level since the Labor Department began collecting such data in the 1940s...
The truth is, we're now entering into a period where Census Bureau jobs will be cut from the workforce, effectively creating a drag on employment statistics for the balance of the year, as Calculated Risk reported, yesterday.
Impact of Decennial Census on June Payroll Report
Calculated Risk
June 19, 2010
...So far the decennial Census payroll has decreased by 156 thousand this month, and will probably subtract 200 to 250 thousand from the payroll report (we will have a good estimate this coming Wednesday when the week ending June 12th is released).
When the employment report is released on July 2nd, a key number will be payroll jobs ex-Census (to understand the underlying trend). The headline number for June - including Census numbers - will probably be negative.
Bold type is diarist's emphasis.
# # #
GYRATING STOCK MARKETS...
It should not be understated that the reality noted in the Atlantic article, below--that somewhere in the neighborhood of 70% of all market trading is being done by computers, not Main Street investors--is really a rather scary and inconvenient reality for all of those still pointing to our stock market recovery as being something positive. Manipulated? Absolutely. Positive? Well, if you think the old sci-fi movie, Logan's Run, was a positive, then I guess you could rationalize that this inconvenient truth is a positive, too...
Monsters in the Market
By Timothy Lavin
The Atlantic (July/August 2010 Edition)
Friday, June 18, 2010
In today's exchanges, strong programs prey on weak ones, humans are hard to find, and the SEC struggles to keep up.
...Algorithms...can exploit the smallest inefficiencies in the market. They can parse trades in millionths of a second. Some species can detect other algos embarking on predictable trading strategies, and ruthlessly adjust their techniques. They're growing ever more complex, subtle, and sophisticated. And as they become more popular, they're creating some serious headaches for regulators.
By some estimates, algorithms now trigger 70 percent of all trades in U.S. equities. The speed and volume of everyday trading have propelled the market into a new and esoteric dimension, and rendered traders in the pits largely obsolete. Average daily share volume on the New York Stock Exchange increased by 181 percent between 2005 and 2009, while the time required to execute a trade on its electronic systems dropped to 650 microseconds.
Such changes have a lot of people worried, including the Securities and Exchange Commission. It released a wide-ranging paper earlier this year seeking suggestions on how to restructure the entire equity market, and created a Division of Risk, Strategy, and Financial Innovation in part to help monitor new technologies. A market collapse in early May--in which automated-trading systems exacerbated a sell-off that drove the Dow down more than 900 points in less than an hour, before it quickly recovered--gave two worries new public salience: that the proprietors of these algos may not be in full control of their creations, and that the strategies they pursue are, in some cases, fundamentally warping the financial markets.
# # #
HOUSING MARKET...
Housing Starts and the Unemployment Rate
Calculated Risk
June 19, 2010 9:02PM
...Housing Starts and Unemployment Rate Click: This graph shows single family housing starts and the unemployment rate through May (inverted).
--SNIP--
...(Last Summer) I wrote:
[T]here is still far too much existing home inventory, a sharp bounce back in housing starts is unlikely, so I think ... a rapid decline in unemployment is also unlikely. Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This lead to job creation and also household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recovery.
--SNIP--
However this time, with the huge overhang of existing housing units, this key sector isn't participating. So in this recovery there is less job creation, less household formation, and less demand for housing units than a normal recovery. This is sort of a circular trap for both GDP growth and employment.
Eventually the excess housing units will be absorbed - (progress is slowly being made, see Housing Stock and Flow) - but until then, this key sector will remain under pressure and I expect the recovery will be sluggish and the unemployment rate will stay elevated.
And, then there's this...
Drop in Home Sales in Wake of Tax Credit Tops Forecasts
BY JAMES R. HAGERTY AND NICK TIMIRAOS
Wall Street Journal Online
June 4, 2010 10:19PM
The withdrawal of federal tax credits for home buyers led to a steeper-than-expected plunge in May home sales in much of the U.S., as the housing market struggles to wean itself from government support.
Economists and real estate analysts expected home sales to slow after the tax credit, of as much as $8,000, expired at the end of April. But early data from real estate brokers indicate that the sales decline has been far more substantial than expected, with some markets showing declines of 25% to 30%.
"Anybody who wanted to buy a house probably did" before the tax credit...
# # #
THE COMMERCIAL REAL ESTATE MARKET HAS NOT REACHED A BOTTOM...
COMMERCIAL REAL ESTATE MARKET REMAINS WEAK
20 May 2010 by BondSquawk
By Rom Badilla, CFA - Bondsquawk.com
As mentioned several times here on Bondsquawk, small to mid-sized banks continue to shutdown and seek safety in the arms of the FDIC. Smaller banks are suffering in part, due to the problems in the commercial real estate markets. The situation could get worse and could be a train wreck waiting to happen. The train is not just headed for banks but for everyone, unless commercial real estate rebounds soon. Unfortunately, recovery in this space appears pretty grim.
According to a Moody's report, commercial real estate prices declined by 0.5 percent for the month of March, which marks the second consecutive monthly decline after a slight increase at the beginning of the year.
Moody's/REAL Commercial Property Price Indices (CPPI) peaked in October of 2007, at around the time of the onset of the recession. Property prices plummeted as the real estate crash intensified and as the index reached a low exactly two years later, a decline of 43.7 percent. Currently, the index continues to remain at depressed levels and is within spitting distance of surpassing the lows...
# # #
LITTLE CONSUMER CONFIDENCE...
Of course, there's always that University of Michigan consumer sampling of 500 respondents that's constantly telling us how optimistic we are. Except when we really are not: "Gallup Polling Paints A Much Bleaker Economic Outlook Picture Than UMichigan."
# # #
...AND DIMINISHED CONSUMER SPENDING...
U.S. retail sales fall for first time since September
Building materials, autos, gasoline sales decline sharply in May
June 11, 2010 9:53AM
Rex Nutting
Marketwatch
...Seasonally adjusted sales were mixed across sectors, dominated by large declines at hardware stores, auto dealers, gas stations, department stores and clothing stores. Modest gains were found in most other types of stores.
The results were much worse than expected, as economists surveyed by MarketWatch were forecasting a 0.2% gain in sales. It was the first decline in sales since September 2009; the seven-month winning streak was the longest since 1999. See our complete economic calendar.
The disappointing results are sure to provoke more talk about a possible double-dip recession following on the heels of the past week's discouragingly weak payrolls report for May...
# # #
REGULATORY REFORM...
The lede in Monday's Business Section (Page B1) of the NY Times pretty much sums up what many, including yours truly, have been saying for over 18 months: WALL STREET REGULATORY REFORM IS LITTLE MORE THAN A SICK JOKE. IN FACT, IMHO, EVEN TODAY WE'RE REMINDED THAT IT'S A TRAVESTY!
The Volcker Rule(s) are being eviscerated as we speak. Here's the proof positive...and, I don't care what the article says (and it happens to reinforce what I'm saying, at least to a great extent), but reliable sources tell me this is a done deal.
It's a veritable headfake loaded with so many loopholes, you might as well refer to it as "regulatory Swiss cheese."
Banking Lobbyists Make a Run at Reform Measures
By ERIC DASH and NELSON D. SCHWARTZ
New York Times
June 21, 2010
As Congress rushes this week to complete the most far-reaching financial reform plan in decades, the banking industry is mounting an 11th-hour end run.
Industry lobbyists -- and sympathetic members of Congress -- are pushing for provisions to undercut a central pillar of the legislation, known as the Volcker Rule, which would forbid banks from using their own money to make risky wagers on the market and would force them to sell off hedge funds and private equity units.
To secure the support needed for their bill, Senate negotiators are leaning toward creating a series of exemptions to the Volcker Rule that would allow banks to continue to operate these businesses as investment funds that hold only client money, according to several Congressional aides, industry officials and lawyers.
The three main changes under consideration would be a carve-out to exclude asset management and insurance companies outright, an exemption that would allow banks to continue to invest in hedge funds and private equity firms, and a long delay that would give banks up to seven years to enact the changes...
# # #
ARE WE TURNING JAPANESE?
Now and Later
By PAUL KRUGMAN
New York Times Op-Ed
June 21, 2010
Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?
--SNIP--
...All around the world, politicians seem determined to do the reverse. They're eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems.
--SNIP--
Right now, we have a severely depressed economy -- and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.
Penny-pinching at a time like this isn't just cruel; it endangers the nation's future. And it doesn't even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues.
--SNIP--
As I said, many politicians seem determined to do the reverse. Many members of Congress, in particular, oppose aid to the long-term unemployed, let alone to hard-pressed state and local governments, on the grounds that we can't afford it. In so doing, they are undermining spending at a time when we really need it, and endangering the recovery. Yet efforts to control health costs were met with cries of "death panels..."
Bold type is diarist's emphasis.
# # #
A SPIKE IN OIL PRICES?
Last of all, let's talk about the price of oil. There are two things I want to mention here:
1.) The price of oil spiked due to disruptions in production and supply after hurricanes Katrina and Rita, in 2005; so, just look at the state of affairs in the Gulf of Mexico, today. (Calendar-wise, we are now getting into prime driving time, as well.)
2.) With the state of the financial regulatory reform bill being the TRAVESTY that it is (see the link to today's NY Times business lede, above), there's really nothing in the way of Wall Street speculators pushing up the price of oil now, just like the Commodities Futures and Trading Commission acknowledged Wall Street did in 2008. See my diary from July 29th, 2009: "CFTC Verifies Taibbi Charges: Wall St. Caused '08 Oil $ Spike."
(Is this just another travesty, or what?)
# # #
The facts are thus: almost ALL of the things Larry Summers is now "concerned" about, in terms of what will lead this country back down a recessionary path--or worse--are ALREADY occurring.
And, as former Fed Chair Paul Volcker reminded us just a couple of weeks ago: "The Time We Have Is Growing Short."
What part of that sentence don't Democrats--and even people in this blogging community--understand?