Paul Krugman,
Nouriel Roubini and
Calculated Risk are all talking about our
"De Facto Double-Dip" recession this weekend. Whether an economic indicator is leading, coincidental or lagging--for all of those reading this that embrace the over-arching concept of political pragmatism--is immaterial to the political end result. Summing it all up into a theme I've been discussing for...years: When it comes to political
realities, technical economic indicators mean quite little as far as the voters' perceptions of our (their) economic well-being are concerned. As Paul Krugman also reminds us this Monday morning, in "
The Pundit Delusion," winning campaigns--especially in economic environments such as this and as I've also been reiterating it for years--is all about jobs/employment.
But, what does happen when many/most of the indicators start going south (or, at best, sideways), too? Again?
Meteor Blades covered some of this quite extensively, on Saturday, in his outstanding post: "
The 'recovery' takes a few more hits." In it, he pointed out that many, if not most, of our economic indicators have been tanking for the past couple of months.
Previously, Kossack gjohnsit discussed these truths in: "The crash of the leading indicators." While others have attempted to rebut gjohnsit's commentary, with factual statistics supported by annotated data from many weeks ago, before much of our latest economic news was even available, the realities of the matter are that both gjohnsit's post and the post rebutting it have been focused around the highly-regarded Economic Cycle Research Insititute's Weekly Leading Indicators, or, the "ECRI's" "WLI," which has continued to plunge (since gjohnsit posted his diary, less than two weeks ago), abysmally.
In fact, as Reuters pointed out on Friday, and as Zero Hedge also elaborated upon it, the ECRI's WLI has sunk to a point where there is now a virtual 100% chance, based upon the ECRI's previous historical statistical fact (42 years of data), that we are all but assured of retracing some of our path downward, back into negative job creation--understanding that anything around a 2.0%-2.5% growth in our country's GDP, or less, assures this, since that translates into the truth that projected jobs created won't even keep pace with the growth of our employment population (combined with the Bureau of Labor Statistics' birth/death rate), from this point forward, well into 2011.
ECRI Plunges At 9.8% Rate, Double Dip Recession Virtually Assured
Zero Hedge
07/16/2010 09:48 -0500
The ECRI Leading Economic Index just dropped to a fresh reading of 120.6 (flat from a previously revised 121.5 as the Columbia profs scramble to create at least a neutral inflection point): this is now a -9.8 drop, and based on empirical evidence presented previously by David Rosenberg, and also confirming all the macro economic data seen in the past two months, virtually assures that the US economy is now fully in a double dip recession scenario."It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions -- with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession ... only 100% of the time (42 years of data)." We are there.
Here's more from Paul Krugman, on Saturday, as far as the implications of all of this are concerned:
De Facto Double Dips
Paul Krugman
NY Times Blog
July 17, 2010, 11:05 am
From Ed McKelvey at Goldman Sachs, which has been very good at calling recent economic trends (no link):
Real GDP growth appears to have dropped below its 21⁄2%-3% long-term potential range last quarter, judging from the latest data on retail sales and foreign trade. We have cut our estimate for second-quarter growth from 3% to 2% (annual rate).
This slowdown is occurring just ahead of the loss of growth support from fiscal stimulus and the inventory cycle that we have been anticipating would occur at midyear. With the various headwinds to private-sector growth (excess vacant housing, state and local budget stresses, lack of lending, reluctance to hire) still firmly in place, we reaffirm our view that real GDP will grow at only a 11⁄2% rate during the second half of 2010, and we worry that reacceleration in 2011 will not occur as now projected...
Goldman's McKelvey continues on to note that: "Despite these growing downside risks, US authorities do not exhibit much urgency to apply more policy stimulus."
Krugman concludes that if growth is this slow in coming months--and this is quickly becoming the consensus--then unemployment and economic capacity statistics will move in a direction which is diametrically opposite of anything that any sane observer would remotely consider a "recovery." Krugman states the obvious: with only 1-1/2% growth (GDP), it is "a double dip in all the senses that matter."
But, that's a projection (albeit a quickly-building economic consensus) which is weeks or months down the road (in terms of when it will come to fruition). So, while we have negative employment forecasts that are quickly morphing into the conventional wisdom, going into and well beyond the mid-terms in November, the truth is that present day realities on Main Street, already, are significantly more negative than many in the MSM, and even some in this community, would have us believe.
Here's more on the "Double Dip Discussion," on Saturday, from Calculated Risk and Nouriel Roubini:
Double Dip Discussion
by CalculatedRisk on 7/17/2010 07:47:00 PM
...The 2nd half slowdown is here. I still think we will avoid a technical double-dip recession, but it will probably feel like one.
Some day growth will pickup again...
--SNIP--
But there is too much capacity in most of the economy. We see this in housing (the good news is there will be a record low number of new housing units delivered this year), and in overall industrial capacity utilization. As an example, domestic auto production is still about 25% below the level of 2006 - so there is no need to expand production. There is also excess capacity in office space, retail space, and other categories of commercial real estate...
And, from Nouriel Roubini, over at ProjectSyndicate.org:
Double Dip Days
Nouriel Roubini
ProjectSyndicate.org
July 16, 2010
The global economy, artificially boosted since the recession of 2008-2009 by massive monetary and fiscal stimulus and financial bailouts, is headed towards a sharp slowdown this year as the effect of these measures wanes.
--SNIP--
The global slowdown - already evident in second-quarter data for 2010 - will accelerate in the second half of the year. ... The likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip. In the US, annual growth was already below trend in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2% in April-June). Growth is set to slow further, to 1.5% in the second half of this year and into 2011.
And, this brings us full circle to Krugman's commentary today, "The Pundit Delusion." As Krugman notes: "What political scientists, as opposed to pundits, tell us is that it really is the economy, stupid."
The Pundit Delusion
By PAUL KRUGMAN
New York Times
July 19, 2010
....The best way for Mr. Obama to have avoided an electoral setback this fall would have been enacting a stimulus that matched the scale of the economic crisis. Obviously, he didn't do that. Maybe he couldn't have passed an adequate-sized plan, but the fact is that he didn't even try. True, senior economic officials reportedly downplayed the need for a really big effort, in effect overruling their staff; but it's also clear that political advisers believed that a smaller package would get more friendly headlines, and that the administration would look better if it won its first big Congressional test.
Krugman continues on to tell us that the administration "...was taken in by the pundit delusion, focusing on how its policies would play in the news rather than on their actual impact on the economy."
Republicans, by the way, seem less susceptible to this delusion. Since Mr. Obama took office, they have engaged in relentless obstruction, obviously unworried about how their actions would look or be reported. And it's working: by blocking Democratic efforts to alleviate the economy's woes, the G.O.P. is helping its chances of a big victory in November....
--SNIP--
...Mr. Obama's best hope at this point is to close the "enthusiasm gap" by taking strong stands that motivate Democrats to come out and vote. But I don't expect to see that happen.
What I expect, instead, if and when the midterms go badly, is that the usual suspects will say that it was because Mr. Obama was too liberal -- when his real mistake was doing too little to create jobs.
Yes, it is the economy, stupid. And, it's sinking fast.
Again.
From a political standpoint, for Democrats this year, does it really matter whether or not we'll maintain a trajectory concurrent with any semblance of a technical recovery? Or, is the conventional wisdom the reality, and we continue on into a technical double-dip? Or, for that matter, will we officially emerge from the first "dip" anytime soon?
Here's Shanikka, one of my favorite DKos bloggers, responding to Meteor Blades' commentary, Saturday:
That Message (19+ / 0-)
May sound great here on blogs and political circles, but it sucks on Main Street. Particularly working class/low-income Main Street. I've been voting for 30 years this year from the 'Hood and I can tell you that I've NEVER seen anyone get up and go to the polls JUST because of "fear of Republicans." They may vote once they actually get to the polls based upon a Democrat being "the lesser of two evils".
But first you have to get them there.
The Democratic Party is looking at a potential bloodbath this fall unless it can motivate what is a highly demoralized, demotivated working class -- in Main Street, the 'Hood, you name it. They were motivated by President Obama in a way that they hadn't been in decades and came out.
But if you spend some time listening to them now? The President has disappointed them, they perceive things as "same old same old" - and they are not enthusiastic in the slightest when you ask whether they are planning to vote. Many have no intention of voting again - they see it as a waste of their time since nothing changed in their lives (from their perspective) - thus defeating the one reason they came out the last time.
by shanikka on Sat Jul 17, 2010 at 12:44:49 PM EDT
To which Meteor Blades responded:
Please, shanikka, don't talk about the... (12+ / 0-)
...reality on the street. It just doesn't jibe with the voter-inspiring resonance of things could be worse.
by Meteor Blades on Sat Jul 17, 2010 at 01:03:53 PM EDT
And, here's Shanikka's conclusion:
Can't Help It MB (20+ / 0-)
For all those here that talk about how reality based places like DailyKOS are, few actually spend time in the reality that is working class/poor people's lives. If they did, they'd know from first-hand experience that people who are suffering and hopeless today spend no time to be worrying about what could be - they are busy trying to survive TODAY. The'd also know that it is far worse for a politician to have disappointed people -- given them hope, only for nothing to change on the ground -- than have never promised anything at all. I am proud of our President's accomplishments in office but too few of them have translated into anything tangible that could be seen and felt by more than we blog pundits and those in the halls of power. Thus, on the street it is indeed Same Old Same Old. And thus, I predict there will be a lot of folks in November that came out in 2008 you couldn't get to the polls in 2010 even if President Obama himself asked.
But him asking with a message of "We're better than the other guy/gal" ain't going to cut it.
by shanikka on Sat Jul 17, 2010 at 01:14:25 PM EDT
So, there's a dose of harsh reality from one of my favorites, right here in the community, when it comes to telling it like it is, politically. But, out in the real world, here's someone else telling it like it is about the economy, today.
And "...Today we have a serious problem."
# # #
(Diarist is authorized, in writing, by Naked Capitalism Publisher Yves Smith to reprint her blog's posts in their entirety.)
Satyajit Das: Botox Economics - Parts 1 & 2
Sunday, July 18, 2010
Naked Capitalism
By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives - Revised Edition (2010, FT-Prentice Hall).
Part I
Botox is commonly used to improve a person's appearance by removing facial lines and other signs of aging. The effect is temporary and can have significant side effects. The world is currently taking the "botox" cure. A flood of money from central banks and governments -- "financial botox" -- has temporarily covered up unresolved and deep-seated problems.The surface is glossy and smooth, the interior decayed and rotten
The 2009 `recovery' was based on low or zero interest rate policies ("ZIRP") of major central banks. Massive government intervention also helped arrest the rate of decline of late 2008/ early 2009. Without government support, it is highly probable that most economies would have been in serious recession. Just as China practised capitalism with Chinese characteristics, developed economies discovered socialism with Western characteristics.
Capital injections, central bank purchases of "toxic" assets and explicit government support for deposits and debt issues helped stabilise the financial system. Changes in accounting rules deferred write-downs of potentially bad assets. Despite these actions, the global financial system remains fragile.
Further losses are likely from consumer loans, including mortgages. In the U.S. mortgage market, one-in-ten householders are at least one payment behind up from one-in-14 a year ago. If foreclosures (now around 5%) are included, then one-in-seven mortgagors are in some form of housing distress.
Recent stability in U.S. house prices may be misleading reflecting the effect of government incentives (the $8,000 first time homebuyer tax credit) and low mortgage rates driven in part by the Fed's MBS purchases. The value of 20-30 % of properties is less than the loan outstanding. Home sales remain modest with around 25-30% of sales of existing homes being foreclosures. Housing inventories also remain high in historic terms. With more adjustable rate mortgages resetting in 2010 and 2011, the risk of further losses on mortgages cannot be discounted unless economic conditions improve.
Rising vacancy rates, falling rentals and declining values of commercial real estate ("CRE"), primarily office and retail properties, are apparent globally. In London, Nomura, the Japanese investment bank, secured a 20-year lease of a new office development on the River Thames - the 12-storey Watermark Place - for £40 per square foot. This was over 40% lower than the rents of nearly £70 per square foot demanded prior to the GFC. Nomura will also not pay any rent until 2015. Mark Lethbridge, partner at Drivers Jonas who advised Nomura, told the Financial Times: "... I'm unlikely to see [the terms] again in my career."
Banks are likely to remain capital constrained in the near future reducing availability of credit. Commercial and consumer loan volumes have declined reflecting a lack of supply but also a lack of demand as companies and individuals reduce leverage.
The real economy remains fragile. Government actions, such as fiscal stimulus and special industry support schemes (cash for clunkers; investment incentives, trade credit subsidies), have boosted demand and industrial activity in the short term. The problem remains as government incentives encourage current consumption and investment but ultimately "steal" from future demand.
Employment, a key indicator given the importance of consumption in developed economies, continues to decline albeit at a slower pace. In the U.S., unemployment reached 10%.
In many countries enforced reduction in working hours and taking paid or unpaid leave reduced the rise in unemployment levels significantly. Working hours and personal income have fallen.
Changes in the structure of the labour force also distort the real picture. If workers working part time involuntarily and looking for full time employment are included, the U.S. underemployment figure is in the 16-18% range. Long term and youth employment also remains high.
European economies, especially countries such as Spain, are also experiencing significant unemployment. In some economies, unemployment is a new "export" as guest workers are shipped back to their country of origin or remittances home fell sharply.
In developed countries where an increasing part of the population is nearing retirement age, wealth effects affect consumption behaviours. Low interest rates and reduced dividend levels limit income and expenditure.
In 2009, global trade stabilised after precipitous earlier falls. According to the CPB Netherlands Bureau for Economic Policy Analysis, as of September 2009 world trade was 8.0% above the low of May 2009 but 14% below its peak of April 2008. Trade protectionism threatens recovery in global trade.
Major risks in the financial and real economy remain and may disrupt the hoped for resumption of business as usual.
Part II
From late 2008 onwards, Governments have spent aggressively, going into or increasing deficits, to increase demand within the economy to offset weak private sector consumption and investment.
Financing these initiatives presents significant challenges. In the five quarters ending 30 September, 2009, U.S. Treasury borrowing increased by $2.8 trillion, a rise of around three times from the level of previous years. The U.K. and European countries increased public debt by similar or higher amounts (in percentage terms).
In 2009, investors readily bought large new issues of government debt, despite relatively low interest rates. Rating agencies maintained sovereign debt ratings, especially for major countries despite deteriorating public finances.
Central bank purchases under `quantitative easing'("QE") (read printing money) programs helped the market absorb the volume of new issuance. According to estimates by Morgan Stanley, Fed purchases of assets, QE programs and other liquidity support programs reduced private sector net purchases of new Treasury issues to $200 billion in 2009. In 2010, in the absence of continued Fed support, private buyers will have to absorb $2,000 billion.
If buyers of sovereign debt pull back, Ireland, Greece and Spain provide an insight into the actions necessary. In order to restore fiscal stability, the Irish government introduced a special 7% pension levy and implemented the toughest budget in the country's history. Public sector salaries were cut between 5-15%. Unemployment and welfare benefits were also cut. More recently Greece and Spain proposed a program of similar budgetary austerity.
Focus in the short run will be on the `PIGS' (Portugal, Ireland, Greece, Spain) but in the longer term it will shift to major economies with high levels of government debt - the `FIBS' (France, Italy, Britain, States). At least, Japan has its very large pool of domestic savings.
The need to maintain the confidence of rating agencies and investors as well as access to markets may ultimately force the required disciplines. As James Carville famously observed: "I want to come back as the bond market. You can intimidate everybody." Politicians everywhere will learn the reality in Thatcher's terms: "You can't buck the markets."
The need to reduce the overall level of debt in certain economies has not been fully addressed. Public debt has been substituted for private debt. As his friend Dink tells author Joe Bageant in Deer Hunting with Jesus: Despatches from America's Class War: "Sounds like a piss-poor solution to me, cause they're just throwing money we ain't got at the big dogs who already got plenty. But hell what do I know?"
The last few decades have seen an economic experiment where increasing levels of debt have been used to promote high growth. This policy had the unintended consequence of increasing risk in the global economy, which was not fully understood by the individual entities taking this risk or regulators and governments. This experiment is now coming to an end.
The real risk is of long-term economic stagnation. A period of low growth, high unemployment or underemployment and over capacity is possible while individuals, firms and governments repair balance sheets.
Governments and central banks continue to inject liberal amounts of botox to cover up problems, at least, while supplies exist. In absence of any definite solutions, policymakers are deferring dealing with the problems, rolling them forward. In the words of David Bowers of Absolute Strategy Research: "It's the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments' assumption of banks' debts]. There's nobody left to pass it to in the future."
The summary of 2009 and the outlook for 2010 may be the logo on a black T-shirt worn by Lisbeth Salander, the heroine of Steig Larsson's Girl with the Dragon Tattoo: "Armageddon was yesterday - Today we have a serious problem."
# # #
Bold type is diarist's emphasis.
So, what's it going to be? Are we going to continue to believe the con men and the delusionary pundits? Or, are we going to accept the fact that we're in a de facto double dip and do something about it before it's too late? Because from where I'm sitting, today, it is the economy and Democrats have a serious problem.
And, reiterating from above, Paul Krugman's giving us the solution on a silver platter:
...Mr. Obama's best hope at this point is to close the "enthusiasm gap" by taking strong stands that motivate Democrats to come out and vote. But I don't expect to see that happen.
What I expect, instead, if and when the midterms go badly, is that the usual suspects will say that it was because Mr. Obama was too liberal -- when his real mistake was doing too little to create jobs.