Friday, February 20, 2009
Paul Krugman writes a nice piece (hat tip, Mark Thoma) about how the U.S. economy will eventually emerge from its recessionary depths. However, it occurs to me that another question should be: when will the economy emerge from the depths? And unless one is prescient, nobody can truly answer that question. But key surveys on construction, sentiment, and manufacturing indicate that it may be a while. An excerpt from Paul Krugman's op-ed piece in the NY Times:So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.
Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.
Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.
The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming. I couldn't agree more: that population growth and household formation will eventually force a recovery in durable goods sales (autos) and home contruction. But furthermore, small level changes can add a lot to GDP growth.
Think about it. New home construction in January was an anemic 466k (which is an annual rate), down a whopping 17% in just one month or 56.2% since one year ago. Impressively, residential construction was just 3.1% of GDP in the fourth quarter of 2008 (Q4 2008), but still snatched 0.85% from overall economic growth (the contribution to growth table here). Since residential construction is nearing zero, small level increases of new construction means big percentage changes and large contributions to GDP growth. Same for autos.
So as soon as homebuilders and automakers get going again, then GDP (domestic production) has a chance at stabilization. But when will that happen? When will the pain stop?
Unfortunately, the headline monthly reports - like housing starts, vehicle sales, inventories, trade, home values, personal income - are all lagged reports by at least one month. Out of the big monthly reports, the employment report is the first to be released; and by the time the release occurs (Feb. 6 for the January employment report), the data is really just a quasi-monthly report because the survey ends the week including the 12th day of the month. So the BLS payroll for January is really data for the December 15 through the week including January 12th. Not a lot of help there.
However, survey reports by managers, builders, or consumers are generally released during that month and can serve to lead sectoral stabilization before it actually occurs.
The National Association of Homebuilders conducts a monthly survey of homebuilding sentiment to construct the Housing Market Index (HMI). In February, the HMI increased by 1 point to 9 from its Jan. record low. An HMI above 50 implies that sales conditions are generally good, while an HMI below 50 indicates poor sales conditions; 9 is bad. Homebuilders are worried about imminent foreclosures, and the government's ability to stem the negative effects from the housing market. Not a lot of hope for new building in the near term.
Regional Fed indices on business sentiment indicate continued stress in manufacturing (auto sales obviously included here). The NY Fed and the Philly Fed have already released their February indices; both tumbled over the month. The NY Fed's regional manufacturers said that the 6-month outlook was grim, while the Philly Fed regional manufacturers are more optimistic about the 6-month outlook. I await the Chicago PMI release, but not a lot of hope for a near-term recovery in manufacturing.
The University of Michigan released the preliminary results of its consumer sentiment survey for February. The headline sentiment index dropped to a record low of 56.2. Consumers were probably a little gloomy about the recent bump in gas prices, and sentiment for the "months ahead" dropped to its lowest level since 1980. Some found some less-gloomy results of the survey, and highlight that consumers are liking the buying conditions in housing.
Unfortunately, I don't see a lot of hope in the near term, and neither do Calculated Risk nor Mark Thoma. And furthermore, once these indicators start to increase - unless the increase is more like a sharp surge - the omen will be more of a less quick contraction rather than a recovery.
It will be interesting to see the magnitude effect of the fiscal stimulus on the macroeconomy, because in reality nobody knows.