Friday, April 2, 2010

The U.S. economy: on the surface and under the hood

The GDP recovery is underway. But below the GDP hood, the picture is not as bright. The labor market is weak, and income-generating prospects remain muted. The latter portends a back-up of consumer spending down the road without substantial policy support.

Please see Spencer's post at Angry Bear blog for a very nice interpretation of today's employment report, but he sums it up quite nicely:
Yes, the employment situation has quit deteriorating, and there are encouraging details within the report. But the overall rebound in the economy and the employment situation is one of being stuck in the doldrums.
But why is the U.S. economy stuck in the doldrums? Isn't GDP recovering smartly? (Read on.)

The chart illustrates the GDP contraction for each recession since 1971, except that for 2001 because in sum GDP did was rather flat. Point "0" represents the quarter where GDP bottoms out. I circumvent the official date of the recession's end as point 0 - the NBER is the agency that "dates" business cycles in the U.S. - because I want to focus on GDP, which is a composite of spending motives (including the government).

On the surface, the economy appears to be improving smartly; GDP bounced back 1.9% since its cyclical low in Q2 2009. But what we've really got here is a inventory-led recovery, with a Q3 boost from auto sales, and depreciated capital and software that must be replaced. Top that off with a small boost from non-defense federal government consumption, where in Q4 that was more than offset by the decline in the contribution to growth coming from state and local governments, and the recovery looks a little less stable.

I work in fixed income. Companies that wish to rollover debt or finance an expansion of capacity may do so through a public bond issuance. As an anecdote, companies will travel to our offices in order to "tell their story" and garner support for the issuance. Guess how many companies have told me that the proceeds of the bond issuance (essentially borrowing funds from the institutional investor at usually a fixed coupon rate) will finance expansion and new production capacity - none this year! Nada. (Actually, that's not totally true: earlier this year an Indonesian power company wanted to rollover debt financed new capacity from last year.)

There's plenty of spare capacity, so that existing resources can supply new demand. However, this portends (in my very small sample) a slowdown in fixed investment growth, and further crimps hopes for a strong recovery.

Jobs growth needs to pick up, or else income and earnings growth will continue down (or at best move sideways).

It is NOT the time for government support to let up. Don't worry about what markets think, worry about what people think. They can't move; and they can't find a job (well at least officially 9.7% of the labor force, or the 9.1m part-time for economic reasons workers). As such, the hope for sizable private-sector income growth is looking negligible.

Rebecca Wilder


  1. <p><span>UPDATE to 2nd qtr 2010 REAL-DOMESTIC-PRODUCT:</span>
    jan.....0.53....0.25 top
    mar....0.54....0.09 (+1)
    apr.....0.47....0.10 top (+1)</span>
    </p><p><span>may....0.41....0.01 stocks fall/yields fall</span>
    </p><p><span> </span>
    </p><p><span>Further accommodation (+1) portends higher spike up & sharper, quicker, drop. </span>
    </p><p><span>Can narrow the time frame but following Wells Wilder's technical analysis works as almost as well for entry & exit points.</span>
    <p><span>Assume we are looking for this April stock market's top:</span>
    </p><p><span> </span>
    </p><p><span>Look for an outside day (higher high, lower close)</span>
    </p><p><span>Look for an outside week (higher high, lower close)</span>
    </p><p><span>Look for an outside month (higher high, lower close)</span>

  2. <span>

    <span><span>How fast is fast?  (or is there an answer?)  Economics can be best described by the rates-of-change in the flow-of-funds.  What is more important, the rate of expansion out of this cyclical bottom?, or the rate of expansion Y-O-Y?, or QTR-QTR? or the length of time it takes to exceed (2nd qtr 2008) REAL-Domestic Product of $13,415.3T?  It stood at $13,149.5T (4th qtr 2009), still below the 2008 peak.  </span></span><span>
    <span> </span>
    <span>It is obvious that the rates-of-change (roc's) used by economists are specious (always at an annualized rate; which never coincides with an economic lag).  The Fed's technical staff, et al., has learned its catechisms.  </span>
    <span> </span>
    <span>Why even use Nominal-DP?  Or do people still believe in the Phillips Curve?  Nominal-DP peaked later then real-dp in this cycle (in the 3rd qtr of 2008). But isn’t the contraction in real-dp the fist indication of a problem (although not the FEDs)?</span></span>
    <span><span><span></span>The growth rates in the monetary lags (MVt) (our means-of-payment money times its rate of turnover), i.e., for Nominal-DP, varies widely.  The FED's only achievable mandate revolves around stabilizing price indices. </span></span>
    <span><span> </span></span>
    <span><span>GDP was the preferred economic aggregate after 1991.  Before then it was GNP.  During the 1900's, GNP's peak rate of growth occurred (1st qtr 1981) @ 19.2% (because of the "time bomb", the widespread introduction of ATS & NOW accounts at depository institutions, regulation & innovation, which vastly accelerated the transactions velocity of money).  </span></span><span>
    <span> </span>
    <span>Or is the GDP recovery (and full employment) best reflected by REAL-National Product which peaked (3rd qtr 2007) @ $13,563.3T.  </span>
    <span>REAL-National Product stands @ $13,246.0T (4th qtr 2009), still below the 2007 peak.</span></span>


  3. I disagree.

    "<span><span><span><span>The FED's only achievable mandate revolves around stabilizing price indices.  </span></span> "</span></span>

    The Fed's only achievable mandate is to reach its self-determined interest rate target. That's it!


  4. <span>
    <p><span><span><span>BULL.  Our excessive rates of inflation (especially since 1965), has been due to an irresponsibly easy monetary policy.  Between 1965 and June of 1989, the operation of the trading desk has been dictated by the federal funds “bracket racket”.<span>  </span>Even when the level of non-borrowed reserves was used as the operating objective, the federal funds brackets were widened, not eliminated.<span>  </span>Ever since 1989 this monetary policy procedure has been executed by setting a series of creeping, or cascading, interest rate pegs.</span><span></span></span></span>
    </p><p><span><span><span>This has assured the bankers that no matter what lines of credit they extend, they can always honor them, since the Fed assures the banks access to costless <span>legal</span> reserves, whenever the banks need to cover their expanding loans – deposits.  </span><span></span></span></span>
    </p><p><span><span><span>Our monetary mismanagement has been the assumption that the money supply can be managed through interest rates.  We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period.  That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about   </span><span></span></span></span>
    </p><p><span><span>Since the member banks have no excess reserves of significance the banks have to acquire additional reserves to support the expansion of deposits, resulting from their loan expansion.  </span></span><span></span>

    </p><p> </p>

  5. <p><span><span>Apparently, the Fed’s technical staff either never learned, or forgot, how Roosevelt got his “2 percent war”.  This was achieved by having the Fed stand ready to buy (or sell) all Treasury obligations at a price which would keep the interest rate on “T” bills below one percent, and long-term bonds around 2 -1/2 percent, and all other obligations in between.<span>  </span>This was achieved through totalitarian means; involving the control of total bank credit and the specific rationing of that credit we had official price stability and “black market” inflation.<span>  </span></span><span></span></span>
    </p><p><span><span>The production of houses and automobiles was virtually stopped, and credit rationing severely reduced the demand for all types of goods and services not directly connected to the war effort.<span>  </span>This plus controls on prices and wages kept the reported rate of inflation down.<span>  </span></span><span></span></span>
    </p><p><span><span>Financing nearly 40% of WWII’s deficits through the creation of new money laid the basis for the chronic inflation this country has experienced since 1945.<span>  </span>Interest rates, especially long-term, would have averaged much higher had investors foreseen this inflation. This was reflected in the price indices as soon as price controls were removed.</span><span></span></span>
    </p><p><span><span>There were recently 5 interest rates (ceilings tied to the Primary Credit Rate @.50%), that the Fed could directly control in the short-run; the effect of Fed operations on all other interest rates is still INDIRECT, and varies WIDELY over time, and in MAGNITUDE.</span><span></span></span>
    </p><p><span><span>The money supply could never be managed by any attempt to control the cost of credit (i.e., thru interest rates pegging governments, or thru "floors", "ceilings", "corridors", "brackets", etc).<span>  </span>IORs will exacerbate thIS Keynesian fallacy The FED cannot control interest rates, even in the short-end of the market, except temporarily.  By attempting to slow the rise in the renumeration rate the FED will pump an excessive volume of costless legal reserves into the member banks.</span><span></span></span>

  6. I don't understand why fixed income underwriters aren't more upset about having to compete with the Fed for bank reserves.  1.2 trillion (up from $60 billion two years ago) there, plus all that new treasury debt.  It's a wonder anyone buys corporate bonds anymore.  Remember back when banks were supposed to balance risk with treasuries, municipal, and corporate bonds.  Do you suppose the financial sector will ever return to that model which worked so well for so long?

    With a steeply progressive enough income tax, we could remove the inflationary pressure of full employment.

  7. <span> <span> It is no surprise that Y/Y comparisons are down, but it occurs to me that you are not comparing to the bottom on each of your data points. It seems obvious that we have bounced off the bottom, and it also seems obvious that last year was higher on each of your data points, as your research confirms. None of that gives any insight into the future, however.</span></span>
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