GDP

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Weekend September 28, 2012

This week was dominate by two themes: the continuation of muddle as our economy wallowed along, better but not a whole lot; and the apparent implosion of the Romney presidential campaign.

First the economy:

The big disappointment was the downward revision of GDP for the second quarter. The final numbers – this is the third and ‘final’ figure we will get – has growth at a meagre 1.3%. This means that in the three years since the last quarter with negative GDP we have experienced an average of 2.2% growth per quarter. That is low by historical standards and suggests an economy deeply mired in its lingering problems. There have been breakout attempts: we had growth of 4.1% at the end of last year, but that faster growth has not been sustained. To put this in some perspective: during the year and a half of crisis we had an average of -3.1% change in GDP; and in the two years before the crisis we saw quarterly growth of … 2.2%. And that last number bears discussion.

While we all constantly berate post-crisis growth as being inadequate we forget that the years prior to the crisis were hardly golden. The economy was sputtering under the weight of its debt and asymmetrical distribution of incomes well before it collapsed. Much of the growth during those years was an illusion propped up by the unsustainable accumulation of debt, and the over reliance on the bubble induced activity in real estate and construction. Take away those bubble effects and the economy has been anemic for the best part of a decade. Indeed going back further we can also argue that much of the supposed boom in the 1990’s was also bubble induced – the hi-tech bubble in that case – and before that, in the late 1980’s we saw an economy propped up by an earlier bout of debt accumulation – the Reagan deficit financing of defense spending in particular.

So the recent performance, if set in this longer term perspective, is not so bad. It is still not good, but it sits more clearly within a long term view of slower growth when compared with early periods such as the 1950’s and 1960’s. We are still at the wrong end of the growth spectrum, but we fit well within the Reagan/Bush trajectory.

This suggests, of course, that our problems are more deep rooted and thus more difficult to resolve than ‘merely’ recovering from the crisis. We have many distortions to unwind and rebalance. Income inequality has to be reduced so that more purchasing power resides in the lower and middle strata, where money gets spent and not simply shipped to the Cayman Islands; the long term Federal budget needs to be better balanced which implies higher revenues as well as cost reduction – in defense primarily; and the financial industry needs to be reduced in size and scope so that our resources flow into the real economy and not into ponzi financial schemes. These all require political adjustments before economic policy can be corrected. And that requires a clear victor in our upcoming election.

Which brings us to the second theme of the week.

Has there ever been a weaker presidential candidate than Mitt Romney? He is awful. His plutocratic airs and graces have finally been fully exposed. His prejudices and his arrogance are in full display. He seems lost and genuinely hurt by the negative reaction to his astonishing diatribe about the 47%. That off the cuff and private talk sank him. It is especially damaging because it was private. It cannot thus be ‘spun’. It was clearly what he thinks. That is what has hurt him the most. Whilst we all thought he looked stiff and awkward, like any prep school kid trying to be one of the guys, he was able to get away with it because he projected a competence and an attempted outreach to the regular voter. People, may not have liked what he is – corporate raiders are not inherently nice – but they could bring themselves to vote for him as a rejection of Obama. They could tolerate Romney. But not after that 47% speech. It stripped away any pretense he had. It showed him to be exactly what we feared he was – a spoiled brat, entitled, out of touch, and mean spirited. His dismissal of half the population as being moochers beyond help and respect was the most clear insight we can have into the mindset of the plutocracy that is trying to cement its control over us. They actually think they are hard done by! In their cramped and distorted world they sincerely believe themselves to be under-appreciated, over-taxed, and despised for being successful.

Perhaps they are. Perhaps not. What we do know is that the post-Reagan plutocracy has not produced an economy worth a lick. For all their supposed smarts, clever financial tricks, and hard work their entire generation has managed only to run the economy into the ground in an epic failure only matched by an earlier generation of plutocrats in the 1920’s and 1930’s.

Their success is based on rent-seeking not skill. They specialize in regulatory capture, corruption, and lobbying. They use these skills to distort the economy for their own gain. This creates excess cash which they then flood Washington with. They mingle only with themselves. They live behind gated communities. They go to private schools. They belong to the right clubs. They act out their expensive lives within a small sector of the world that, to them, is the entire world. They presume to have the right to lead because of their self-promoted success.

But. That success is hollow. It depends entirely upon their ability to continue to twist the game in their own favor. And as the effects of their squeezing gradually dries out the economy, they must resort to ever more blatant and destructive activities. They have to double down on their rent-seeking. They have to invent ever more risky financial trickery. They have to extend their reach further and further. Until the dead weight of their excesses brings the entire game to a screeching halt, forcing us to endure a depression.

Romney exists within this vortex. He is swept up by it. He is self-validated by it. He cannot see beyond it. To him it is the real world with all its own justifications, rules, institutions, and culture. That it is profoundly anti-social is beyond his comprehension. So when he sees a veteran living off a government pension he can genuinely see a moocher. Or he can genuinely mean it when he advises poor kids to start a business by borrowing the capital from their parents. And he simply doesn’t see anything wrong with making the uninsured go to the emergency room for health care. The list of indifference and uncaring goes on. It is typical of his ilk.

And, remember, they are the ones who advocate austerity and hardship as the cure to our economic ills. They are the ones who privilege capital over labor. And they are the ones who protect creditors rather than debtors.

Romney’s whole life was lived through this prism. He steadily checked off boxes on his resume. It was inevitable he would run for ever higher office. What else was a rich kid to do?

Then he exposed himself. And by so doing exposed his plutocratic class.

The single most effective political ad running on TV this year uses Romney’s words. It uses only his voice. It announces itself as an ad for Obama and then simply allows Romney to talk. Nothing else. It is an act of self-destruction like no other. And it is working.

Perhaps, just perhaps, the plutocrats have over-reached, and this election marks the beginning of repair and recapture of the economy for the rest of us.

Who knows.

A lot depends on Obama. And he hasn’t said much lately. He hasn’t needed to.

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Incomes Flat, But Spending Up

So we end the week with a little more insight into consumer behavior. The numbers for August show a scant 0.1% rise in personal incomes, continuing what is now a well established trend of very mediocre gains. In contrast, spending rose at a 0.5% clip, implying that households dipped into savings in order to spend. This is the second month in a row that we have observed this pattern so it is worth thinking through for possible implications.

First the pessimistic view.

With incomes not rising strongly people are being forced to use savings to augment those incomes as they spend. Consumption throughout the year has been at a low rate suggesting that households are still concerned about job security, debt levels, and their prospects for growth. This hesitancy to spend has been breached only by the need to replace worn out cars and other large ticket items, two categories of spending that have bucked the trend during the past few months. Once those things have been replaced, so this view goes, people retreat back to their defensive posture to wait out the lingering storm.

Second, the optimistic view.

Households are now showing the first concerted signs that they have paid down debt sufficiently to undertake significant purchases like new cars and other durable goods. And they are growing in confidence enough to do this spending from savings rather than directly from incomes. When coupled with recent gains in measures of consumer confidence the willingness to delve into savings suggests that households are less worried about job security, have their debt levels under control, and are more upbeat about their prospects. This view then supports the argument that we are nearing the end of retrenchment and that consumption will pick up steadily over the next few quarters.

Both views can be argued from the current facts. So which one is likely to prevail?

Well, unusually, I am going to hedge a little.

I think the signs are good that the recovery is well established and that households are feeling better about the future. This augurs well and is supported by many of the figures we are now seeing. But, the speed of improvement will remain weaker than that necessary to lift us out of the current doldrums without an additional injection of stimulus to provide one last kick across the finishing line. Unfortunately getting such a kick is unlikely – all the talk is still wrongly focused on austerity – and all the major risk factors are negative – the muddle in Europe and our own debt debate being the primary negatives weighing us down.

So, while I think people are primed and ready to go, our leadership isn’t. What leadership we have is off on its own fighting unnecessary battles against enemies like inflation that don’t exist and ignoring those that need vanquishing like the paucity of demand.

The troops are ready. The generals aren’t. Oh well.

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Here We Go A-Wallowing

This is what floundering looks like. Well, perhaps I am being a bit harsh. After all we had a couple of good reports earlier this week, and today’s news on new claims for unemployment assistance is fairly decent. But the final revision of second quarter GDP and the durable goods data confirm that the economy is best described as being a doggie paddle swim rather than a free-stroke. There’s a lot of splashing but not a lot of movement.

The second quarter saw GDP rise a paltry annualized 1.3%. That’s nowhere near good enough to resolve our employment problems and leaves us very vulnerable to the twin impending crises of the Euro’s ongoing unravelling and our own self-inflicted budget impasse. We have precious few degrees of freedom which means that everything needs to go well – which I doubt they will – if we are to avoid even slower growth in upcoming quarters.

Recall that the last estimate for second quarter GDP was 1.7%, so the final tally represents more pessimistic view and confirms what we all felt about the midsummer: we became becalmed. This is especially downbeat because the two major factors contributing to the downward revision are exactly those we are hoping will drive us into a more rapid recovery. Personal consumption growth was revised down from 1.7% to 1.5%; and business investment growth was revised down from 4.2% to 3.6%. Since the other two components of GDP, trade and government spending, are both either relatively flat and/or highly dependent on the impending crises I mentioned earlier, we are dependent on the private sector to fuel the recovery. And the private sector is still wallowing in the aftermath of its bubble induced, debt retrenchment.

This is, of course, not news, but today’s news is a vivid reminder of how much work is yet to be done. No amount of political sharp talk can mask the failure of economic policy over the past decade – or more depending on how meticulous you want to be in tracing back the causes of our problems.

There is no point in re-hashing the discussion: we suffer from a lack of demand, and the longer we fail to address that issue the longer our wallowing will continue.

Today’s durable goods order report was decidedly different from most expectations. August’s 13.2% decline was much steeper than anyone predicted. It is, however, a very distorted number. Durable goods orders are highly volatile because they include some very large items such as aircraft orders and defense spending on capital goods. For instance, aircraft orders fell a whopping 102% in August alone because airlines had bunched their orders up during the Paris Air Show producing a spike up in July of 51%. Stripping out the effects of those two categories leaves us with a very different impression: the other categories actually grew slightly, at an annualized rate of 1.1%,reversing the declines of 5.2% in July and 2.7% in June.

I think it is fair to expect a slight pause in business investment, as illustrated in durable goods orders, while companies assess the likely damage to demand resulting from the upcoming, post-election, negotiations over the Federal budget. Failure to re-work the current arrangement would send us over the proverbial fiscal ‘cliff’ and by most accounts produce an immediate recession. Congressional failure to reach an agreement over the budget is injecting a level of uncertainty that inhibits growth. As you know, my opinion is that we ought to be augmenting not diminishing demand, but that is not the prevalent view in Washington where austerity in some form appears to be the more likely outcome. We are paying a heavy price for the impasse in Washington, and every quarter that goes by without a sensible long term budget in place adds to the pain.

Finally a little good news: today’s report on weekly claims for unemployment assistance was a modest step in the right direction. At 359,000 it was 26,000 down on the prior week and managed to produce a slight 4,000 improvement in its four week moving average. So that’s the good news. Unfortunately that four week average is almost spot on where it has lingered all year, and is woefully above a rate consistent with a rapid recovery in employment. While supporters of Obama will no doubt crow that this is much better than we saw at the depths of crisis – true – and is better than the record of the Bush administration -also true – it is nothing to be proud of. We are generating jobs at about the same rate the population is growing. That is insufficient and speaks to rotten economic policy in the face of a human crisis that everyone in Washington pays lip service to, but substantially ignores.

Of course it would help if economists could agree on what a good policy would be, but that, I fear, is a pipe dream. But, come to think of it, most economic theory is a pipe dream anyway, so why should we expect economists to be of value in fixing an economy?

Of that, another time.

 

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Consumer Confidence Rises Sharply

Let’s not get excited, but this morning’s Conference Board report on consumer confidence is quite surprising. The index jumped from a revised 61.3 in August to 70.3 in September, beating expectations and, perhaps, altering the outlook for growth. This is the highest reading for seven months and suggests that the summer’s downswing is well past.

The detailed figures reveal a sharp and understandable split between what people think of the present and what they are expecting. The current conditions still draw a skeptical response – only half of respondents think much of circumstances – but even within that part of the report attitudes are brightening. In particular the feelings expressed about employment are lifting, albeit very slowly.

Questions about the future elicit a much different and much more optimistic response. Fully 80% of respondents expect the situation to improve over the next few months, especially in the labor market, and they back this rising optimism with expressed intentions to spend. For instance, the number of people saying they will buy a major appliance or a new car both rose during September, continuing a trend that set in around mid-summer. Were these intentions to become actual activity then the added consumption would boost GDP from its current rather tepid levels back towards a more acceptable trajectory with the potential knock-on effect of boosting employment.

Be forewarned though: there is only a weak link between these confidence readings and subsequent spending behavior, so we ought not to  declare the muddle over. The most important ramification of the lifting mood may be more in the political arena than in the economy. Rising optimism augurs well for Obama and his re-election chances. Quite what he will do in his second term is another question altogether. We can discuss that at another time. Meanwhile today’s news suggests that the long slow recovery continues and may be accelerating just a bit.

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The Fed Acts

Well it had to sometime. No one else is doing anything.

Only a few days ago I expressed a certain dismay that Ben Bernanke said a lot of the right things in his Jackson Hole speech, but then had done nothing. He articulated exactly why the Fed ought to act, and act aggressively, and then fell silent. It looks as if he was waiting for one more rotten employment report before he could gird himself for the fight.

And he saw that report last week. With the economy’s abysmal not very good job creation lingering, as evidenced by last week’s paltry increase in payrolls, time had run out. It took a while for the Fed to realize that it has two policy objectives and not one. The first – battling inflation – has so dominated Fed thinking that the second – helping maintain full employment – scarcely gets a look in. Typical of central bankers everywhere the Fed has become a slave to low inflation. Even when that means damaging the employment outlook.

Targeting inflation has its merits. Price stability, after all, has a lot going for it. And there are times when hammering inflation is worth the short term loss of jobs that seems inevitably to accompany the necessary disinflating. Nonetheless the obverse must also be true. There are times when letting inflation creep up is worth the boost to employment. In other words the trade off between employment and inflation is an active and ongoing compromise working in both directions. We seem to have forgotten that. So with our central bankers obsessed by inflation the unemployed were thrown on the mercy of fiscal policy, which as we know is so politically fraught as to be nonexistent much of the time – Obama’s way-too-weak stimulus notwithstanding.

Today that changed somewhat.

The new round of monetary policy – called QE3 – is remarkable in a couple of key respects.

First, it is open ended. The Fed has set no specific timetable for its purchases, saying only that it will monitor trends and keep up its action as long as necessary.

Second, it is going to focus its purchases on mortgage backed securities rather than Treasuries. According to Bernanke this is in order to bolster the real estate market, and to provide support at that end of the risk spectrum.

Oh, one more thing, the Fed also extended its low interest rate target period by a further six months. This means it is not expecting to raise rates until mid-2015. This extension alone is depressing. It implies that the Fed sees high unemployment persisting for a long while yet. Perhaps more intriguing was the comment that the Fed intends to keep low rates even after the recovery gathers steam. So we ought not to experience the usual rough tightening that central bankers love to impose the moment they see growth. This time the Fed is committed to allowing growth to build momentum before reacting. At least that’s the story for now.

So. What does this mean?

I think I am on the cautious side with this. In an economy going through a debt reduction of the scale we are, lowering interest rates is a more blunt tool than under normal circumstances. Plus the lack of demand is the driver of low business investment, not the cost of borrowing. So with households still gun shy over taking on more debt, and with businesses skeptical about the need to expand operations, the stimulative impact of cheaper money is lessened.

Having said that, with fiscal policy contorted and neutralized by our political impasse, the Fed’s action is the best we can hope for in the near term. So we ought to applaud and keep our fingers crossed. One of our two doctors noticed our malaise. Unfortunately the wrong one. Better that than nothing.

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