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The Daily Capitalist: State of the Economy, Part I
[Noozhawk’s note: This is the first in a three-part series by Jeff Harding on the state of the economy as we enter 2010. Click here to read Part II. Click here to read Part III.]
I have been poring over current economic data, year-end reports from various sources, and current or proposed legislation. It leads me to conclude that my views of the economy’s future have not substantially changed.
I think it still comes down to the real estate market, deleveraging, organic business cycle recovery, changed consumption patterns, and taxation and regulation. Layer on top of that the Fed’s options. It still is not pretty.
The basic question you have to ask is: What will drive the economy forward?
Right now, the answer is capital. And I’m not talking about money the government spends to stimulate the economy.
I am referring to private capital supplied by merchant banks from new savings or accumulated capital. I am talking about investment capital from savings directed into various conduits such as hedge and venture capital funds, various private lending sources such as factors and leasing companies, investment banks, pension funds, insurance companies, the securities market.
If consumer spending is the bedrock of our economy, then consumer spending without the juice that makes capitalism flow equals slow or no growth.
As we all know, the juice has dried up. And the reason for it is that there is still a substantial amount of debt on the books of financial institutions and individuals that needs to be liquidated or paid off. Deleveraging. Until that happens, the economy will stagnate. At this point, there is not much more the government can do; its attempts to “cure” the problem are making things worse.
There is another overriding factor to consider: This is the biggest financial crisis the world has ever experienced. The bubble reached unprecedented highs in a vast portion of the planet, and debt levels have never been as great on a worldwide basis. It is a mistake to think this is just another recession, as most economists do. While the impacts of such financial crises have been similar throughout history, one must fully appreciate the scope of this one.
Fundamental Considerations
Last year I wrote “Economic Megatrends That Will Drive Our Future.” These “megatrends,” as I called them, represent fundamental changes to the economy:
» Megatrend No. 1. The culture of consumption is broken and won’t return to former levels.
» Megatrend No. 2. Consumers will continue to increase savings to prepare for retirement.
» Megatrend No. 3. Declining U.S. consumer demand will continue to negatively impact the world economy.
» Megatrend No. 4. Deflation will continue for some time.
» Megatrend No. 5. Homeownership rates will decline to more historical levels of, say, around 66 percent, down from the high of 69 percent during the boom, which will keep a lid on home prices.
» Megatrend No. 6. Government stimulus and recovery programs only delay recovery and deepen the pain for workers.
» Megatrend No. 7. Massive federal deficits will double the national debt, result in higher taxes and act as a permanent drag on the economy.
These conditions will continue to hold back GDP growth for some time. Many economists predict that things will go back to “normal,” though perhaps slightly less robust as before. They are wrong.
What we can conclude from these megatrends:
» Consumer spending will be subdued, especially among the biggest spenders: the boomers.
» Households will reduce debt and increase savings.
» Housing demand will decline.
» As the government becomes a larger factor in the economy as a percentage of GDP, economic growth will decline.
» Higher taxes will be needed to pay for increasing deficits, which also will subdue economic growth.
These are facts, not guesses.
The Consumer
Personal Consumer Expenditures (PCE) have accounted for about 70 percent of the economy. PCE does include Medicare expenditures for individuals, so it’s a bit skewed.
The chart shows a rebound in consumer spending as a result of fiscal stimulus, mainly from Cash for Clunkers (See the durable goods section of GDP), and from holiday discount sales.
Consumer spending increased in November for the sixth time in seven months. Retailers increased sales 3.3 percent in January. The biggest rise was in apparel retailers.
Then there is the reduction of household debt. Note in the chart how debt exploded after 2000. Rising home prices were the asset base for the debt. The boom was credit financed: Consumers borrowed rather than saved.
And now the personal savings rate is growing rather dramatically.
As you can see from the chart, consumers are reducing debt and increasing savings (4.8 percent per latest numbers). Note that savings decreased a bit at year-end. That is where the cash for the blip in consumption came from. Also note that saving is resuming its climb (4.8 percent).
Consumer credit has tanked. In November, the latest numbers, consumer credit fell $17.5 billion. “The series of 10 straight declines was the longest since record-keeping began in 1943. … Consumer credit outstanding decreased at a seasonally adjusted annual rate of 8.5 percent to $2.465 trillion … .”
Banks are reluctant to lend, credit card debt has declined and consumers — worried about the economy, debt and retirement — are saving.
Unemployment
Unemployment hasn’t improved much, and as the recent employment numbers reveal, while the rate of unemployment is slowing down, the actual numbers of unemployment remain high, at 9.7 percent, although down from 10 percent.
Currently, U-6 unemployment is still very high: 16.5 percent, but down from 17.3 percent in the prior month. U-6 is “total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force, plus all marginally attached workers.” This includes about 2.5 million workers who aren’t even looking for jobs anymore.
Wages and income are at all-time lows:
“Wage and benefit costs, both before and after adjusting for inflation, grew more slowly in 2009 than in any year since the U.S. government began tracking data in 1982, as double-digit unemployment weakened workers’ ability to command higher pay,” according to the Labor Department.
“Adjusted for inflation, wages and benefits fell 1.3 percent, after rising 2.8 percent in 2008, the first year of the recession. The inflation-adjusted cost of wages and benefits at the end of 2009 stood just 1.1 percent higher than at the end of the previous recession in 2001.”
In his Jan. 29 report, David Rosenberg noted, “In Q4, aggregate private hours worked contracted at a 0.5 percent rate. Never happened in last 50 years with GDP growth at 5.7 percent.
He questions the robustness of GDP. The other side of this is that productivity output per worker increased on a ”seasonally adjusted annual rate of 6.2 percent in the October-to-December period.” This says that employers have streamlined production and operations, are lean and mean, and are reluctant to hire until they are sure demand has really improved.
Without rising incomes, you can’t have increased savings and reduction of debt and increased consumption. Savings defers consumption. Incomes are flat, as shown above.
Fiscal Stimulus
Christina Romer told us when unemployment was 8 percent that we needed fiscal stimulus to stop unemployment from going to 9 percent. At 10 percent, we are told we need even more stimulus. The administration is trying to claim that fiscal stimulus has been a big success. But it has spent only $58 billion of $200 billion in federal contracts, grants and loans awarded out of a total of $275 billion allotted for such expenditures — not, as Paul Krugman keeps reminding us, sufficient (according to Keynesian theory) to revive a $14 trillion economy.
It is true that fiscal stimulus has an impact on GDP, so it is unfair to say such stimulus cannot create any economic activity. The problem is that it doesn’t create wealth, which is the foundation for true “organic” economic growth.
Stimulus is really just a transfer payment: taking money from one person and giving it to someone else to spend on something the government wants. There is absolutely no evidence that Keynesian stimulus is working now or has ever worked where employed. And, no one ever asks the person whose money funded such stimulus what he/she was going to do with the money — how much private economic activity was lost as a result?
Regardless, despite calls for more stimulus, there appears to be little political will for it. It is no coincidence that we are hearing talk of “fiscal responsibility” and “worrisome debt” from the Obama administration. President Barack Obama realizes that runaway spending and rising deficits jeopardize his ambition for expensive social programs such as “free” health care and “free” college education.
The administration has given up on stimulus and is focusing on a jobs bill it hopes will reduce unemployment before the next election.
Thank you, voters of Massachusetts.
— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.
» wrote on 02.12.10 @ 08:03 PM
America’s young people helped elect Barack Obama. Way to go kids! This article is for you. Let’s take a look at your future.
We won’t need a time machine. We will just need to visit Europe and talk to the youth of France, Italy, and Greece. Don’t worry. They won’t mind. They have plenty of time to talk. THEY DON’T HAVE JOBS.
Young people in Western Europe tend to sit around, smoke Marlboro cigarettes, drink espresso (and Coca Cola), and (at least until this election) bitch about America.
They have been taught, since their first day in school, that capitalism is evil—that the government can, and should, provide health care, employment, and eventually, guaranteed retirement benefits for everyone.
MY QUESTION: HOW’S THAT WOKIN’ OUT FOR US NOW????
FROM: Waltzing on the Titanic
November 15, 2008
By Larrey Anderson
http://www.americanthinker.com/2008/11/waltzing_on_the_titanic_1.html
» wrote on 02.12.10 @ 10:17 PM
Break the government unions and trial lawyer pay offs to our leaders who are puppets of the union..cut staff and wages 40%..
» wrote on 02.12.10 @ 11:32 PM
The Sept. 11, 2010 issue of the New Yorker has a interview with the apparently former member of the Chicago School, Richard Posner. Posner is quoted as saying Keynes “The General Theory of Employment, Interest, and Money” is a “masterpiece” and “the best guide we have to the crisis.” Judge Posner is also quoted, “The movement to deregulate the financial industry went too far by exaggerating the resilience-the self-healing powers-of laissez-faire capitalism”
He has more to say about the failings of economists. All this from a former Law Professor at the University of Chicago, a well regarded economics writer and a Reagan appointed federal judge.
And now back to the Keynes bashing.
» wrote on 02.13.10 @ 12:24 AM
Banking/Corporations (and maybe not from your American neighborhood) are running the systems, so just hold on to your bootstraps and maybe you can become one of the CEO’s. Yea, fat chance. Stop the corporate lobbyists and maybe we could have a chance at living a life together free of false achievement.
Government is not going away unless you do not mind a nuke or out of control AI/nano/bio-technology in everyone’s backyard. Yes, we are all in one boat and if you throw someone overboard, you might be next.
Put your libertarian idealism next to others socialist ideals and get to work creating a moderate way to live.
» wrote on 02.13.10 @ 08:33 AM
sbnative, the real youth unemployment rate in the U.S. is higher than France,Germany and most european countries.
Yes the youth in America voted for Obama and thank goodness. Once again, Jeff and you seem to ignore the fact that much of where we stand today economically is due to the destruction by the Bush administration. Do you really believe that in one year you can turn an economy around that was near another Great Republican Depression?
Americans as a whole have lived above their means while seeing their wages flat for the past decade. This is due to a combination of bad policies and mass media advertizing that creates precieved material needs.
I believe the way out of this mess is to first fix the polical system where the lobbyists and corporations do not run policy. If we can get people elected that actually want to do the right thing that would be a big start. The recent ruling by the Supreme Court allowing corporations and unions an unlimited ability to advertize for or against a candidate takes America in the wrong direction.
We need to invest in things that will make America competitive in the world while having some backbone in trade policies and when dealing with international corporations. We should invest in education, infrastructure, science, biotech and technology while downsizing our military spending back to rational levels. Right now, 52% of all government spending is on our military, a record. We also need to severly downsize some of the very oversized government departments.
Through our policies, including taxes, we need to promote manufactoring, patents and ideas in our country.
You cannot have a society where the vast majority are struggling just to pay their bills. Sadly, corporations like Goldman Sachs robbed the tax payers. Many believe they paid us back but they seem to forget about the credit default swaps made whole to the tune of $10 billion, the warrants they were allowed to buy back at below market levels and the fasttrack conversion to a commericial bank that gave them access to free money.
The Goldman Sach’s lesson demonstrates the leverage they and other corporations have and how it needs to change.
» wrote on 02.13.10 @ 10:40 AM
Kudos to SB native, He is saying it like it is.
Our generation has created this financial mess, now we have to rebuke FEAR, take courage, work smart and hard, and focus on getting ourselves out of this fiasco. It is going to be tough, take some sacrifice and time, but with God’s help we can all work our way back to health and prosperity….. and we can’t depend on government to solve the problems.
» wrote on 02.13.10 @ 11:23 AM
The fundamentals, always overlooked by idealists, are the foundation on which you build a system. Economic growth occurs when you add to a system, regardless of whether it is capitalist or socialist. Keynesian economics does not account for or promote growth. It only argues for movement, which is why socialists love it. You just move stuff around and hopefully, if you are an elite, you move more to yourself. Capitalism isn’t any different. The difference between the two systems is who controls the movement, you or the government, capitalism or socialism. Now if you add more people you usually have more economic growth. If you extract more resources, make more stuff or farm more goods the same result can happen. So the basic question is this, do we want to grow our economy or just move what we have around? In the first case there is the potential for all of us to benefit, in the second there are winners and losers. Once you figure out in your own mind what scenario you want, then we can figure out which economic system does the best job of delivering it (if you want a hint, look at the former Soviet Union, Cuba, the US and modern China).
» wrote on 02.13.10 @ 01:05 PM
“No evidence that Keynesian stimulus is working or ever has.”
WRONG! We had a total government stimulated economy in WWII and by War’s end the American economy was producing more than 75 percent of the world’s industrial output. The matrix of economic factors is never just one: and unique circumstances attend each situation, but we emerged from the Keynesian economy of WWII the economic powerhouse of the planet. It is not whether stimulus can work, because it can, but it is how it is used. So far, it is being used ineptly by the Obama administration, in part because some of the people making the decisions are not really Keynesian, more Greenspanian types who are licking their wounds at the moment. Lack of government regulation of the financial industry is a big reason we are where we are today (not the only reason) and the Greenspanians just can’t face that fact. With the Greenspanians in power: Get ready for the next bubble, folks. It will come, and likely be a body blow that will hit an economy that has not recovered from the current bubble.
» wrote on 02.13.10 @ 03:54 PM
Not clear what background in macro-economics analysis or forecasting Mr. Harding
has. But looks like the start of a fascinating three-parter, and am eager to learn more.
Was heartened that Harding and Dan Petry recently flew to Washington, on their own
dimes, to testify before the Senate Finance Committee, about the roles of Greenspan, Bernanke, Geithner in the current economic meltdown.
Did not expect to hear Harding and Petry offer to work closely with lame duck chair
Chris Dodd to expedite legislation to plug the holes in financial and reporting rules
that contributed to the mess.
Did not expect to hear them publicly acknowledge that their prior support for mostly de-regulated markets and financial oversight during the Clinton-Bush years
might have inadvertently contributed to the greed, ethical, legal lapses that helped
facilitate the current recession.
Because Fox, CNBC, CNN and the on-line Wall St. Journal are so constrained by
revenue shortfalls themselves, the Harding/Petry testimony in those areas haven’t
yet been publicly shared.
So imagine that Parts 2 and 3 of Mr. Harding’s essay series will push the clock back
10-15 years, and in retrospect, explain what his team got “right” and what they did
not.
Can hardly wait.
» wrote on 02.14.10 @ 12:21 AM
Its our country not the unions & lawyers—who cares what they say or threaten
» wrote on 02.14.10 @ 12:16 PM
Earl, thanks for the note on Keynesian economics. Yes it is damned important what you spend the money on. After WWII we spent an incredible amount of money on bolstering MANUFACTURING. All the that effort went to waste when ideologs high jacking environmental concern as a front op for ushering in socialism, did much damage to our manufacturing infrastructure and business sector through crippling regulation. We still could have cleaned up industry and been a world leader in clean manufacturing even in heavy industry if we had chosen to use better trading laws to protect rather than chase away our own industry. But what you missed Earl is that spending money on one segment of the economy means money has to come out of others. This is the false logic of Keynesian economics, that movement stimulates. No it doesn’t, not in the macro sense, it only robs Peter to pay Paul. Now if you do that but invest in a “growth” segment like durable goods manufacturing, resource exploration like coal, oil, feedstock supply, etc… then you may get a bounce in overall economic growth. The trick is not allowing your insane borrowing to ruin the global economy so badly that nothing will work, sort of like we are doing now.
» wrote on 02.16.10 @ 11:08 AM
As a former “consumer spender”, I can attest to the accuracy of Mr. Hardings essay. My wife and I were “schooled” on optimism as a way of life. We would take on life as a daily creation and we would develop our business creating opportunity for ourselves by creating real estate investment wealth for our customers.
Creating and spending income in the low to mid six figures was the norm.
Not so anymore. And that isn’t because the real estate market is still moving only spottily.
We guard every dollar. Pay off debt on a weekly basis. We look to build liquid savings and pass on all spending apart from groceries and utilities.
If we have (and we have) taken a quarter of a million dollars “out of the market” annually and, if we are not the only ones…we are in the midst of a foundational change in American economics.
Continued capitalism, yes.
Unchecked consumer spending, no.
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