Tag Archives: fiscal policy

The US economy is slowing. Things might get exciting if this continues.

Summary: In an this time of almost unprecedented economic intervention by governments — experiments on a scale never before attempted during peacetime — determining the state of the economy is difficult. Determining the near future of the economic is almost impossible. Determining the distant future requires psychic powers. Today we continue our series of looking at the data and guessing about the future.

“It’s hard to make predictions, especially about the future.”
— Aphorism, origin unknown

Economics

Contents

  1. Accurate economic forecasting is difficult.
  2. The recovery takes a nap
  3. What happens if the US slides into a recession?
  4. Look at the big four indicators
  5. What is a recession?
  6. Other posts in this series
  7. For More Information

(1) Accurate economic forecasting is difficult

“The worst is behind us. … And what did the worst do to us? Slowed growth to 0.5% in one quarter. Boo frickin hoo.”
— M Simon of the Classical Values website, mocking my warnings about the economy. Said on 27 August 2008, just as the economy was about to go off a cliff

The US economy is large, complex, and rapidly changing. Economic theory is immature. Our economic data collection agencies are grossly underfunded. The combination makes accurate forecasts almost impossible, especially detecting inflection points. Even economists find it difficult, proven by the record shown by surveys of economists. The best known are the Blue Chip Financial Forecasts and the Wall Street Journal’s Economic Forecasting Survey (available to non-subscribers here). Neither has ever forecast a recession.

(2) The recovery takes a nap

The US economy has been growing at 2% – 2.5% since 2010, with slow periods met by government action (fiscal or monetary stimulus). The last two quarters were slow growth: real GDP grew 0.4% in Q4 and 1.8% in Q1. Q2 looks to be another slow quarter. The consensus was +2% before the June data started to come in; now estimates are dropping fast (updated July 19):

We use the finest forecasting tools

  • Credit Suisse: +1.1%
  • JP Morgan: +1.0%
  • Bank of America -Merrill: 0.9%
  • Goldman: +0.8%
  • Macroeconomic Advisers: 0.6%
  • Barclays and Royal Bank Scotland: +0.5%
  • Morgan Stanley: 0.3%

We are in trouble if the theory about a “stall speed” is correct — that slowing below roughly 2% increases the odds of a recession. On the other hand, forecasts for second half and 2014 GDP are not being cut, so the gap between first half and second half GDP is widening fast — reflecting confidence about the transient effects of higher taxes, the sequester, higher oil prices, and higher interest rates. Also confidence that consumer spending and business investment will accelerate in the second half of 2013. And, above all, confidence about the wealth effects supposedly created by QE3 (more on this on another day).

In May there were many forecasts for 4% GDP growth in 2015. Now the consensus forecast is 3.0%. Hopes for a boom have dimmed, or been pushed into the future.

(3) What happens if the US slides into a recession?

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The June jobs report: continued slow growth, bought at a high cost

Summary: The news media focuses on the month-to-month changes in the jobs report, which consist mostly of noise. Strong months confirm the optimists; weak months confirm the pessimists. In fact the trend of growth remains the real story, with the US economy near stall speed — supported only (like the other developed nations) by massive multi-year fiscal and monetary stimulus. Slow growth from programs we cannot long continue. Worst we have squandered much of the money borrowed, which could be rebuilding America. Just as Japan has done since 1989.

Economy

Contents

  1. The big picture
  2. About the recovery
  3. Household survey
  4. Establishment survey
  5. Unemployment
  6. Other important metrics
  7. Other posts in this series
  8. For more information about US economy

(1) The big picture

Here we examine the June employment report from the Bureau of Labor Statistics. They conduct two surveys: one of households, one of businesses. They are not directly comparable, each giving different perspectives on the US economy. This report paints a picture consistent with the many other streams of information about the economy: slow growth, slightly above the average of the past 12 months.

How well has the recovery run? There is no “best” metric. The most commonly used by economists is the ratio of civilian employment to the population. It paints a grim picture. The red line shows the trend from the pre-crash high, adjusted for demographics (boomers retiring).

June Jobs

(2) About the recovery

To understand the jobs report one must first put it in a larger context: during this period the government’s public debt increased $901 billion — 5.7% of GDP (see debt here and GDP here), one of the higher fiscal deficits in the world. Our shiny recovery results from massive borrowing and spending — plus large and unconventional monetary policy. Organic growth has not yet resumed.

The US economy slowly improves only due to the massive “drugs” of monetary and fiscal stimulus (the former boosted with QE3 as the latter winds down). Drugs administered by experts are good; the US slow growth is better than Europe’s suffering under austerity. But fiscal and monetary policy, like powerful drugs, have severe side-effects which at some unknown point in the future will become problematic or even untenable. And the withdrawal has begun: the sequester, still taking effect, and the future “tapiring” of Fed stimulus.

The worst side effects were unexpected:

  • Years of deficit spending left little improvement in our infrastructure. Like Japan, we spent trillions with little to show for it.
  • Years of extreme monetary stimulus have distorted the economy, in ways perhaps difficult to unwind.
  • The stimulus eliminated pressure for reform. We have had the New Deal stimulus without the New Deal reforms (some of which failed, but the others laid the foundation for the great post-war boom).

(3) The Household survey

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The April jobs report shows continued slow growth, bought at great cost

Summary:  The news media focuses on the month-to-month changes in the jobs report, which consist mostly of noise. Strong months confirm the optimists; weak months confirm the pessimists. In fact the trend of growth remains the real story, with the US economy near stall speed — supported only (like the other developed nations) by massive multi-year fiscal and monetary stimulus. Slow growth bought at great cost. A cost we cannot long continue to pay, borrowing and squandering the money ($ which instead could be rebuilding America). Just like Japan since 1989.

Contents

  1. Conclusions
  2. About the recovery
  3. Household survey
  4. Establishment survey
  5. Unemployment
  6. Other important metrics
  7. Other posts in this series
  8. For more information about US economy

(1)  Conclusions

Here we examine the April employment report from the Bureau of Labor Statistics.  They conduct two surveys: one of households, one of businesses.  They are not directly comparable, each giving different perspectives on the US economy.  This report paints a picture consistent with the many other streams of information about the economy: slow growth. Slowing slow growth, as shown by this from ECRI — through March. The April numbers (1.6%, 1.2%) are small ticks up in these lines.

From ECRI, 5 April 2013

From ECRI, 5 April 2013

(2)  About the recovery

To understand the jobs report one must first understand the recovery of which it is one aspect:  during this period the government’s public debt increased $1.03 trillion — 6.5% of GDP (see debt here and GDP here), one of the higher fiscal deficits in the world.  Our shiny recovery results from massive borrowing and spending — plus increasingly unconventional monetary policy.

In other words, organic growth has not yet resumed.  The US economy has stabilized and slowly improves only due to the massive “drugs”  of monetary and fiscal stimulus (the former boosted with QE3 as the latter winds down).  Both have severe side-effects, which at some unknown point in the future will become problematic or untenable.  But the worst side effect was unexpected:  the stimulus eliminated pressure for reform.  We have had the New Deal stimulus without the New Deal reforms (some of which failed, but the others laid the foundation for the great post-war boom).

(3)  The Household survey

The Current Population survey is a simple survey of households, with large error bars but no revisions.  It’s worth watching because it’s the basis for the headline unemployment rate, it gives some useful data not in the more-accurate business (establishment) survey, and because some research suggests that the household report shows inflection points before the establishment survey.

Here are the numbers, in thousands, not seasonally adjusted.  Note that 1/3 of the new jobs during the past year are part-time jobs. {That’s from the March report; appears here in error}

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The March jobs report shows continued slow growth, bought at great cost

Summary:  The news media focuses on the month-to-month changes in the jobs report, which consist mostly of noise. Strong months confirm the optimists; weak months confirm the pessimists. The trend of growth remains the real story, with the US economy near stall speed — supported only (like the other developed nations) by massive multi-year fiscal and monetary stimulus. Slow growth bought at great cost. A cost we cannot long continue to pay, borrowing and squandering the money ($ which instead could be rebuilding America). Just like Japan since 1989.

Contents

  1. Conclusions
  2. About the recovery
  3. Household survey
  4. Establishment survey
  5. Unemployment
  6. Other important metrics
  7. For more information about US economy

(1)  Conclusions

Here we examine the March employment report from the Bureau of Labor Statistics.  They conduct two surveys: one of households, one of businesses.  They are not directly comparable, each giving different perspectives on the US economy.  This report paints a picture consistent with the many other streams of information about the economy: slow growth. Slowing slow growth, as shown by this from ECRI:

From ECRI, 5 April 2013

From ECRI, 5 April 2013

(2)  About the recovery

To understand the jobs report one must first understand the recovery of which it is one aspect:  during this period the government’s public debt increased $1.1 trillion — 6.8% of GDP (see debt here and GDP here), one of the higher fiscal deficits in the world.  Our shiny recovery results from massive borrowing and spending.

In other words, organic growth has not yet resumed.  The US economy has stabilized and slowly improves only due to the massive “drugs”  of monetary and fiscal stimulus (the former boosted with QE3 as the latter winds down).  Both have severe side-effects, which at some unknown point in the future will become problematic or untenable.  But the worst side effect was unexpected:  the stimulus eliminated pressure for reform.  We have had the New Deal stimulus without the New Deal reforms (some of which failed, but the others laid the foundation for the great post-war boom).

(3)  The Household survey

The Current Population survey is a simple survey of households, with large error bars but no revisions.  It’s worth watching because it’s the basis for the headline unemployment rate, it gives some useful data not in the more-accurate business (establishment) survey, and because some research suggests that the household report shows inflection points before the establishment survey.

Here are the numbers, in thousands, not seasonally adjusted. Note that 1/3 of the new jobs during the past year are part-time jobs.

Continue reading

Portraits of a nation in decline. An unnecessary and easily fixed decline.

Summary:  Many important stories can be told simply, sometimes even in pictures. So it is with one aspect of America’s decline. Our decisions and the results are easily shown in this post. Fortunately we hold elections every two years, should we wish to organize and change the direction of America’s public policy — and put America back on the path to prosperity.

It need not be like this.

We need not be like this.

Contents

  1. A portrait of a nation in decline
  2. Another portrait of a nation in decline, showing the cause
  3. Here we see madness
  4. Portrait of a well-managed rival
  5. Leave a comment!
  6. For More Information

(1)  A portrait of a nation in decline

Here we see a sinkhole in bankrupt Harrisburg PA (story here), one of the worst among the many America cities unable to pay for maintenance of their infrastructure.  Since many cities underfund their infrastructure, this will become an increasingly common story during the next decade.

By Donald Gilliland, The Patriot-News

By Donald Gilliland, The Patriot-News

(2)  Another portrait of a great nation in decline

This graph shows non-defense public investment by local, state, and Federal government as a percent of GDP. This underfunding is what allowed America’s once fine infrastructure to decay into the shabby decay that one sees today across much of America.

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Another way to look at the national debt. More comforting, less scary.

Summary:   Today we have one example from the flow of comforting words about the government’s deficits. While pleasant reading, written by a knowledgeable expert, it does not withstand close scrutiny.

Government expert at work!

Government expert at work, keeping us warm.

One of the great oddities of history is why nations adopt policies that were so obviously doomed to failure, or even disaster. It’s a long list, from 17th C economist John Law’s managing the debt of France with the Mississippi Company (latter known as the Mississippi Bubble), to Japan declaring war on almost everybody.  For good reason Barbara Tuchman named her greatest history book The March of Folly.

There are two constant elements of these stories.  First, warnings from experts. Second, assurances that these obviously crazy policies this time would end well.

So it is with the US government debt. We have all heard the warnings. As the debt grows, so do the volume of those saying not to worry. The economists of the Keynesian mainstream provide one form of comfort (fix the deficit later).  The economists of the Modern Monetary Theory school provide another form (debts don’t matter, until they cause inflation or a currency collapse).  A third group provides a vague form of comfort. An example of this is “Another way to look at the national debt” by Zachary Karabell (President of River Twice Research), special to the Washington Post, 8 February 2013 — Opening:

Welcome to the next chapter of the endless debt debate. The release of a Congressional Budget Office report on the next 10 years of the U.S. economy ends a brief lull in Washington. As we return once again to our regularly scheduled program of “Crisis and Impasse,” let’s take a moment to consider the following heretical idea: We have no debt problem.

We have spent years demonizing debt, and now have an entire political movement dedicated to the proposition that government debt will destroy America as we know it unless something is done now!

Stand by for a debunking of fears about the debt! I feel better already. The next line starts the analysis:

Yet debt is simply a new form of currency that is issued, bought, priced and sold like any other currency …

This is false. First, government debt (eg, 30 year Treasury bonds) are not currency in any meaningful sense. They vary in price (currency is the standard of measurement for asset prices, like bonds).  More important, although the government can convert debt into currency by printing money (ie, monetization) the process is not automatic.  It is a political decision to inflate away the value of the nation’s loans.

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What about the past and future effects of the economic stimulus?

Summary:  Yesterday we examined the condition of the US economy. Today we look at a major driver of our prosperity, and what might be its long-term effects.

Stand by for a boom!

Stand by for a boom!

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Contents

  1. How we got here
  2. What do we have to show from 5 years of massive stimulus?
  3. Why continue the stimulus?
  4. Putting the stimulus in perspective
  5. For More Information
  6. Another perspective

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(1)  How we got here

In December 2007 the US economy fell into recession. In February 2008 President Bush signed the Economic Stimulus Act of 2008, with an estimated cost of $12 billion in 2008.  Many such bills followed in the five years since then. The Fed pitched in, taking the Federal Funds rate from a peak of 5.25% in June 2006 to effectively zero in December 2008 (the ZIRP, Zero Interest Rate Policy) — where it remains today.

Plus there have been a wide range of other measures, conventional and unconventional, by various government agencies (eg, Treasury, FHA, SEC, Federal Reserve).

(2)  What do we have to show from five years of massive stimulus?

(a)  Since 2007 America has had one of the strongest economies in the developed world. This includes record high corporate profits, a slow steady rise in jobs, and rising incomes for the 1%.  But it has not come for free; it cost $6.4 trillion in new Federal public debt since the recession started in December 2007. That’s a 225% 125% increase in the debt (a double in size), $1.2 trillion per year.

(b)  The many powerful Fed actions, with few parallels in modern history for their magnitude and duration, have had a felicitous effect on profits of the Fed’s primary clients:  the banks.  Mission accomplished!

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