Reblogged: How're we doing? (A review of 2013)

[Practice Good Theory Blog]

Overview: Slow economy, rocketing stock market! Since the 2007-08 downturn, most measures of the economy have stabilized. Despite this, total-employment is still lower. The broadest GDP measure has been increasing very slowly. Meanwhile, house-prices have turned up for the last two years, and the stock market is at an all-time high.

Corporate profits are high since GDP is growing slowly while firms have kept a reign on costs. In addition, companies have been buying back stock at above-average levels. This is different from the type of excitement that drove the dot.com boom, because it does not cascade into higher salaries and expenditures: quite the opposite. In the short/medium term, this does not bode well for employment numbers and wages.

Here are some of the details:

Employment: Though the unemployment rate has been falling, it is mainly because so many people (particularly younger folk) have given up looking for jobs. For the core age-range 25-54 years, employment % is flat.

(BLS has latest data)










Real GDP: Real GDP picked up after pausing for about a year. It is growing slower than before, with people like Bill Gross of PIMCO saying we're in a "new normal". The graph is from the FRED database. The Y axis uses a log-scale, to make it easier to see growth rates. I have added hand-drawn, rough (by eye) "trend lines". Real GDP has grown steadily after each recession, but the rate has slowed a few times. With that said, the current trend is not long enough to tell; see how it was similarly slow in the late 1970s.

Here is a per capita version:  The flattening is clear.

Retail Sales: Have resumed their pre-recession pace. A flat first half of 2012 now looks like an inconspicuous blip.

Home prices:
The Case-Schiller index has been rising for two years now.

Price-rise: The CPI has stayed relatively low -- under 2% for the last year. Using the TIPS to calculate the market's "expected inflation" shows it is under 2% going out 10 years, reaching 2% only 30 years from now!

Summary: There is no enthusiasm about the economy. The Christmas season might improve on last year, but it is unlikely to be great. Consequently, companies are unlikely to raise hiring or wages much more than they've been doing. Government entities aren't likely to go gang-busters either. At the Federal level, even without another debt-limit stand-off, we will probably not see a new fiscal splurge. So, "new normal" seems appropriate.

Even though the stock-market is booming, it is without excitement: more like "there's no other game in town, while the FED keeps rates low; and, profits are high through cost-control". The divergence cannot go on forever, but it can resolve itself in various ways. Much of the market-sentiment is driven by what John Hussman calls "superstition" about the Fed's ability to keep this playing out for a many more years.

I still think a new downturn is very likely before Obama's term ends. Let's see.

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[Ben Archer]

Even though the stock-market is booming, it is without excitement: more like "there's no other game in town, while the FED keeps rates low; and, profits are high through cost-control". The divergence cannot go on forever, but it can resolve itself in various ways. Much of the market-sentiment is driven by what John Hussman calls "superstition" about the Fed's ability to keep this playing out for a many more years.

 

I'd like an example of how it's going to "resolve itself in various ways."   I mostly agree with the summary, but I think that there was growth was very odd, since by all accounts we should've had a correction/recession. 

 

The economy's growth, particularly last quarter was very unusual if you consider how much of the budget deficit we pain off. Reductions that sharp almost always will cause a real drag on the economy because of fiscal austerity headwinds. Not to mention taxes went up. So the 1.6% growth last quarter was very significant. Also...the fact that they reduced spending for two years in a row, which hasn't happened since 1955. They're predicting the deficit will be reduced even further to $500 billion next year.  This just shows you the power of Quantitative Easing. 

 

I see this as a bad thing...as talks of tapering will likely come up, given the liquidity the US government has now. I doubt the fed will taper, but even considering it will affect interest rates (which have already risen a full point on the yield on their own). Despite what PIMCO would have you believe, the Fed can not keep interest rates down. 

 

I also find the unemployment numbers extremely misleading. Bette to look at it this way: 63.2% of Americans have left the labor force.  It's the lowest since 1978. A lot of these people are on entitlements or on disability, they're getting their food stamps.

Edited December 5, 2013 by Ben Archer

[softwareNerd]

This post has a good graphic on the major components in GDP-growth. The most consistent driver of nominal GDP growth is "personal consumption". This dropped for a little over a year. However, at some point, once major job losses and foreclosures are done, those who remain standing and who are still employed, continued to raised their spending every so slightly.

 

It's important to understand that a lowered level  of government spending causes GDP to drop while it is being lowered, but not after it has been lowered. Suppose the budget says: spend 100 this year and increase it by 4% each year. Now, if that is cut to come down to 96, and then to grow 2% a year, GDP growth data will be impacted negatively during the transition from 100 to 96, and then it starts to add to the data once again. Also, spending did not come down all that much. Increased revenues -- probably as a result of good profits, capital gains and higher tax-rates -- have been more responsible for narrowing the deficit.

Edited December 5, 2013 by softwareNerd