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Economy Bottomed Out? No End in Sight
Many economic analysts have seized on several recent economic reports to claim that the economy has bottomed out and that the upturn is in sight. This analysis badly misreads the data.
The first number to spur the optimism was the big 22.2% jump in new housing starts from January to February. That is impressive, except that the February number was only 4.5% above the December number. Looking more closely, we see that new housing permits were up by 3% in February, exactly offsetting the decline in January.
In other words, houses that were not started in January due to the weather were instead started in February. The January downturn was due to the weather and the February uptick was therefore an artifact of weather. Weather also explains the upturn in February housing sales data.
Analysts also touted the relatively good chain stores sales data for March. While sales were not great compared with year ago levels, they were quick to point out that they could have been worse.
The factor that many analysts seemed to miss was that many stores have gone out of business over the last year, while very few new stores have opened. This means that the same absolute level of retail sales for the economy as a whole should mean a big jump in business for the chains.
The other item exciting the optimists was Wells Fargo report that it earned $3bn in profits in the first quarter of 2009. This was enough to cause Time magazine to pronounce the end of the banking crisis.
The problem with reported bank profits is that banks have enormous discretion over when they choose to recognise losses. Their discretion is even larger now that the Financial Accounting Standards Board has suspended mark-to-market accounting. This means that Wells Fargo and other banks have the ability to manipulate their financial reporting so that they can show profits whenever it is convenient. The losses will appear later.
The other item exciting the optimists was the run-up in the stock market from its earlier lows. This one is best left for children. Tea leaves would provide a better measure of the economy's prospects than the gyrations of the stock market. Remember these are the same people that pushed the Nasdaq share index over the 5,000 mark back in 2000. Most investors never saw the housing bubble or the problems that sank Bear Stearns, Lehman Brothers or AIG. If they have any understanding of the economy now that it would be a remarkable new development.
A more serious analysis would note that the economy is shedding close to 700,000 jobs a month, a pace that will almost certainly continue through April. An economy that is about to turn around does not lose 700,000 jobs a month.
The optimists point out that employment is a lagging indicator; the economy will begin growing before the economy starts creating jobs and the unemployment rate begins to fall. This might be true when the economy is losing 100,000 jobs a month. It doesn't make sense when the economy is losing 700,000 jobs a month.
Before the economy turns around the rate of job loss must slow. At this point, there is no evidence this is happening, although the economy clearly cannot lose 700,000 jobs a month for long.
The other reason this pace of job loss in noteworthy is that it corresponds to a substantial loss in demand. In addition to the job loss reported in April, employers also shortened the working week for those who did not lose their jobs. The US Labor department reported that aggregate hours worked fell by 1% in March. If the wage bill is falling at the rate of 1% a month, then workers are going to be reducing their consumption. This is not the basis for an economic turnaround.
The economy cannot and will not keep falling forever. But it takes real sources of demand to drive the economy forward. In past downturns, a burst of consumption, especially on cars and housing, was the factor driving the economy forward. With the huge baby boom cohorts having just lost most of their wealth in the housing crash and stock market plunge, a new burst of consumption seems unlikely. These households desperately need to rebuild their savings in the few years they have left until retirement.
In the short-term, the government will be the main source of demand growth. In the longer term, we will need to get our imports and exports closer to balance, which can only be done by a sharp fall in the dollar's exchange rate. If the optimists understood economics, they would know that they have little optimism about at this point.
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20 Comments so far
Show AllFrom 2002 through 2008 the media kept reminding us that we were in a "jobless recovery" from the 2001-2002 recession. This is a characteristic unique to the current "recession".
Nobody is applying that fact when they analyze the data. Many laid off workers never got a real job during the Dubya era, instead they got by with part-time or no job because they could keep refinancing their real estate to make ends meet. Many others became pseudo real estate agents, mortgage brokers and construction workers to supplement the supply of REAL real estate agents, REAL mortgage brokers and REAL construction workers. Many of these people fall between the cracks when unemployment numbers are calculated. The unemployment numbers are therefore much higher than the statistics let on.
Even if the banks were scrupulouly honest in reporting their financial status, the results would be questionable. The assets and liabilities of banks is completely screwy. Their assets are the monies they have out on loan - what they don't have, the liabilities are what is on deposit with them.
Since it's only money (and electronic money at that) there is great leeway in the way they can run the numbers and report their status.
During the Reaganeighties I worked in the corporate headquarters of one of those large banks, in a position where I got a good peek-behind-the-curtain look at senior management. I came away with the conclusion that large financial insitutions are criminal conspiracies and they only reason they don't run afoul of the law is they bribe the politicians and keep the lawbooks cooked in their favor. For a quarter century people have been scoffing at this opinion of mine, but now we're seeing that I wasn't deluded after all. The banks scammed billions from us and asked for more and more in bailout money with nothing much being asked of them -- I'd like to see them have to lower credit card interest rates in order to qualify for bailout money, but that doesn't seem to be likely to happen.
To sweeten the deal Snowbama and the seven insiders are now allowing banks to value their assets mark to market, a complete delusion in the current economic environment.
My house had a market value of $600,000 in 2006. I would be lucky to get $400,000 today. If I was a bank I could value the house at $600,000 (or higher) today.
"If the optimists understood economics, they would know that they have little optimism about at this point."
Understand economics? May as well play the roulette and hope it isn't fixed.
"The other item exciting the optimists was Wells Fargo report that it earned $3bn in profits in the first quarter of 2009. This was enough to cause Time magazine to pronounce the end of the banking crisis....The problem with reported bank profits is that banks have enormous discretion over when they choose to recognise losses."
Yes, and when you're given billions in TARP money that you haven't loaned out, I guess it's not too difficult to show a profit.
Optimism is wonderful if it's based on reality.
Check out this website:
http://www.nakedcapitalism.com/2009/04/analyst-wells-fargo-to-show-120-billion.html
In order to try to bring the books into balance, the Federal Governmnet will have to cut programs and spending.
They have made it clear they will not cut military spending and study after study shows that as far as bang for the buck goes, military spending creates little in the way of multipliers.
This means they will have to cut program spending that is intended to help the poor, children and the elderly all of these programs producing the most in the way of multipliers.
This will mean less consumer spending. The notion that the indebted consumer will get out there and borrow more money from the Banks where the banks use the money taken from the consumer in the way of taxes for these various bailout bills is rather absurd.
Once again the Government is trying to create an ILLUSION. The "Good news" is a rather weak attempt to restore confidence so that China keeps lending money and so that more people get sucked back into the Stock market where the good folk at Goldman Sachs will once again be given licence to steal the same.
It was mentioned by one that the banks a criminal conspiracy. Yes that certainly the case and in lockstep with them is the Governmnet of the United States of America. The Governmnet of the USA is no different then Madoff wherein the numbers manipulated and massaged to give the ILLUSION that all is going ok.
I more or less agree with you, but keep in mind that the ILLUSION is extremely important. Americans want the economy to do well and will gladly accept some rosy views. The better everyone feels, the better things will work out. There is a chance that big ticket military items will eventually see some cuts. Also the military is seriously looking at spending some money on alternative energy. As long as Obama is Pres, I don't see any meaningful drops in social spending, but of course that would change big time if Repubs get back in power. I'm sure we will eventually have a bit of an increase in government funding by increasing taxes on wealth and eventually on dirty energy. At some point our cheap imports from China will end and that will make a lot of us feel poorer.
New York State, one of the largest employers in new York, has eliminated all overtime and cut back on hours for contracters. .
Albany Medical Center, the second largest employer in Albany approves any overtime through the CEOs office. Kept at a minimum
This equates to substantial lost income for the employed and will have a major impact on local retailers.
Unemployment does not take into consideration a loss of hours worked.
Bernanke Sees Signs US Contraction May Be Slowing
(Bloomberg - 1 hour ago)
We have all seen the signs:
"The End is Near"
and "Repent"
or "Jesus Saves - S&H Green Stamps"
I thought the warmongering cheerleader's term was over.
Actually,
http://www.moderateindependent.com/v6iNOV232008Economy.htm
is a more accurate analysis of the economy.
If the optimists understood economics, they would know that they have little optimism about at this point.
The "optimists" are not really optimists but garden variety, flat-out liars who are frightened by the obvious signs of permanent decline.
Indeed, the news was boiling over with the possibility that we're seeing the end to the 'slowdown.' Yet, they added, that they still expect millions of jobs to be lost through the end of this year. To hear the spout their nonsense is almost surreal.
What's the big deal here? Wells Fargo posted a mega-huge "profit", the rest of the bankster gangsters are expected to post record profits; The CEO of Chevron Corp got a "compensation" of over 13 million, for example. If you are living in the ivory tower bubble of the Elite, things are looking up
As Krugman explains today on his blog, banks have tremendous freedom to post profits or losses as they see fit.
One starts to feel like Alice looking down the rabbit hole.
When I predicted the current economic dissolve in 2005, people
would call me all kinds of things. Pessimist was the nicest one.
What I told people then and now is the same. A recession is a
temporary lag of any economy and it implies, that the economy
gets 'back on the track' and everything will be fine again.
You get the irony. Fact is, we are lied to by the 'governments'
all over the planet, yet we are lied to and are deceived strongest
in the US, the inventor of compassion free capitalism.
As You have already realized, the military industrial complex is
reminiscent of the Nazi Germany MIC and with the exact same
propaganda its necessity is sold to the sheeple. While most lesser
mentally gifted find great pride in the proclamation of being the
greatest military might on the planet, from a more sophisticated
point of view, it is the worst sign of utter failure on a humanistic
level. All military expenditures, specifically the cheered to wars,
are financed by the federal reserve aka the privately held monetary
banking system.
The reason why this is NOT recession is simple. A recession implies
that Your economy gets back to where it was before. Nothing is
further from the truth. All the mental trash that comes from bernanke
et al is just an attempt to make believe, to hypnotize, or to convince
themselves that the 'recession' is already over. Actually I am waiting
for Mr. Obama's statement, that it wasn't that bad after all. Not as
bad as in the twenties.
There are choke people here that know that the government always lies
to You. That's what it is intended to do. Remember kennedy? Ask not
what your gov. can do for You, just STFU and do what I say and give
me all your money. I need it to conquer the world.
This as much a recession as the earth is flat. I know there are enough
people around who believe exactly that. The earth is flat and was made
in china in six days. That's why it is breaking apart right now. The
very limited warranty for human mankind is over.
What we are looking at indeed is a radical change of the way human kind
does business on the expense of the planet they dwell on. With the
highest moral being trillions of dollars spend in the killing business,
who in his right mind would ever ask why we are where we are right now.
The impending correction of infantile american merchandising practices
through a planet that has simply enough of us will soon be apparent.
Imagine all those idiotic wet dream weapon systems you paid for with the
money You worked hard for (unlike politicians and bankers ect.)helping
You to battle global harming in form of hurricanes, tornadoes, floods
and massive wild fires.
What I do know is that the US and its inhabitants will pay the price for
its wrecklessly greedy policies, domestic and foreign. What COULD we have
done with the money wasted on military and the bailout pearls thrown
before the swines?
Well fargo is like those mortuary businesses. Charging you all along for
something that you will never receive. Banks are as criminal as can be,
they deserve to go down, all of them.
Optimism? Nope. Hope? Yes. Because I believe in the ingenuity of some
Americans that know we are only able to make it without repugs in all
levels. This is not a recession. This is the beginning of the end of the
american wet dream built on abuse and slavery. Capitalism is over. The
only way to prolong it is to use military force. Get into another war.
Print some more money.
Grass roots 'economy' is the only salvation we have. No more ungovernment,
military, banks, corporations. You might not want to bet on that in Vegas
though. Odds will be 1:50,000,000,000,000.
If u don't have job right now it over alright.
And if You have one, You better do whatever Your
god like employer tells You to do, or You are 'out'.
It will take years just to get housing back down to realistic market values - anyone who can still make mortgage payments will try to hold out until prices go up, which means there is still plenty of 'underwater' real estate that's not being counted. I haven't seen rental prices coming down - which is why so many people will struggle to stay in their over-mortgaged homes.
Because there is no real economic stimulus for ordinary people - and no such talk is even allowed to be considered - the economic environment is not going to change. You can't get blood out of a turnip. With no money, there are no customers - and without customers, there is no hope of any recovery. This is what happens under fascism - at least true conservatives appreciate the need for healthy customers in order for their business to thrive. (It's called enlightened self-interest.) Fascists deny reality - they make up the rules to suit their short-term goals and their nonsensical ideology. Corporate Militarism is their god - people are just cogs or cannon-fodder, fungible.
Remember how many times that idiot-psycho-puppet Bush kept saying "fundamentals are sound" - reading his script, of course - the one written by the same corrupt liars-club that gave us WMDs under our beds. Bush was so stupid that he touted the housing bubble as proof that this was an "ownership society" - yeah, owned by the financial gurus who killed the Goose That Lays The Golden Eggs.
We're toast. The rest of the world is trying to figure out how to disconnect from our wrong number - all those exporting industries that used US consumers as ATM machines. At least Europe has a decent social safety-net and can probably ride out this economic tsunami - which is just beginning, by the way. Europeans have faced hard times before - the older set even remembers the Nazi occupation, followed by decades of 'austerity' - they know how to survive on nothing. (They also hoard gold for hard times.)
This is a Global Depression and it will take at least a decade to recover - for those whose goal IS recovery. (That excludes the US - where the bankers, military, corporations, and other swindlers couldn't care less about what happens to ordinary Americans. There are billions of other potential 'customers' around the world who just need to be indoctrinated (brainwashed) into self-destructive consumption. Other cultures may not be as easy to brainwash as idiotic ignorant Americans who bought the idea that the US is Numero Uno - surviving WWII was not that hard, since we were neither invaded nor bombed into rubble - is that what made the US 'Number One' in the world? (Not to mention the brain-drain in the post-WWII era, especially German scientists and frightened Jews who were not welcomed back into their previous communities - anti-Jewish prejudice ran higher in Eastern Europe than in the US.) In fact, the US has always benefited by the brain-drain of professionals fleeing local wars - but they won't be coming here anymore.
What is a "good" U.S. economy? Private autos cost 25% of U.S. GDP. Biofuels, windmills and electric cars will just prolong the death. Make transit free. Move to town. Give the suburbs to the organic farmers. Educate all children.
http://freepublictransit.org