One Quick Thing: GDP Not Good

I know I said I’d be on vacation, but thanks to 3G coverage, I can add this item today.  The second revision of 1st qtr GDP 2010 GDP growth rate was announced.  It’s revised down again, and it still looks like it’s mostly all the result of inventory accumulation.  So we have GDP = C + planned Investment + unplanned Inventory accumulation + G + net exports.   And the major reason the overall number is up 2.7% is due to unplanned Inventory accumulation.  We need C and planned Investment to increase — that’s a healthy economy.  But it wasn’t happening in 1st qtr and it looks like things have slipped or slowed since 1st quarter.   So I’m raising my estimate of the chances of a double-dip recession with negative GDP growth in the second half of 2010 to 50% or maybe 60%.

See Calculated Risk:

The Q1 real GDP rate was revised down again (third estimate) to 2.7% from the 2nd estimate of 3.0%.

Consumer spending was weaker in Q1 than originally estimated. PCE growth (personal consumption expenditures) was revised down to 3.0% in Q1 from the previous estimate of 3.5%.

Some more from Reuters: Economy Grew Slower in First Quarter than Expected, Up 2.7%

… business spending, which only rose at a 2.2 percent rate instead of 3.1 percent as reported last month. This was as a spending on structures was revised down to show a slightly bigger decline than reported last month. Growth in software and equipment investment was also lowered to a 11.4 percent rate from 12.7 percent.

Another drag on growth came from exports whose growth was eclipsed by a rise in imports, resulting in a trade deficit that subtracted from GDP.

… real final sales to domestic purchasers, considered a better measure of domestic demand, rose at a 1.6 percent rate instead of the 2.0 percent pace reported last month.

The “Change in private inventories” was revised up to a contribution of 1.88% from the previous estimate of 1.65%. So inventory adjustment accounted for over two-thirds of the GDP growth in Q1 – and the inventory adjustment appears over. This is a weak third estimate.

Posted by CalculatedRisk on 6/25/2010 08:32:00 AM

One More Time, the Government Is NOT Like a Household or a Business

Ron Dzwonkowski of the Detroit Free Press ran a column today urging people to participate in various “town hall” discussions to help figure out the US can deal with it’s “deficit” and the “debt” that must “lead to collapse”.

Mr. Dzwonkowski adopts the posture of  “reasonable, practical man” – not that of an ideologue.  In fact he appeals to “basic math and logic”.   But again, we see that Keynes was right:   Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Mr. Dzwonkowski is the slave of defunct economists from the late 1800’s and early 1900’s when gold and bankers reigned supreme.  This is not the world we live in today.  The following is the text of the email I sent him.

I was most disappointed in your column on Sunday, June 20. There are many reasons for my disappointment, but the greatest is your repetition of economic nonsense that is flatly, factually wrong.

I quote your opening:

Basic math — and logic — says you can’t keep spending almost $2 for every $1 in your pocket. However, neither rules in Washington, where our national government now adopts budgets that authorize spending more than $1 trillion beyond tax collections and has accumulated a debt in excess of $13 trillion, a simply incomprehensible number…..This can’t go on; it’s a formula for collapse.

Actually basic math and accounting (and “logic”) brings the exact opposite conclusion. I believe you have fallen prey to a very common error, an error that is promoted by people who know better (or should) but have reasons to keep people believing the error. The error is simple:

You assume that the national government is the same as any household or any business or any corporation. It is not.

Households, businesses, corporations, and even state governments are all “financing-constrained”. This means that before they can spend, they must raise the funding through either revenue (income or taxes depending on the entitity), borrowing, or selling assets. SImply put, they must have something in the checking account before writing the check to spend.

A national government is NOT the same as these other entities. A national government CAN and DOES spend without any restriction on raising the funds first.

For these purposes, I’m using a “national government” to mean one that is:

a. sovereign in it’s money (in other words, it is the sole source of determining what is money/legal tender inside it’s territory)

b. let’s it’s money float in exchange rate and doesn’t promise a fixed conversion rate into any other currency or gold

c. borrows money in it’s own currency (when it chooses to borrow) and not a foreign currency.

Who fits this definition? The U.S., Japan, Canada, the U.K., Australia, India, among many (most) others. Who doesn’t fit? Anybody in the Euro Monetary Union (Greece, Spain, Italy, France, Germany, etc). Who else doesn’t fit? Anybody that borrows in foreign currencies (Russia & Argentina in the 1990’s).

What I am explaining is not “an economic theory” – it is basic, fundamental national income accounting and fundamental banking procedures.

The blunt truth is that the U.S. can indeed continue to run deficits. The same people who claim that we are on the verge of collapse (as you claim is obvious) said exactly the same thing about Japan in the mid-1990’s. A decade and a half later Japan is still running “high deficits” and has no problem with either it’s budget or “solvency”.

The blunt truth is that when unemployment is well in excess of 9% nationally, any attempt to reduce deficit spending now by cutting spending or raising taxes will only further contract the economy, reduce actual tax collections and make the actual deficit bigger (see Ireland over the last 2 years).

The fundamental economic reality (again, basic math and accounting, not “theory”) is that if the private sector, you and me and private businesses, want to get financially richer, that is if we want to see our bank balances and 401K’s get bigger over time, the government, the public sector, must run a deficit. It is simply impossible for the private sector to net save money AND have the government run a surplus at the same time. (technically, there is one situation where it is possible, but that can ONLY happen if net exports is so large – think 20% or more of GDP – Chinese scale. Such large net exports cannot happen in all countries at once).

These are not the thoughts of sole “crank professor”. I could provide plenty of support for everything I’ve said. In fact, if you are interested, I would be happy to discuss it further and help you learn.

I am distressed because I work so hard to educate students to think critically, evaluate the evidence, and make sound “logical” conclusions. But I can only reach maybe 150 students per semester. You, however, reach thousands of people and you repeat what are eggregious errors of math, logic, and accounting, while repeating these fallacies while posturing as a neutral adult voice of reason. I could leave it at that, except that this epidemic of illogical thinking about government budgets has consequences. Social services will be sacrificed on an the alter of 1800’s economics theory where governments were constrained by what gold the bankers would lend them.

Woot! After 4 Years, We’re NOT No. 1!

Michigan has finally lost it’s title as the state with the highest unemployment rate.  The May numbers are out and Michigan’s rate has dropped to 13.6%.  Nevada takes the top spot now with 14.0%.  Michigan is continuing to move in the right direction since GM and Chrysler emerged from bankruptcy in 2009, but danger still lurks ahead.  A double-dip recession could stall auto sales and the Michigan recovery in late 2010 or early 2011.  It’s a distinct possibility with declining US stimulus, a EuroZone determined to commit economic suicide, and increasing calls for “austerity” in the U.S.  As usual, Calculated Risk gives us a great graph and explanation:

From the BLS: Regional and State Employment and Unemployment Summary

Regional and state unemployment rates were slightly lower in May. Thirty-seven states and the District of Columbia recorded unemployment rate decreases over the month, 6 states had increases, and 7 states had no change, the U.S. Bureau of Labor Statistics reported today. …

In May, nonfarm payroll employment increased in 41 states and the District of Columbia, decreased in 5 states, and was unchanged in 4 states.

Nevada reported the highest unemployment rate among the states, 14.0 percent in May. This is the first month in which Nevada recorded the highest rate among the states and the first time since April of 2006 that a state other than Michigan has posted the highest rate. The rate in Nevada also set a new series high. (All region, division, and state series begin in 1976.) The states with the next highest rates were Michigan, 13.6 percent; California, 12.4 percent; and Rhode Island, 12.3 percent.
emphasis added

State Unemployment Click on graph for larger image in new window.

This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).

Sixteen states and D.C. now have double digit unemployment rates. New Jersey is close.

Nevada set a new series high at 14% and now has the highest state unemployment rate. Michigan held the top spot for over 4 years.

Doing With Less Oil

Recession and revulsion at BP are doing what many thought not possible:  getting Americans to use less gasoline per person per day.  From Political Calculations:

Monthly Average Gallons of Finished Oil Products Supplied per United States Resident per Day, January 1982 through March 2010 The chart to the right reveals what we found when we took the U.S. Energy Information Agency’s figures for the average number of thousands of barrels of Finished Petroleum Products Supplied to the U.S. per day, converted those figures to the equivalent number of U.S. gallons, then divided that result by the number of people within the United States, as measured by the U.S. Census’ Resident Population Estimate for each month from January 1982 through March 2010 (we found that data in two places – here it is for between April 1980 through November 2000, and for April 2000 through the present).

What we find is that since January 1982, the average daily oil consumption for individual Americans living in the United States has averaged 2.56 gallons per person. More remarkably, we see that Americans have dramatically reduced their consumption of oil and its derivative products since July 2007.

So dramatically, in fact, that Americans today are consuming roughly one-third of a gallon per person less than they did on average from January 1982 through November 2007, the last full month before the largest recession in the U.S. since World War II began. As of March 2010, Americans are consuming an average 2.28 gallons of oil per day.

That drop has occurred even as the resident population of the United States steadily increased throughout this period.

Catch 22 Recovery

From UCLA: UCLA Anderson Forecast: U.S. recovery a long, slow climb; Calif. recovery weaker than nation’s (emphases mine):

“If the next year is going to bring exceptional growth,” [UCLA Anderson Forecast director Edward] Leamer writes, “consumers will need to express their optimism in the way that really counts — buying homes and cars. And that is not going to happen if businesses continue to express their pessimism in the way that really counts — by not hiring workers.”

The result is an economic Catch-22.

Leamer explains that significant reductions in the unemployment rate require real gross domestic product (GDP) growth in the 5.0 percent to 6.0 percent range. Normal GDP growth is 3.0 percent, enough to sustain unemployment levels, but not strong enough to put Americans back to work. As a consequence, consumers concerned about their employment status are reluctant to spend, and businesses concerned about growth are reluctant to hire.

The forecast for GDP growth this year is 3.4 percent, followed by 2.4 percent in 2011 and 2.8 percent in 2012, well below the 5.0 percent growth of previous recoveries and even a bit below the 3.0 percent long-term normal growth. With this weak economic growth comes a weak labor market, and unemployment slowly declines to 8.6 percent by 2012.

via Calculated Risk: UCLA’s Leamer: “A Homeless Recovery”.

This is actually not surprising unless one has never read Keynes.  It’s the kind of catch-22 that happens in a severe recession/depression.  The only ways to break out of it:

  1. Government increases spending – since most pols have (erroneously  concluded) that last year’s too-small stimulus proves govt spending doesn’t work, our politicians have ruled this option out.
  2. Dramatic increase in exports and reduction in imports – but since most nations are trying to do this and it was a global recession and all countries cannot be net exporters at the same time (who would buy all those exports?), this won’t happen.
  3. We wait for the gradual elimination of excess capacity:  we wait for workers to die or retire or emigrate and we wait for business machinery to deteriorate and then need to be replaced.

The coming decade is looking very grim without a change in policy.