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Monday, November 23, 2009

Steve Keen suggests recovery patch-up may fail

Demand Side has rejected the nearly universal call by economists that the recession is over and recovery has begun.  In doing so, we observed that a jobless recovery is now the norm, this time we have the investment-less recovery, and soon we'll have the recovery-less recovery.  But there WAS investment in the data after all, as Steve Keen points out here.  Yes.  A 23.4 percent bump in residential investment.  This following declines of -23, -38 and -23 in the previous three quarters.  Why we still are not jumping on the bandwagon, I wonder.

Check out the link for some illustrative charts.

Have we dodged the Iceberg?
Debtwatch No. 40 November 2009 
by Steve Keen

The most recent “unexpectedly good” growth figures for the USA appear to indicate that what will still be the worst downturn since the Great Depression is finally over. However this is not your usual downturn. Not only is it acknowledged as the most severe since the Great Depression, it has also evoked the most remarkable government economic stimulus ever seen. It would be bizarre if this had not had an effect on the data.

Whether a recovery is truly underway in the private sector therefore depends on how the economy is likely to perform after the stimulus is withdrawn.

The “recession is over” reaction could be valid under two circumstances. Either:
  • The figures are very high even when the government stimulus is taken into account; or
  • If the economy could be expected to continue growing endogenously after the stimulus were withdrawn, even if the aggregate numbers for this quarter were good only because the government stimulus was so large.
Let’s consider the first option. The growth rate on an annualised basis for the last quarter was 3.5%. The BEA’s decomposition of this notes that 1.66% of the growth was due to increased motor vehicle output, which was primarily driven by the government’s “Cash for Clunkers” program. Another 0.48% was due to the growth in government expenditure.

There are also some elements of the figures that simply seem, in the original sense of the word, incredible. For example, rising investment levels—up 11.5%—were a major reason for the positive reading. But all components of this measure were either tepid or negative—except for residential investment, which was up a whopping 23.4%.  That just doesn’t tally with the most depressed real estate market in history; possibly this huge contribution to aggregate investment could be the result of a large movement from a very small base, whereas the sector’s weight in the overall calculations of investment hasn’t been revised downwards to reflect its true contribution today. Or it could be a problem with the data sample that will be revised substantially downwards in later estimates of GDP.

Either way, the prospect that a serious recession, which was caused by the bursting of a housing bubble, which left an unprecedented stock of unsold existing houses on the market, and which has led to an unprecedented unsold over-supply of existing housing stock, has been ended by a revival in housing investment… is simply incredible.

That leaves the second option—that even though the positive figure was the product of the government stimulus, when this is withdrawn the economy can be expected to continue growing on its own.  Here trends in consumer income and non-residential investment are the important issues. These would both need to be positive (or at least turning from lows) for the private sector to resume growth in the next quarter without the need for stimulus.

Consumer disposable income fell at a substantial 3.4% annualised rate in the quarter, while fixed investment expenditure rose by an anaemic 2.3% and investment in structures fell by 2.5%.    It is thus likely that if the government stimulus were withdrawn, both these private sector areas would show even more negative figures over this quarter.


[T]here is another factor that hasn’t yet been considered—the role of credit. During post-War recession, credit growth has dropped well below trend, and the recovery has involved rising debt levels. This is not the sign of a healthy economy—far from it—but this is how the US economy has “recovered” from every previous post-WWII recession.  Not this time it appears.  If this is a recovery, then it’s a highly unusual one because credit growth is still well below trend—and, in fact, negative: America is deleveraging.

We therefore have the strange combination that one accepted “leading indicator” of recovery—a turnaround in investment—appears to have occurred, while another less favoured indicator—the trend in credit growth—is still pointing at recession.


[T]he data favours debt growth as the leading indicator to watch. Investment is strongly correlated with GDP, but that’s hardly surprising since it constitutes a major and volatile component of GDP. Just as with consumption—the larger but less volatile major component—its correlation is highest when coincident with GDP. It is not a leading indicator.

The two best leading indicators are debt, and government spending—with the former stronger than the latter. Government spending a year ahead of GDP is a good indicator of which way GDP will go—something which supports the Chartalist approach to macroeconomics and undermines conventional “neoclassical” economic thinking. But changes in debt are a stronger indicator still, and have a stronger effect closer to the actual movements in GDP.

I don’t believe that this quarter of growth for the USA implies it has dodged the iceberg. Instead a patch-up job has been done on the damage, but the USS is still taking on water as the private sector deleverages.

1 comment:

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