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Sunday, July 24, 2011

Transcript 450: Real Recession Continues as Political Theater Distracts

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Returning from our three and a half week retreat we expected to see more difference in the economic landscape than actually met our eye. Unfortunately, the political theater is in summer reruns, and nothing of substance has really changed, which means things are getting worse.

The debt ceiling debate has everyone else focused, and I suppose it is possible that disaster might be allowed to happen. After all, it is real fire they are playing with up there on the stage. Many otherwise intelligent people are absorbed in the show. To us the time for fiscal responsibility was when we were making our purchases, not now when the credit card bills come in the mail.

The great crime to us is the madness of austerity, which has overtaken both sides, it seems. So high drama or not, the current game of chicken is not very interesting. It’s like we have become fascinated with a schoolyard shouting match and failed to notice we are standing in the path of a runaway bus.

What is most the same is that we are still claiming to be in a recovery. Once again, as an economic recovery denier, Demand Side has the shorter story to tell. Disaster was delayed, but not necessarily avoided, by a tremendous government intervention in financial markets and by huge federal deficits. Now we are bouncing along the bottom with big and growing downside risks.

NBER, the National Bureau of Economic Research, made the longer story necessary for others by officially calling an end to recession and the start of recovery now more than two years ago. At a minimum, the phrase, “but it doesn’t feel like a recovery,” must accompany any comment or analysis for it to be taken seriously. A fuller and more honest version includes the interesting fact that the recession continues in employment, where we are leveling out at five percent below the peak nearly three and a half years ago. Employment is two-thirds of the economy. This is a level of loss unseen except for one quarter in 1949 when we were transitioning from wartime to peacetime. Construction and housing continue in recession, another footnote sometimes omitted, never mind that housing has led every single recovery – other than this one – in the postwar period.

No. the only recovery in sight has occurred on Wall Street and on corporate balance sheets. It’s a curious thing that markets continue strong in spite of the bad economic news, and perhaps odd that they don’t seem worked up like the rest of us by the preposterous debt ceiling play inside the beltway. But if you think corporate profits, stock and bond prices are the definition of a recovery, then I have a trillion dollars worth of mortgage backed securities you might be interested in. Actually, the Fed and Ben Bernanke already bought them. But I have a good used bridge.

Summarizing the data, courtesy Calculated Risk’s chart gallery.

• More months of jobs have been lost in this great recession than in all other postwar recessions combined. Absolute. Even in percentage terms, we are sure to achieve that amazing mark before we’re through. More months of jobs will be lost in this … downturn … than from all other recessions – all ten others – combined.
• The official unemployment rate has been above 9 percent except briefly since spring 2009. Only the Reagan-Volcker Recession of 1981 produced higher unemployment numbers, and then for a shorter period of time.
• The employment-to-population ratio is four points off the start of the recession and is not recovering.
• The average duration of employment is astronomically high. Over six million people, more than double the number ever before, have been unemployed for more than 26 weeks.
• New home sales have been at all-time lows for more than a year and in depression for more than three.
• Housing starts, of course, same story.
• Mortgage equity withdrawal added 8 percent to demand in the boom years 2003-06. Now it subtracts nearly 4%. That’s a 12% change to the downside.
• Percentage of equity in homes? Used to be 60%, now below 40% and falling
• Multi-family starts bounced off historic lows. Completions continue to fall.
• Ah, good news, apartment vacancy rates falling, market tightening.
• Private construction spending on non-residential projects, in the tank.
• Architecture Billings Index, in contraction mode and falling. Never recovered from 2008.
• Commercial Real Estate prices have fallen further faster, but also somewhat later, than residential prices.
• Office vacancy rates, no surprise, stuck near the historic highs of the early 1990s.
• Mall vacancy – both strip and regional malls – historic highs and rising.
• Investment in offices, hotels and shopping facilities – quelle surprise – low and falling.
• Manufacturing: Capacity utilization below 75%
• Industrial production at 2004 levels, still 6 percent below the previous peak.
• Small businesses: Optimism, low and falling
• Hiring plans low
• Poor sales as the biggest problem, still well above any pre-recession number.
• GDP: 1.8% for Q1. Stagnant at a low level. Demand Side forecasts GDP falling to negative in the second half.
• Ah, more good news, equipment and software investment is up, as corporations take advantage of tax concessions to automate their operations.
• PCE, personal consumption expenditures, inflated by high oil and food prices (cutting into stagnant incomes), but now falling.
• Real personal income now well below the pre-recession levels.
• Real GDP barely back to the pre-recession level of 2007, per capita GDP down down down, as four years more of people are splitting up the same GDP.

But how can you tell for sure we’re not in recovery? The deficit. It is huge and rising. Not a recovery story. We need jobs as in direct jobs programs. We need a recovery in housing and household balance sheets as in renegotiation of principle on mortgages. We need stabilization of government services as in direct aid to state and local governments and remediation of infrastructure.

Maybe we’ll remember the debt ceiling fight as the cause of our hospitalization, but our physician might point to collapsing aggregate demand. As Robert Reich said recently,

For thirty years now we've been hearing from Supply Side economists who say that if we reduce tax rates on the rich and on corporations and keep the cost of capital low, we'll get more jobs and growth, and the benefits will "trickle down" to everyone else. Well, we've tried the theory out, and little or nothing has trickled down.

Tax revenues are now 15 percent of the national economy. That's the lowest in sixty years, and capital is cheaper than ever. But the economy is going nowhere.

Can I be blunt? It's the demand side, stupid.


  1. The problem is that the president is following the wrong advice so do not expect a recovery. When he was elected we all thought that he would be like Roosevelt. Yet it appears he is another Hoover. While the private sector is deleveraging someone has to tale up the slack in the economy. It appears that using household analogies means that the economy will be tanking and another two years will be wasted.

  2. I read somewhere that the Republican agenda can only be to mercilessly destroy any remnants of an economy that was geared to the needs of ordinary people. The alternative would be to admit that Roosevelt (a Democrat) was right.