The U.S. economy: on the surface and under the hood
by Rebecca Wilder
The GDP recovery is underway. But below the GDP hood, the picture is not as bright. The labor market is weak, and income-generating prospects remain muted. The latter portends a back-up of consumer spending down the road without substantial policy support.
Please see Spencer’s post for a very nice interpretation of today’s employment report, but he sums it up quite nicely:
Yes, the employment situation has quit deteriorating, and there are encouraging details within the report. But the overall rebound in the economy and the employment situation is one of being stuck in the doldrums.
But why is the U.S. economy stuck in the doldrums? Isn’t GDP recovering smartly? (Read on.)
The chart illustrates the GDP contraction for each recession since 1971, except that for 2001 because in sum GDP did was rather flat. Point “0” represents the quarter where GDP bottoms out. I circumvent the official date of the recession’s end as point 0 – the NBER is the agency that “dates” business cycles in the U.S. – because I want to focus on GDP, which is a composite of spending motives (including the government).
On the surface, the economy appears to be improving smartly; GDP bounced back 1.9% since its cyclical low in Q2 2009. But what we’ve really got here is a inventory-led recovery, with a Q3 boost from auto sales, and depreciated capital and software that must be replaced. Top that off with a small boost from non-defense federal government consumption, where in Q4 that was more than offset by the decline in the contribution to growth coming from state and local governments, and the recovery looks a little less stable.
I work in fixed income. Companies that wish to rollover debt or finance an expansion of capacity may do so through a public bond issuance. As an anecdote, companies will travel to our offices in order to “tell their story” and garner support for the issuance. Guess how many companies have told me that the proceeds of the bond issuance (essentially borrowing funds from the institutional investor at usually a fixed coupon rate) will finance expansion and new production capacity – none this year! Nada. (Actually, that’s not totally true: earlier this year an Indonesian power company wanted to rollover debt financed new capacity from last year.)
There’s plenty of spare capacity, so that existing resources can supply new demand. However, this portends (in my very small sample) a slowdown in fixed investment growth, and further crimps hopes for a strong recovery.
Jobs growth needs to pick up, or else income and earnings growth will continue down (or at best move sideways).
It is NOT the time for government support to let up. Don’t worry about what markets think, worry about what people think. They can’t move; and they can’t find a job (well at least officially 9.7% of the labor force, or the 9.1m part-time for economic reasons workers). As such, the hope for sizable private-sector income growth is looking negligible.
Rebecca Wilder
Rebecca
Thanks for the post. I have a question for you.
I am having a discussion over at Barry Ritholz’s site where I made statement (based on interpreting some numbers I saw at Bill Mitchells site) that 98% of financial market activity is pure gambling. Not money going to productive investment but simply money that is betting on some price move in an already existing asset and trying to win that bet. Do you think my statement is inaccurate?
Based on what I read in your post today I think it (2% productive investment activity)might be low at present. In aggregate it appears that there are no productive investments occurring now yet financial market activity is chugging right along and “profits” are being made. Our financial system seems to be pure Las Vegas and not about connecting capital to projects.
Thanks
Rebecca,
Nice post…………… again!
Would like your opinion on something. I have been in a discussion at Barry Ritholzs site and I made the comment ( not pulled COMPLETELY out my buttt but based on some numbers I saw at billy blog) that I think 98% of financial market activity is pure gambling on price moves of existing financial assets and not dedicated at all to “investment” in the sense most economists use the term (adding to the stock of existing assets and increasing flow of goods and services).
After reading your post here I think 98% might be low. In aggregate it appears that no net investment is happening yet financial markets are still chugging along making money for some and costing others.
What do you think? Is my contention correct or is Barry correct and my number is grossly wrong?
The ship hath been suddenly becalmed.
Down dropt the breeze, the sails dropt down,
‘Twas sad as sad could be ;
And we did speak only to break
The silence of the sea !
All in a hot and copper sky,
The bloody Sun, at noon,
Right up above the mast did stand,
No bigger than the Moon.
Day after day, day after day,
We stuck, nor breath nor motion ;
As idle as a painted ship
Upon a painted Ocean
“The Rime of the Ancient Mariner”
It will be interesting to see what the Senate and the House does after Easter Break with Unemployment Compensation. If they do nothing, millions of Unemployed will be dumped into Not In Labor Force. If there is no Tier 5 and just an extension of Tier 4, there are still millions being dumped into Not In Labor Force. I kind of woner if this delay by Congress to decide on Extending Unemployment Compensation is political so as to come back and make the unpopular decsion and yet reap the benefit of an improved Labor Market.
Greg,
I think 98% of financial market activity is pure gambling on price moves of existing financial assets
The number is 100%. Financial market activity doesn’t add “net investment” (your formulation), it sets prices or values on investments. This allows all other non-market traded investment to happen. In this sense it facilitates economy-wide investment. Try to imagine investing, or buying or selling anything, in the absence of price data.
I seem to recall that you somehow consider an IPO to be “new net investment.” It is not. When you buy a stock of an already listed company you are buying shares in that company’s prospective cash flows. When you buy shares in a new company (IPO) you are also buying shares in that companiy’s prospective cash flows. The only difference is that the shares of the IPO were formally not publicly traded, and now they are. There is no new money or assets added, the only difference is liquidity.
Would we not see a rise in GDP in an economy that is 36% financial when the other 64% is flat? Being that jobless claims are declining, I would say the other 64% has flattened out.
Being that we make money from money and not many people are needed to do it (computer programed trading, royalties, licensing fees, etc) why are we so surprised to see a rise in GDP and yet see those who live and earn only in the producer part of the economy not gaining?
There is no dichotomy here. People have not been gaining for decades now relative to the GDP rise (or productivity rise). We have been told they were gaining, but that’s only because of the steril approach to economic analysis. Any positive change in a number is considered positive over all. So, if the family gained 1.5%, then the family gained.
This steril approach allowed us to watch our GDP growth become ever smaller until it was zero before acting. It allowed us to watch the ever small growth for decades and come up with all sorts of reasons why it was just the way it was to be. A rational and responsible profession would have noted the ever smaller gain and sounded a warning. Preferably sometime after the first decade of ever smaller GDP gain.
Sammy
Maybe its a definition deficiency but “financial market activity” is not JUST a price setting mechanism.
It in some cases actually moves money to a new venture, which certainly had an initial price and then becomes part of the secondary market (if stock is sold in it) where people trade but the value of that item in the market (if it say doubles in price in a month) does not create more goods and services activity, other than share trading activity. An IPO is a new asset to invest in (its akin to a new model of car becoming available) but it doesnt add new money to the exisitng stock of private sector financial assets, you are correct and I never meant to imply otherwise. Only the currency issuer (govt) can add net financial assets to the private sector. When one uses a bank to add “money” via a loan there is an equal liability that eventually must be extinguished so the net addition is zero.
What about companies that arent publicly traded. Do they have a price? Is that price determined by traders? That company started with an injection of capital (maybe “new” capital if govt was involved or just reshuffling capital if all private money was involved) and became a new item to be purchased potentially but it also probably involved employing new people, provided it didnt just poach employees from elsewhere and cause an offsetting loss of employees from elsewhere.
My point in my comment was to simply suggest that more and more activity these days is simply gambling, but way too many people think they are investing, and doing something useful to the economy (building new things potentially) when they put their 800/mo in their 401k. They’re not!
This not where money for new economic growth is coming from and people are led to believe otherwise.
The Dow rising is NOT a sign of a strong economy necessarily and lately(last 20 yrs or so) not at ALL.
DOLB:
Gotta get Sunday dinner going here soon. Here are a few words from the Dallas Fed on EOY 2009:
“The final estimate of fourth quarter GDP released by the Bureau of Economic Analysis showed that more than two-thirds of the quarter’s growth was attributable to less inventory liquidation. Consumer spending, net exports and business fixed investment were revised moderately weaker than originally estimated. Real final sales, which exclude inventories, grew 1.7 percent—1.4 percentage points from rising domestic demand and 0.3 percentage points from higher net exports. Real final sales has averaged less than 1.9 percent over the past two quarters, indicating that the underlying demand for goods and services is still rather tepid.”
and for 1st Quarter 2010 on Financials:
“Contributing positively to the prospects for renewed economic growth, conditions in short-term and long-term funding markets have largely returned to normal.”
“Market yields and related spreads for interbank lending, commercial paper, Treasury securities, corporate bonds and mortgages have attenuated over the past several months. Specifically, corporate bond spreads have recovered to levels seen in mid-2008.” http://www.dallasfed.org/research/update-us/2010/1002.cfm “Dallas Fed Mixed Data Moderate Recovery” March 31, 2010
I agree there is some wishful thinking out there as literally millions need to go back to work before this becomes a Labor Economic Boom. As it stands, I see it more a boom time for Wall Street, TBTF banks. and corporations as Labor costs are held low.
The Fed injected $trillions into Wall Street and TARP +some was there also to save Manhattan from its own created implosion. And then we have “Bunning” worried about how to pay for Unemployment Compensation Bennies, Boehner on Healthcare costs, etc. So far a Wall Street led recovery with the rest of us sweeping up after the elephant.
DOLB:
Gotta get Sunday dinner going here soon. Here are a few words from the Dallas Fed on EOY 2009:
“The final estimate of fourth quarter GDP released by the Bureau of Economic Analysis showed that more than two-thirds of the quarter’s growth was attributable to less inventory liquidation. Consumer spending, net exports and business fixed investment were revised moderately weaker than originally estimated. Real final sales, which exclude inventories, grew 1.7 percent—1.4 percentage points from rising domestic demand and 0.3 percentage points from higher net exports. Real final sales has averaged less than 1.9 percent over the past two quarters, indicating that the underlying demand for goods and services is still rather tepid.”
and for 1st Quarter 2010 on Financials:
“Contributing positively to the prospects for renewed economic growth, conditions in short-term and long-term funding markets have largely returned to normal.”
“Market yields and related spreads for interbank lending, commercial paper, Treasury securities, corporate bonds and mortgages have attenuated over the past several months. Specifically, corporate bond spreads have recovered to levels seen in mid-2008.” http://www.dallasfed.org/research/update-us/2010/1002.cfm “Dallas Fed Mixed Data Moderate Recovery” March 31, 2010
I agree there is some wishful thinking out there as literally millions need to go back to work before this becomes a Labor Economic Boom. As it stands, I see it more a boom time for Wall Street, TBTF banks. and corporations as Labor costs are held low.
The Fed injected $trillions into Wall Street and TARP +some was there also to save Manhattan from its own created implosion. And then we have “Bunning” worried about how to pay for Unemployment Compensation Bennies, Boehner on Healthcare costs, etc. So far a Wall Street led recovery with the rest of us sweeping up after the elephant.
DOLB:
Maybe we can call it putting “Lipstick-on-a-Pig” in our efforts to dress up March and may it look as favorable as possible for much of the nation. Say some nice words, dress it up, and introduce it as the best it can be. Unfortunately, a pig is still a pig regardless of the lipstick. It appears the gov is looking to do something different now that Wall Street and TBTF banks are safe other than address the rest of the economy.
Here are a few words from the Dallas Fed on EOY 2009:
“The final estimate of fourth quarter GDP released by the Bureau of Economic Analysis showed that more than two-thirds of the quarter’s growth was attributable to less inventory liquidation. Consumer spending, net exports and business fixed investment were revised moderately weaker than originally estimated. Real final sales, which exclude inventories, grew 1.7 percent—1.4 percentage points from rising domestic demand and 0.3 percentage points from higher net exports. Real final sales has averaged less than 1.9 percent over the past two quarters, indicating that the underlying demand for goods and services is still rather tepid.”
and for 1st Quarter 2010 on Financials:
“Contributing positively to the prospects for renewed economic growth, conditions in short-term and long-term funding markets have largely returned to normal.”
“Market yields and related spreads for interbank lending, commercial paper, Treasury securities, corporate bonds and mortgages have attenuated over the past several months. Specifically, corporate bond spreads have recovered to levels seen in mid-2008.” http://www.dallasfed.org/research/update-us/2010/1002.cfm “Dallas Fed Mixed Data Moderate Recovery” March 31, 2010
I agree there is some wishful thinking out there as literally millions need to go back to work before this becomes a Labor Economic Boom. As it stands, I see it more a boom time for Wall Street, TBTF banks. and corporations as Labor costs are held low. The Fed injected $trillions into Wall Street and TARP +some was there also to save Manhattan from its own created implosion. And then we have “Bunning” worried about how to pay for Unemployment Compensation Bennies, Boehner on Healthcare costs, etc. So far a Wall Street led recovery. Don’t forget to kiss the pig on the way out! 🙂
A point that Calculated Risk keeps making — In the past, construction has been a substantial component of “normal recoveries”. It’s not going to happen this time. There is huge excess capacity in Commercial Real Estate 20-30-40%. Pick a number. And there is also a huge, if hidden, overhang in Residential Real Estate because “bankers” are very reticent to foreclose. If they did, they would have to sell into fragile markets at prices that will cause them to book large losses. So prices now are being somewhat supported by an artificial shortage of available houses. It’s reported anecdotally, that a significant number of “homeowners” have quit making payments, but the banks are not moving to evict them. It’s not very likely that can last.
There is no shortage of rental property and the Price to Rent ratio suggests that housing prices haven’t really bottomed out and will probably grind down another 10-15% over the next few years. Don’t count on Real Estate/Construction to contribute much to recovery for at least a few years. See http://www.calculatedriskblog.com/2010/03/housing-price-to-rent-ratio.html
It’s hard to see exactly what is going to fuel economic recovery. It won’t be Real Estate or Construction apparently. Might be some other areas if enough homeowners simply give the house to the bank, rent somewhere for less than they were paying and have some actual disposable income, but that seems like a process that will be gradual if it happens at all.
Everything is fine and dandy. Obama’s policies will double the national debt in 8 years, reckless government spending is out of control, and next year we get a large increase in income tax rates. If only Obama and crew will start a trade war with China …….to protect american union jobs. Herbert Hoover could not do it any better.
You know what’s coming.
– Those who gloss over and think wishfully
– Those who think the end is nigh
– Those who don’t think at all
Everyone and one in all, know what is coming.
And it scares the living Sh!t out out of everyone in every category.
Smiles, frowns or indifference – no matter.
You’ve got an unsettled feeling in yer gut.
America’s jobs growth engine is being choked to death.
A record 25 percent increase in the taxes against US small businesses — from costs associated with new health care law, to an increased Medicare tax, increased capital gains taxes and higher state and city taxes — is repealing any ability of these entrepreneurs to add jobs to their payroll.
And the numbers for New York’s small- to medium-sized business are just as harrowing.
By one estimate, the effective tax rate on the 26 million small businesses across the country — which in the past have accounted for more than half of the job growth in the US — has jumped to 50 percent from 40 percent, sucking valuable cash from the businesses.
These dollars could have been used to add to payrolls or make capital improvements — but instead will be siphoned off by Uncle Sam, state and municipal governments.
http://www.nypost.com/p/news/business/small_biz_big_tax_Tm9zntbp2I339WyBwwOgzK
LOL. Wrong.
It is the nature of the Republican party that has gotten the “publicly” held debt so high for so long. The nature of building a economy completely on privately held debt and offshoring.
I would save Union held jobs 10/10 as they are far more patriotic and intouch with America than the decadent internationalism of the invester class.
There are several things wrong with the article…one is that the taxes are seen as simply additive and equal for a small business. As a small business owner I fail to see how capital gains is relevent to my taxes and ability to get credit for my business.
And of course using the marginal rate of 35 to 39.5% as if it is an accurate number in real life is misleading, as any small business owner knows.
Property taxes are increasing due to other revenue sources drying up. Of course my neighbor next door, a teacher, does not get a salary actually but a tax subsidy in this scheme and is in for a rude awakening even with this year’s budgets.
ISM, after reporting a very nice batch of non-factory data today, turned right around and said that credit constraints could put an end to that. A useful distinction might be between financial activity relevant to the real economy and all other kinds financial actiivity. It was bond trading, after all, that made UBS so much money in the latest quarter, not lending or investment banking.