Friday, August 14, 2009

No "New Normal" Say Some Economists; Prosperity without Jobs?

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Bloomberg has a story this morning saying "No New Normal", which is good timing, as it counteracts the "it's different this time" thinking I have been professing for a few years and some others agree with. But it is instructive to see the other side of the trade as well.

While I agree there is pent up demand, only so many will have the means to execute on this demand. I see many people in Michigan who would love to buy things - they have a lot of pent up demand... but they cannot. The evidence for me will not be in the next 4-8 months, but out a few quarters after the tsunami of government money floods through the system... how consumers act then. Between now and that point every data point has been bastardized by governmental money, so it's impossible to tell how the economy functions or how the consumer acts without handouts left and right. Further this is not just a "deep economic setback" - this was a credit crisis. Green shooters continue to go back to recent US examples rather than looking at what happened post Depression or post Japanese credit bubble bursting.

I continue to believe that as the globe recovers, and our interest rates rise - it will be a major setback for US consumers who need cheap commodities and cheaper money. This is what they have been trained on and if interest rates rise concurrent to energy and food prices - game over. Just imagine how the housing market, now trained on low 5% mortgage acts at 6.5%. Which in historical terms is not high but in how we've been trained will be seen as horrific. As always, we can be wrong and until we look back in 3-4 years we won't know. You should always have a thesis but be flexible enough to change as evidence points differently.

Let me reiterate GDP (Gross Domestic Product) could jump to +6% for a few quarters for all I know; the way these reports are compiled have many flaws - if housing is stagnant versus a large drop that adds to GDP, or if imports drop dramatically as they have (signaling a weak consumer) - they adds to GDP since it helps the trade deficit. I don't think GDP measures "health" very well at all. Stagnant is not exactly growth in the real world, but in GDP world it is.
  • Instead of a so-called New Normal of subdued growth, the U.S. may be heading for a robust recovery. The worst recession since the 1930s has created a reservoir of demand that will buoy the economy, say a growing number of economists...
  • “Whenever we have plunged off a cliff and fallen into a deep hole in the past, for a while the economy has a tendency to bounce back very quickly,” said Glassman, a senior economist at JPMorgan in New York. Glassman and his colleagues this month said forecasts of 3 percent to 4 percent growth in coming quarters may be too low given “pent-up” consumer demand.
  • The New Normal theory predicts that the recession will leave unemployment, forecast to reach 10 percent for the first time since 1983 early next year, higher for years. Glassman and Meyer dispute that. “The thing I object to most about the New Normal idea is that we are stuck and have to accept higher unemployment -- if you look at the Fed, they are doing everything they can to fight it,” said Glassman, who formerly worked as a Fed economist in Washington.
  • Meyer, who served as a central bank governor from 1996 until 2002... expects GDP to jump by 3.6 percent in 2010 and 3.9 percent in 2011. Annual growth surpassed 3 percent only once so far this decade, in 2004, and has averaged just 2.2 percent.
Circling back to what we said above - on the following point I agree. As we slowly but surely get rid of production in America, we've replaced it with consuming. So one substitution for making things that other countries would want is building homes. Lots of them. Some of the pundits said in 2007 what is the big deal if housing corrects anyhow, it is only 4.5% of GDP. They missed the forest for the trees. So much of our economy now is dependent on building homes and all the affiliated industries that go with building said homes. It's a corner we've backed ourselves into. U
  • “The big driver of that is home prices,” said Meyer, referring to his recovery forecast. “If home prices stabilize, that is a tremendous boost to housing that dominates every other variable in our equation. There is a lot of pent-up demand in that particular area.” (Unfortunately we still have 18 million empty homes to fill first)
  • Home construction has subtracted from GDP growth for a record 14 straight quarters through June 2009.
Again, let me stress if housing only flat lines it will create a surge in GDP - which means nothing in real terms. Sometime in 2010 I expect housing to add to GDP (green shoots) - even as it sits relatively limp in real terms. That is not "growth" - unless you work in government reporting. And as a market participant we must be ready for the yells of ecstasy when this happens. Remember, almost no one looks under the hood on Wall Street - headlines are all that matter and the greener the better! Details are for nerds. And bond guys.
  • Housing and automobile sales are at “very depressed levels” and are likely to contribute to growth even if they don’t reach prior peaks, said Stanley, chief economist at RBS Securities in Greenwich, Connecticut, who used to work at the Richmond Fed.
I also agree there. With the house ATM (see how it all comes back to housing?) we created more demand than reality .. or at least what could come from savings. We sold at annual 16M+ levels; at the worst this past year we were down to a 9M level. The truth is in between, I am guessing 12-13M. So as we rebound to the true demand - that will boost GDP again. But we'll be far below old levels of 16M....
  • “Consumers are holding off on practically all of their discretionary purchases,” said Stanley, who sees the expansion picking up from 2.9 percent next year to 4.4 percent in 2011 and “about” 3.5 percent in 2012. “There is a lot of pent-up demand.”
So here are the historical data - I believe the jobless recovery of 2002-2004 will be the model AFTER the initial surge from "near Depression" to "the new normal". So first that spike and then sideways. Why? Again we are offshoring some work, some of the work was in unsustainable industries (steroid induced finance and housing), and some is just gone forever (think auto jobs and newspaper). And what do we have to replace all that? So far... government, government, healthcare (which is now heavily government), and... well, more government.
  • Recoveries from the past two recessions were weaker than in previous decades. After the 2001 recession, the economy expanded just 1.6 percent in 2002, picking up to 2.5 percent the next year. The 1990-91 recession was followed by 3.3 percent growth in 1992 and a 2.7 percent gain in 1993.
  • By contrast, the U.S. roared out of the 1981-82 recession. In 1983, GDP rose 4.5 percent, accelerating to a 7.2 percent pace in 1984.
Again, early 80s were a different time. People were put on furlough and then hired back. Now people get let go and many times never go back to those jobs. That was pre NAFTA. That was pre outsourcing surge. That was pre technology allowing a worker today to do the job of 1.5 workers of the early 80s. That was pre service economy. Etc. What major new industries outside of "computer / technology" have we added since the early 80s? (and much of computer / technology "production" is not in the US, its in Asia) The only major growth industry I can think of is ... again, healthcare - supported by government spending. And we can't actually afford many of those healthcare jobs - we are borrowing and putting it on IOU (see Medicare nearly $40T of unfunded liabilities) Government comes in 2nd as the largest growth industry. Please feel free to leave a comment on what other jobs bank I am missing over the past decade exluding "finance" which has now been revealed to be a ghoulish mirage.

So we'll see how it goes... until I see the "green energy revolution" which seems to the only hope for a massive influx of jobs (even though Germany is 10 years ahead of us, and Japan 8) replace all the jobs we've lost the past 2 decades it is hard to see how the new normal does not happen (allowing for a spike to get us back from this substandard level of today to something more benign)

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For a supporting view, and considering how the US labor data has been "adjusted" since the early 90s upward - the picture is even darker than this data represents see this BusinessWeek blurb: A Lost Decade for Jobs

I would argue that if the government accurately reporting job growth, we'd be very negative (not "flat) in terms of job growth for the past 10 years. But even with the government "adjusting data upward versus pre 1990s" we're flat. Which is not a good situation considering population growth. And let me emphasize again that healthcare and education are considered private when they largely no longer are. If you argue otherwise, ask how the healthcare or education system would look without public tax dollars supporting them.
  • Private sector job growth was almost non-existent over the past ten years.
  • Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.


  • Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year.
So let's return to the dogma of the "dynamic" US economy - as it we get rid of "old school" jobs like "making stuff" from the heavens will fall new industries with lots of new jobs. In return for that dynamic fact, workers simply must have zero stability, and slashed benefits. Oops, and stagnant wages the past decade adjusted for inflation. It didn't quite work out that way when we look at the data did it? So instead have the Federal Reserve create multiple bubbles to hide the fact the middle class is being hollowed out. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] Now ask yourself where we would be as an economy if we were not borrowing from the future to the tune of nearly $40 Trillion to fund the 17% of the economy that is healthcare jobs. Actually don't ask - let us just celebrate the stock market going up - which tells us everything is ok. Jobs are highly overrated - corporate profits are the true signal of a nation's health.

Again, have your child strive for a government job ... that's our future. And our recent past... we just won't admit it. What do you see changing in the next 10 years?


Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support.

Industry Change, May 1999-2009

(thousands of jobs)*


Private healthcare 2898
Food and drinking places 1567
Gov educ 1390
Professional and business services 885
Gov except health and ed 843
Social assistance 796
Private education 772
Arts, entertainment, and recreation 188
Gov health 148
Mining 133
Financial activities 130
Utilities -40
Transportation and warehousing -43
Retail -91
Accomodations -119
Wholesale -166
Construction -238
Information -525
Manufacturing -5372


*Gov health and gov educ based on April 2009 estimates
Data: BLS


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