The Bureau of Economic Analysis (BEA, a part of the Commerce Department) came out with its long awaited report on GDP for the second quarter and the results show a sagging economy. GDP weighed in at a positive 2.4% growth for Q2, but that is against a backdrop of an upwardly revised Q1 of +3.7%. This is something I have been expecting and it appears that more recent data is declining even more.
It has been my premise that (1) fiscal stimulus would only give a temporary boost to GDP without leaving any permanent economic growth, and that (2) the business cycle is stalling out because the government has thwarted the underlying factors necessary for a recovery.
The headline from the mainstream media has been for the most part that the reason GDP declined from Q1 is that exports have dropped and that imports have risen. In calculating the “national account” the BEA nets out imports and exports: imports result in payments to foreign sellers and exports result in payments from foreign buyers. Rising exports have been largely due to the surging value of the dollar in Q4-09 and Q1-10 as troubles in the eurozone caused institutions to dump euros for dollars. Europe’s troubles caused the euro to decline relative to the dollar and this made U.S. exports more expensive U.S. exports fell off. Further, Europe’s problems caused them to cut back on their imports that hurt not only U.S. exporters but also large exporters like China. As you can see, the euro is starting to turn around as the foreign exchange markets believe Europe is solving its problems. This may help exports if European companies recover.
But the decline in exports is not the real story behind GDP. The real story is the fact that the production cycle is stalling out because of a lack of consumer demand. … Continue reading GDP Sags In Q2 2010
Last weekend I attended Freedom Fest, a libertarian-ish convention in Las Vegas. You know, from Steve Forbes to Peter Schiff. I was there for a one day session with the Mises Institute but also wandered in and out of other lectures, perused the vendor section, and cruised the floors of Bally’s and Bellagio. Here are a couple economics vignettes of things that interested me about Las Vegas.
Tale No. 1 Las Vegas
Because I wasn’t staying at Freedom Fest’s venue, Bally’s, but rather at a friend’s place, I managed to take about 8 cab trips back and forth (you can’t walk around when it’s 110°) and struck up conversations with my cabbies. All, except for two, were immigrants from Haiti, Ethiopia, Iran, West Indies, Central America, and one who refused to identify his country of origin. Without exception they all said business was slow, tips were down, and they were making far less money than during the boom.
But here’s the saddest tale, and I am told, far from infrequent. My cabbie Tony, 50 years old and born in the USA, was no longer a home owner. He had a home, bought during the boom, maxed out his loan at 90% of value, and watched it go down from the $305,000 he paid to “I don’t know what it’s worth today. I gave it back to the bank.”
As gambling in Vegas was seen as a frivolous pastime, his cab business declined at well–he and his partner had 5 cabs and his employees drove the other cabs in double shifts. He lost those as well when he couldn’t make the bank payments. Oh, and he and his wife got divorced, and then she lost her job as well. “I got nothing, but I love my family,” Tony said. It gets worse.
His father also got into the “game” and bought 3 homes. The last one was at a developer’s “lottery” for about $800,000. When he mentioned that dad was the lucky buyer at a lottery, I knew right where the conversation was going. Dad lost all three homes and is now broke. Without his Social Security check, he’d be living with Tony. … Continue reading Tales of Vegas Part I
Today’s history lesson reminds us of current day Europe. Would France invade Greece at the behest of its bankers to oust Papandreou, insert their own candidate, and restore fiscal sanity to get its banks paid off? Here’s the tale of Ptolemy XII who, as Thatcher said, ran out of other people’s money and turned to [...]
This article is a look at the US’s recovery, Europe’s recovery, Asia’s (China) recovery, and how they all tie together.
Tuesday the ISM manufacturing report came out for the US and showed more positive results. The index was at 59.7 down just a tad from April’s 60.4, and showed a continuation in the steady gain in manufacturing since the bottom in November of 2008.
 courtesy Wall Street Journal
The rise in US manufacturing has been driven largely by exports. The EU and Asia have been strong buyers of US goods, especially since the dollar is down relative to the euro and other currencies. A cheap dollar make US exports more attractive to those countries with higher value currencies. The ISM export index rose to 62 in may, up from 61 in April, the highest level since 1988. The driver of exports has been inventory restocking as inventories are being replenished. The same factors are driving manufacturing here.
 courtesy the Wall Street Journal
Exports have been strong in technology, construction and mining equipment, aircraft and transportation equipment, manufacturing equipment, and commodities. Manufacturing is usually a sign that the economy is recovering. As new capital equipment is manufactured, companies spend more on raw materials, hire workers, the workers spend the money, it stimulates consumers spending, demand for consumer goods rises, and off we go.
There is a big if here. What if the growth in manufacturing is actually a false economic signal? In other words, what if manufacturers are increasing production based on orders that do not signal a recovery of consumer demand? What if the perceived consumer demand is just fiscal stimulus money directed at bailing out industries that were already failing because consumers decided they didn’t want those goods anymore (houses, for example)?
… Continue reading What Will Drive Manufacturing?
David Wessel, I have five words for you: post hoc, ergo propter hoc.
Mr. Wessel is the Wall Street Journal’s chief economics commentator, and is often the face of the Journal on television. He wrote an article recently (“Bailouts Save Day, Win Scorn“) that laments the fact that, despite the fact that the bailouts saved the world, Mr. and Ms. America don’t believe it. In fact, he points out that Americans’ distrust of government and large corporations has grown as a result of the bailouts, something they see as unfair, and an example of cronyism between Wall Street and Washington.
He says in the article:
The world has had a terrifying brush with another Great Depression. Although the recent scare in Europe is a reminder that this isn’t over yet, it looks like we’ve escaped that—in no small measure because of taxpayer-financed bailouts and fiscal stimulus, as maligned and imperfect as they were.
Mr. Wessel is a bright guy, a star of a pro-capitalism newspaper. Yet he makes serious economic and logic errors that are not based on theory or the record. He needs a lesson in economics and epistemology (the science of how we know what we know).
Post hoc, ergo propter hoc is a Latin phrase describing a logical fallacy. The fallacy is: because A occurred and then B occurred, then A caused B. In modern behavioral economics this also coincides with the principle of “confirmation bias,” where you look for data that coincides with your desired conclusion.
There are two fallacies here. … Continue reading Bailouts Didn’t Save Day, Deserve Scorn
Today we had several important economics releases that on their face point to a recovery. I think we are actually stagnating economically, and many of these positive factors will prove transitory.
Consumer Spending Report
Consumer spending increased slightly in March by 0.6% (MoM) although income only went up by 0.3% (MoM).
Spending was driven by a decrease in savings (2.7% vs. 3.0% in February) and a substantial increased in government unemployment and other welfare benefits. These government transfer payments were up $24.9 billion in March, compared with an increase of $7.3 billion in February.
In other words, government transfer payments are helping to encourage spending and discourage savings.
While you can argue that unemployment benefits aid consumption, that is not the case. The money has to come from somewhere and that somewhere is your current or future earnings (through taxation) which means you have or will eventually have less to spend. Transfer payments such as these never have any lasting benefit to the economy.
Here is a chart from Calculated Risk that shows exactly what I mean:
 Thanks to Bill McBride of Calculated Risk for all of your excellent work that saves me a whole lot of time
This shows that income, excluding government payments, is flat and transfer payments have had a significant impact on spending.
What were consumers buying? It appears to be autos and appliances.
… Continue reading Spending, Industrial Output, and Recovery
We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the first part of a three-part series on this topic.
We are told that China has huge housing needs, that demand will continue for decades, and that prices have nowhere to go but up. But that’s not how economics works for housing or for any other product. It may be true for China’s long term, but the short run can kill you.
Having been in that business, we were told here that America’s long term growth potential was almost limitless, that new family formations, immigration, and abundant financing would continue to drive the housing market higher. And remember, they said housing prices had never declined on a national basis in the last 60 years.
“They” were wrong as it has now been painfully revealed to us. There are many factors affecting the supply of and demand for housing. And prices do go down, dramatically. So, when you hear that China’s housing market will grow in a linear direction and that its economy will not be impacted by a housing bubble, you can evaluate that statement in light of recent history.
4 Important Things to Know About China
Before I go into the details of what is happening in China right now, there are four things about China to consider.
First, most economic statistics from China are inaccurate. This is the result of state, top-down driven economic planning. The nice thing about a planned economy is that they can pretty well dictate what GDP will be because of the way they calculate it. What they mean by “GDP” is very different than what other countries mean by GDP.
China counts the funds that are distributed from Beijing to local governments and entities as spent when distributed. Retail goods are calculated as sold when factories ship goods, not when they are purchased by consumers. This is an artifact of communist central planning that brought them the ruinous Five Year Plans and the Great Leap Forward (Backward) of Mao Zedong.
Local or regional bureaucrats responsible for allocating resources or implementing policies are often corrupt, inept, and lie about the results of their efforts. What comes to mind is the school in Sichuan province (the so-called “tofu-dregs schoolhouse”) that collapsed during the earthquake in 2008 because local officials were bribed, paid off, colluded, whatever, by the contractor who was responsible for the shoddy product. You can multiply that ten thousand times. No one knows what is really spent and what goes into the pockets of corrupt officials.
Second, local and regional governments and state-run enterprises are in serious financial trouble because of the real estate bubble. A big revenue source for local and regional governments is from land sales to developers. We’ve all heard the stories of landowners and tenants getting kicked off their land to make way for a new block of homes or condos. Their compensation is small, and you can guess where a lot of the money goes. The local entities borrowed lots of money to finance developers. Beijing is so worried about the financial solvency of local governments that Premier Wen Jiabao announced at the National People’s Congress last week that it will issue 200 billion yuan worth of bonds on behalf of local governments.
In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.
“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said [Northwestern University Professor Victor Shih] who spent months researching borrowing by about 8,000 local government entities. …
Su Ning, a deputy governor at China’s central bank, said March 8 that a “fairly high proportion” of total lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans in 2009. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said in Beijing.
… Continue reading China’s Fragile Economy, Its Housing Bubble, and What It Means To Us: Part I
March 1 (Bloomberg) — The U.S. Transportation Department will lay off 2,000 employees today, halting construction projects, reimbursements to state governments and highway safety programs, according to a statement.
Employees will be furloughed without pay because a funding measure stalled in Congress, the department said in a statement today. The affected workers are in [...]
The core Consumer Price Index fell for the first time since 1982–0.1%–in January. Economists are lauding this deflation as a good thing on the theory that it gives the Fed more flexibility: in keeping interest rates low, as they have been doing, they don’t have to worry about inflation. I’m not sure what they mean by that since it has been the policy of the Fed to try to create inflation as a way to get out of our recession. It hasn’t worked.
If I’m not mistaken, just a few months back economists were worried about a deflationary tailspin and a further decline in employment. It was felt that whenever the Fed needed to, it could, and should, gin up a little inflation and bail us out of a deflationary spiral. There has been no shortage of credit poured into the economy by the Fed, otherwise the Fed wouldn’t need an exit strategy, yet the very thing stimulus and easy money was supposed to prevent, deflation and unemployment, stubbornly refuse to disappear. The Fed points to green shoots (GDP Q4 gain of 5.7%) such as the increase in manufacturing activity, auto sales, and health care expenditures. But …
It is not a coincidence that WalMart experienced it first ever decline in its U.S. same store sales. WalMart, which accounts for about 10% of all retail sales in the U.S., noted that heavy discounting (deflation) in food and electronics lowered the overall value of its sales. The strong corporate profits we are seeing so far have resulted from efficiencies rather than increased sales for the most part, and this can’t continue much longer–you can only fire so many people, shorten work week and cut slack to a point and then sales have to kick in. As well, inventory restocking will only boost the economy so far until the consumer goes shopping again.
According to classic Monetary and Keynesian theory, flooding the economy with money stimulates the economy, causes prices to rise, and consumer spending and general economic activity resume. Why hasn’t the Fed’s inflationary policy worked? Why is credit continuing to dramatically contract? Why are prices falling? … Continue reading It’s Supposed to Work: The CPI and Further Adventures in Keynesian Policy
Comments on President Obama’s State of the Union Speech
I will say that President Obama is pretty good at this speech stuff. Remember last year when Professor Obama said that the adults are now in charge and we’re going to clean up the mess the kids made? This year had a [...]
China has created a new housing bubble. Here are some excellent reports on what the bubble looks like and some ominous glimpses on how it may end. Like all bubbles it will burst and the economic fallout will impact China’s economy and the U.S.’s. The frenzy indicates that the blow-up will [...]
President Obama used his bully pulpit on Thursday to chastise banks and bankers while announcing a punitive tax on them to assuage an angry populace. Is his rage against the big paydays justified? Not for the reasons he thinks. [...]
By Jeff Harding.
This video was sent to me by Dan Mitchell at Cato. Dan presents an excellent summary of why government spending is harmful to the economy and prosperity. Whether or not it results in deficits, the greater the spending by government as a percentage of GDP, the greater is the negative impact on the [...]
Jeff Harding.
I don’t mean to keep picking on Japan. But, they are the textbook case of why Keynesian economics doesn’t work. Actually, now that I think about it, they are the textbook case of why Austrian free market economics works. I have set them up as the poster child for bad policies. They [...]
By Jeff Harding.
In order to understand the present state of the U.S. economy you have to understand that there are two things happening at once. For the most part they are in conflict with each other, in that one track can negatively impact the other.
Lest I be accused of putting out conflicting information, there [...]
By Jeff Harding
Good news is breaking out all over it seems. The housing market is finding a bottom and in some key markets prices are rising. The Case-Shiller report, the National Association of Realtor’s median price report, and the Federal Housing Finance Agency (FHFA) price indexes all report gains in sales and home [...]
By Jeff Harding
Japan has the world’s second largest economy so we need to pay careful attention to what they are doing. The Q2 numbers just came out and real gross domestic product grew 0.9%, an annual pace of expansion of 3.7%. There are many commentators and economist already calling Japan’s recession at an [...]
By Jeff Harding
Just in case you missed this, Neil Bardofsky, the guy in charge of auditing TARP and related programs, said yesterday that “U.S. taxpayers may be on the hook for as much as $2.37 trillion to bolster the economy and bail out financial companies.” This includes all obligations by the Fed and [...]
By Jeff Harding
This is what I have been saying about Keynesian fiscal stimulus for the last year: when it doesn’t work, its advocates come up with excuses such as we didn’t do enough, we didn’t do it soon enough, intervening events thwarted the efficacy of this policy. Etcetera, etcetera.
WASHINGTON — Vice President Joe [...]
By Jeff Harding
The numbers for inflation/deflation came out today.
U.S. annual inflation slid deeper into negative territory in May as consumer prices posted their largest annual decline in almost 60 years.
Still, a slight rise from the prior month and an increase in core prices that exclude food and energy support the [...]
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