This Recession Isn't Over: Now for the Hard Part

I've spent a lot of time talking about the major differences between the current recession and the types of recessions that most investors have grown accustomed to. This ain't your father's recession.

Unfortunately, many are making the mistake of applying recent recessionary data to come to the conclusions that we're going to experience an '82, '91 or '02 type of recovery. I believe they are sorely mistaken.

There is no doubt that we averted a serious crisis last fall, but that doesn't mean we are out of the woods. I have often noted that there is a huge difference between real recovery and the deceleration in economic declines. This means that the hardest part of the cycle is likely ahead of us. As we've said before, this is a two part credit crisis.

In a recent research report HSBC notes:

The progress seen so far could yet prove to be the easiest part of the recovery…with a number of formidable, structural challenges awaiting on the horizon.

However, financial markets, we suspect, may be about to find out that it’s often better to travel than arrive. Despite all the developments of the past year, we believe that the most formidable challenges may lie ahead, and that the more demanding questions are yet to be answered. It now seems likely that the worst outcomes which threatened last autumn have been averted, but it’s far from certain that a solid, durable recovery will emerge over the coming twelve months or, when abstracting from the cycle entirely, just what economic underpinnings remain.

Among the greenest of the green shoots has been China's sharp rebound in recent months. HSBC, however, is skeptical of China's positive impact and believes the optimism is a bit overdone:

At first glance, the sharp rebound in China’s fixed investment (up 34% year-on-year in May) certainly sits oddly with the continued collapse in imports (down 25% over the same period), but the steep decline in import values is at least partly explained by commodity prices, which are still much lower than a year ago. China’s import volumes of iron ore and oil are, in fact, among the few that have shown any significant revival recently and the ongoing infrastructure investment suggests this is set to continue, bringing obvious benefits to its main suppliers of these products: India, Russia, Australia, Brazil, South Africa and the Middle East. Other areas of high government spending such as energy conservation should also prompt greater imports of specialist machinery and equipment and new technology, providing some benefits to the likes of Japan, Germany and the US (see Riding on China’s recovery by Qu Hongbin, 27 May 2009). But any support from China will likely prove only a modest positive when placed against the weakness of investment spending in the excess capacity-ridden developed world.

To put the numbers in into context: for every 1% point rise in the US household savings rate, China’s consumer spending growth would have to accelerate by nearly 7% points to compensate.

They go on to note that China's rebound is actually contributing to the price increases we're experiencing in most major commodity markets. David Rosenberg noted last week that consumers are suffering from debilitating wage deflation. The rising commodity prices are compounding the problems:

In all of the major economies energy is detracting significantly from the annual change in consumer prices and will continue to do so over the next few months. But with oil prices having risen steadily
since the start of the year, the consumer price index is drifting up again, suggesting the boost to quarterly real wages is now over. Indeed, assuming oil prices remain at current levels, energy will be detracting from the quarterly change in real wages as early as Q3 (chart 9).

Higher oil prices could also raise inflation expectations, as in H1 2008 when they rose to such a degree that it prompted the ECB to raise rates in July 2008. A repeat of this appears highly unlikely given the degree of slack in the economy and the much lower potential for a wage response. Wage growth in the US and UK has already slowed sharply and although nominal wage growth in the Eurozone has recently held up fairly well, this is primarily a consequence of the delayed labour market adjustment in the major economies which we expect to come through later this year. In Eurozone countries where employment and consumer spending have already fallen sharply – notably Spain and Ireland – so has core inflation. The same point applies to the developed world generally given that the unemployment rate is now higher than the peak during the early 1990s recession (chart 11). Looking at capacity more broadly, the global output gap, which we expect to exceed 4% of global GDP by the end of 2009, also suggests that the cyclical position of the global economy is not conducive to generating inflationary pressures (chart 12). Judging by their recent communications, this view is also shared by the major central banks, for whom the prospect of rising structural unemployment and a perhaps prolonged reallocation of resources across their respective economies will represent substantial
analytical challenges.

A recent McKinsey report comes to similar conclusions. U.S. consumers are wilting under the pressures of deflating wages, job losses and debt (of course, Americans aren't the only ones deleveraging).

US consumers have responded to the global economic crisis by curtailing their expenditures, paying down debt, and saving more—all logical responses to a recession. Yet most consumers have acted by choice, not necessity, according to McKinsey. Spending, saving, and debt averages are not at abnormal levels today but rather returning to long-term trends.

It was the behavior of US consumers during the past two decades, our research shows, that was the aberration. The return to traditional spending patterns will cause companies to adjust to a fundamentally altered playing field.

In a McKinsey survey conducted in March 2009, 90 percent of the US respondents said that their households had reduced spending as a result of the recession—33 percent of them “significantly” so. The survey, which included 600 households in three consumer segments comprising around 40 percent of all US homes, found that 45 percent of those who reduced spending did so by necessity, 55 percent by choice.

HSBC attributes the rapid deleveraging to three key factors:

These key issues, therefore, cannot be ignored, particularly as the degree of adjustment in the US household sector over the past year has actually been fairly quick, with the savings rate having risen to 6.9%, back towards its average of the last 50 years. The UK household savings ratio has risen moderately, while even Spain has seen a marked turnaround in the household financial balance. The unusually rapid pace of this deleveraging reflects three key factors:

1. The exceptional contraction in credit in late 2008 and early 2009. Flow of funds data for both the US and UK showed a net fall in new lending in Q4 for first time since these series began (see chart 15). Demand for credit will have played a role in this given the collapse in confidence post-Lehman which is borne out by the bank lending surveys. However, many households will have had no choice but to curtail their borrowing.
2. The dramatic reduction in interest rates has lowered the interest burden sharply, particularly in the UK, allowing households to pay down significant amounts of debt merely by keeping monthly payments unchanged.
3. The boost to real incomes from the fall in oil prices meant households were able to pay down debt without curtailing spending too dramatically.

In order to try to understand the size, scope and duration of these problems it's useful to look back at Japan's deleveraging cycle. We've noted that the crisis in the U.S. appears to be very similar, though occurring at mach speed. Nonetheless, this doesn't mean we're near the end of the current crisis and likely still have years of economic difficulties ahead.

After Japan’s bubbles burst, private non-financial companies undertook a decade-long de-leveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. Firms massively reduced their spending on investment, shifting their financial balance from deficit to a large and growing surplus. There are clearly differences, which we have discussed in the past, but if US households were to undertake a similar de-leveraging, their debt-to income ratio would need to drop to around 100% over the next 10 years. That would return it to the level that prevailed in 2002. The FRBSF estimates that the household saving rate would need to rise to 10% by the end of 2018 and that a rise in the saving rate of this magnitude would subtract about three-quarters of a percentage point from annual consumption growth each year, relative to a baseline scenario in which the saving rate did not change.

Despite recent progress and chatter of green shoots, it's unlikely that this deleveraging process will end quickly or in anything close to a v-shaped recovery.

Disclosure: No positions

Comments

[whidbey:]

"consumers are suffering from debilitating wage deflation. The rising commodity prices are compounding the problems:"

The structural change to come is the recognition by the Administration that spending > revenues is not sustainable without crushing the consumer and small businesses. If that happens (and it now seems probable) we must expect that a deeper recession or worse is possible. It all happens in the trenches where consumers live or die. Thanks, nice insights.

Jul 06 10:17 AM

[AndrewBaker:]

If the consumer does not spend, then there is no recovery. The green shoots that have been talked about revolve in large part around China using its dollars to buy real assets rather than hold a currency that's heading south. But these assets have little use right now as demand is not there, so even the rise in commodity prices recently will tail off.

The hard part will be getting spending going again, but many people do not have the funds to spend and those that have money are now saving it for the future as most people cannot be so sure of their jobs, if they still have one.

Throwing bail-out money around does no good if there is no real production going on, and at this time, there isn't. Let companies that fail, fail, instead of keeping a deceased entity going using money that could be put to better use. It will hurt, but at least we will be moving on, not perpetuating a failed business that is holding back a real recovery.

Jul 06 10:48 AM

[Moon Kil Woong:]

Anyone attempting to assuage their economy with quantitative easing will also visit the dark side of that tecnique just like Japan did.

However, since the US has no trade surplus or reserves to speak of it is liable to turn out oh so very badly. You would think people would learn from history, but the fact the US revoked the Glass Stegall act has already proved that a complete fallacy.

Jul 06 10:55 AM

[Alphameister:]

The point of maximum danger has passed, but the great ordeal of healing has barely begun. It's very difficult to be optimistic regarding the long-term future of the US.

Jul 06 11:05 AM

[steve graves:]

Great piece, fully concur. Considering that U.S. & E.U. consumer spending combined generates 27.5% of the global GDP, how can any meaningful global recovery possibly occur without them leading the way?

Savings rates in the U.S. are approaching the historical norm, where they will very likely remain (otherwise they wouldn't refer to it as a historical norm); consumer spending, as measured by PCE, has literally fallen off a cliff (again, by historical standards); consumer credit has finally begun to decrease after steadily rising for a generation, but this 'adjustment' has only proceeded to mid-2008 levels (which would imply it has a ways to go); unemployment in both the U.S. and the E.U. will almost certainly continue to rise for at least another year, after which 'jobless recoveries' seem very real possibilities. How then can a global recovery occur when the consumers who drive the global economy are no longer able or willing to fully participate? When consumers in the U.S. can no longer use their rising home equity as ATM machines (a little sleight of hand that made our GDP seem half-way respectable for half a dozen years, post 9/11)? Where will consumers borrow the virtual money they need in order to fuel our much anticipated economic recovery? And if not them, who? Short of handing out a billion VISA cards in China and India it's difficult to imagine the green shoots actually growing.

Jul 06 11:14 AM

[John Mylant:]

"Despite recent progress and chatter of green shoots, it's unlikely that this deleveraging process will end quickly or in anything close to a v-shaped recovery."

I like this quote. It is very simple, we all have been talking about the Bear Bounce and we have had it and now we are all talking about the recession again. It is still around, things are not that rosy looking yet. We really need to position ourselves for making money in a sideways to down market.

Jul 06 11:17 AM

[Jason Rines...:]

I would have to disagree Alphameister. Commercial RE is the shoe that is now free falling and is MUCH bigger problem then consumer RE. All the US has done is to stave off default for a few years. Entitlements and government policy including additional tax policies will be make things worse. How about another year of deflation? That is coming followed in 2011 by inflation & taxation whammy. I pulled out of the market completely in March. I expect four more years of whipsaw, surprises and further erosion of freedom as government becomes bigger. We are still shedding jobs and as the article mentions, wage deflation even as commodities rise. It's going to get worse and be ugly and I imagine the 2012 elections will decide if we are to maintain a Republic or become Communist-lite

Jul 06 11:18 AM

[six:]

The US consumer is reverting to their mean spending level. This level is NOT what the past 2 decades represent. Hummers, McMansions, Luxury Vacations are not something most consumers should have ever purchased. The real rub here is that these items were not purchased with cash but with debt and now that debt is being destroyed at a rapid pace. As the consumer retrenches the banks are pounded, consumer spending plummets and savings increase.
The question is when does this change, why will it change and how will it change? DO NOT EXPECT A "RECOVERY"- expect a shift to a "new normal". A normal that does not include spending 130% of your disposable income. The consequence of that is consumer spending will stay far below historic norms (last 25 years) and that is a tremendous drag on both the US economy and the world economy. So despite the rantig of almost every pundit do not look for inflation. Stay with either a short term outlook on equities or plan to hold them for 25 years. If you can't commit to that leave them alone. Look at bonds and preffered stocks and then only to the highest rated issues. As far as TIPS go I would rather own oil or gasoline as a hedge aginist inflation. Cash is still king and may continue to be for quite some time.

Jul 06 11:23 AM

[MGA_1:]

Sorry, but I think we're actually about 1/3 or 1/4 the way through this thing. The problem is still *debt*. Tons of it. Credit card, Alt-A/Option Arms and then commercial real estate. Then our govt.

I don't think comparing us with 90's Japan is a good comparison - I would actually say we are more like 2000 Argentina. A lot of external debt (china/japan). Huge public sector programs and budget deficits and I think the govt is going to try and save the day through monetary policy. I'm looking for a continued inflationary downturn.

Jul 06 11:28 AM

[The Pragmat...:]

Looks like the charts didn't publish with the article. You can see the accompanying charts at pragcap.com - thanks for reading everyone. Hope it helps.

Jul 06 11:38 AM

[Larry House:]

Sad but true. There is no quick fix for years and years of excesses. This will have to be fixed the old fashioned way--we have to work through it. Consumers are changing not for a few weeks or months; they are changing (at least Boomers are) for the rest of their lives. New taxes cannot solve balance sheet problems for the governement, but taxes will be raised as they try that approach. The "cures" that are being proposed will come close to killing the patient and may do harm for decades.

Jul 06 11:57 AM

[MatrixSurfer:]

I do appreciate the analysis and agree in the main with the conclusion. I cannot wrap my ahead around a comparison with Japan. Our governments operate so differently - and now here we have at least 29 states on the brink of insolvency (or there already) and a likely government/Barney Frank bailout - with implications that simply are not taken into account in this analysys. I am even sure any more exactly what kind of government we DO have - representative republic? Hardly. So with the recent moves into statism, I doubt there exists a valid historical comparison. Its a brave new world and I am preparing my clients for a 'worst case scenario' and a 'worser case scenario'. I have been in this business for 15 years, and have always found reasons for optimism - but it is a daily struggle now. We are on very, very thin ice and unless by some miracle the shackles on our creative, entreprenuerial spirit are removed the future is looking; well, less than robust.

Jul 06 11:58 AM

[jhartz:]

Predictions that are based on past events will prove less valid than usual, IMO, because we are all making assumptions based on interpretation of economic data that is being rigged to present the most optimistic readings.

Those people who look closely at their own small area of expertise keep finding clear differences between what the government and the media are reporting and what they, themselves, are personally observing.

I've visited some local malls and spoken with small retail business owners. I've looked at actual real estate sales taking place in the area where I'm most knowledgeable. The trends are all down, and many potential sales are not being made because the seller would take away nothing other than the capacity to pay off all or nearly all of his mortgage.

This recession isn't going to improve until people have reliable data to make their decisions. As long as the powers that be try to conceal important economic facts from investors, and manipulate all the markets in hopes of preventing collapse, we will be strangling all hopes of eventual recovery. We need transparency, and more importantly, lack of tampering, inside our capitalist markets.

Jul 06 12:45 PM

[Larrysyr:]

The governmental moves of the past year and a half have staved off complete disaster, which would have led to massive social unrest. These measures have held off the immediate emergency long enough to give us a chance to talk about "working through this." But work through it we must.

Consumers cannot spend more than they make. Credit is not infinite. If we're lucky, the lower levels of economic activity will hold up while the economy turns to new activities as drivers. I don't know what these new drivers will be, but I am certain they will not involve buying useless stuff at the mall.

Looking for a rebound in consumer spending is looking for a return to the past. That is the wrong way to be looking.

Jul 06 01:06 PM

[receipt:]

The first step toward "recovery" is to admit you have a problem. Until President Obama holds a prime time news conference clearly stating that the faked inflation, GDP, and unemployment statistics the government has published since the Clinton Presidency have distorted and misled comsumers and policy makers alike, and must be recalculated and republished and most importantly repaid (to make up for the theft from those whose incomes depend upon the inflation guages) we have zero chance to regain the trust in each other which used to characterize the resulting vibrant American economy. The chances of this happening? ZERO. The chances of a real recovery until it does? ZERO. Advice? Get into and stay in CASH.

Jul 06 01:36 PM

[Michael Clark:]

By my math we are not quite half way through. The contraction (should have) started in 2001. The dot com bubble was a huge warning shot over the bow and should have marked the end of the expansion. Alan G. should have begun raising rates slowly. He did start to raise rates in 2004-5, I believe, but it was too late. The contraction (de-leveraging) will last until about 2019.

Why 2019. Read a draft of my book at
www.hoalantrangallery....

Jul 06 01:40 PM

[American in...:]

To the contrary, without huge deficit spending there will be no recovery. I am amazed by these conservatives who still think a balanced budget in the midst of a severe recession is a good idea.


On Jul 06 10:17 AM whidbey wrote:

> "consumers are suffering from debilitating wage deflation. The rising
> commodity prices are compounding the problems:"
>
> The structural change to come is the recognition by the Administration
> that spending > revenues is not sustainable without crushing the
> consumer and small businesses. If that happens (and it now seems
> probable) we must expect that a deeper recession or worse is possible.
> It all happens in the trenches where consumers live or die. Thanks,
> nice insights.

Jul 06 02:18 PM

[American in...:]

Stop the nonsense about faked government statistics. This is an urban myth. Government statistics are solid.


On Jul 06 01:36 PM receipt wrote:

> The first step toward "recovery" is to admit you have a problem.
> Until President Obama holds a prime time news conference clearly
> stating that the faked inflation, GDP, and unemployment statistics
> the government has published since the Clinton Presidency have distorted
> and misled comsumers and policy makers alike, and must be recalculated
> and republished and most importantly repaid (to make up for the theft
> from those whose incomes depend upon the inflation guages) we have
> zero chance to regain the trust in each other which used to characterize
> the resulting vibrant American economy. The chances of this happening?
> ZERO. The chances of a real recovery until it does? ZERO. Advice?
> Get into and stay in CASH.

Jul 06 02:20 PM

[robert.b.fe...:]

There really is no telling how far in or out of trouble we may be in beacause of the afore mentioned deceptions perpetrated by multiple administrations and nations. However team Obama is agressivly persuing unsutainable agenda programs (borrow and spend) and carrying the deceptive practices to a whole new level. Currently world wide there is over $400T in unsecured debt (if any debt can be considered secure now). That folks is 12 times the entire amount of global GDP and still growing. Green shoots? better look for them growing out of the manure being shoveled on top of us.

Jul 06 02:21 PM

[American in...:]

You need to stop this nonsense about government statistics. It is an urban myth that government statistics are not accurate. Show us the beef ...


On Jul 06 12:45 PM jhartz wrote:

> Predictions that are based on past events will prove less valid than
> usual, IMO, because we are all making assumptions based on interpretation
> of economic data that is being rigged to present the most optimistic
> readings.
>
> Those people who look closely at their own small area of expertise
> keep finding clear differences between what the government and the
> media are reporting and what they, themselves, are personally observing.
>
>
> I've visited some local malls and spoken with small retail business
> owners. I've looked at actual real estate sales taking place in the
> area where I'm most knowledgeable. The trends are all down, and many
> potential sales are not being made because the seller would take
> away nothing other than the capacity to pay off all or nearly all
> of his mortgage.
>
> This recession isn't going to improve until people have reliable
> data to make their decisions. As long as the powers that be try to
> conceal important economic facts from investors, and manipulate all
> the markets in hopes of preventing collapse, we will be strangling
> all hopes of eventual recovery. We need transparency, and more importantly,
> lack of tampering, inside our capitalist markets.

Jul 06 02:22 PM

[American in...:]

That's rubbish. You have derived that silly 400 Trillion figure by including debts that have not yet been incurred!

It's a meaningless figure.

Sloppy, sloppy, sloppy ...


On Jul 06 02:21 PM robert.b.ferguson wrote:

> There really is no telling how far in or out of trouble we may be
> in beacause of the afore mentioned deceptions perpetrated by multiple
> administrations and nations. However team Obama is agressivly persuing
> unsutainable agenda programs (borrow and spend) and carrying the
> deceptive practices to a whole new level. Currently world wide there
> is over $400T in unsecured debt (if any debt can be considered secure
> now). That folks is 12 times the entire amount of global GDP and
> still growing. Green shoots? better look for them growing out of
> the manure being shoveled on top of us.

Jul 06 02:26 PM

[robert.b.fe...:]

Really? John Lounsberry did an excellent piece on unemployment numbers in today's editors picks. Please read it and then tell us how solid the numbers are.


On Jul 06 02:22 PM American in Paris wrote:

> You need to stop this nonsense about government statistics. It is
> an urban myth that government statistics are not accurate. Show us
> the beef ...

Jul 06 02:27 PM

[WS1835:]

On Jul 06 11:28 AM MGA_1 wrote:

> Sorry, but I think we're actually about 1/3 or 1/4 the way through
> this thing. The problem is still *debt*. Tons of it. Credit card,
> Alt-A/Option Arms and then commercial real estate. Then our govt.
>
> I don't think comparing us with 90's Japan is a good comparison > I would actually say we are more like 2000 Argentina. A lot of external debt (china/japan). Huge public sector programs and budget deficits and I think the govt is going to try and save the day through monetary policy. I'm looking for a continued inflationary downturn.


I also like the Argentina comparison, but for different reasons.

First, over the last 30 years the USA has developed the same permanent political class that has characterized Argentinian politics since Peron. No matter who gets elected, the same old cliche is in charge. So the general political paradigm is very similar.

Second, Argentina has responded to their deteriorating economy/finances the same way as we have. Rather than reduce spending and limit government, they have raised taxes, siezed private assets (IRA confiscation anyone?) and printed more money to fill the gaps. Sound a bit similar to the current policy drift in Washington DC?

Arguably Argentina is a few years down the path from where the USA is now, but we are quickly closing the gap.

Jul 06 02:28 PM

[American in...:]

Japan is the classic example of a deflationary economy. It's useful because it suffered exactly what the US suffered: a huge asset bubble.

Japan lost a decade and suffered deflation despite rapidly expanding money supply and significant fiscal stimulus.


On Jul 06 11:58 AM MatrixSurfer wrote:

> I do appreciate the analysis and agree in the main with the conclusion.
> I cannot wrap my ahead around a comparison with Japan. Our governments
> operate so differently - and now here we have at least 29 states
> on the brink of insolvency (or there already) and a likely government/Barney
> Frank bailout - with implications that simply are not taken into
> account in this analysys. I am even sure any more exactly what kind
> of government we DO have - representative republic? Hardly. So with
> the recent moves into statism, I doubt there exists a valid historical
> comparison. Its a brave new world and I am preparing my clients
> for a 'worst case scenario' and a 'worser case scenario'. I have
> been in this business for 15 years, and have always found reasons
> for optimism - but it is a daily struggle now. We are on very, very
> thin ice and unless by some miracle the shackles on our creative,
> entreprenuerial spirit are removed the future is looking; well, less
> than robust.

Jul 06 02:29 PM

[Fighting Yoda:]

Of course the V recovery, green shoots etc were simply PR hatchet jobs- all have been confirmed to be baseless. It would be like a L or a down-stair case with landings, corrugated sheet – lots of analogies. Almost no one sees any job recovery till ‘011 – more like a protracted jobless recovery. Last couple of decades our economy has been dependent on the consumer who has dependent on credit – both are totally impaired now. Consumer is deleveraging – trying to save and reduce debt – so the big party is over.

Inflation vs. Deflation is the unsettled debate; I am on the deflation side. Job losses and wage drops can lead to nothing but deflation – as is clearly in evidence all over. Specific commodities may rise (or not fall as much) because of demand/supply scenarios- that should not be misconstrued as inflation- even in a bad job market certain skills are sought after.

From the market perspective I do see the likelihood of steep declines – lets see what Alcoa, Dow etc tell us about earnings this week.

Jul 06 02:40 PM

[MatrixSurfer:]

I would appreciated ANY substiantated (read: un-manipulated), factual data that massive deficit spending by a government leads to prosperity. Thanks.


On Jul 06 02:18 PM American in Paris wrote:

> To the contrary, without huge deficit spending there will be no recovery.
> I am amazed by these conservatives who still think a balanced budget
> in the midst of a severe recession is a good idea.

Jul 06 02:41 PM

[Stone Fox C...:]

yes, the recession will never end and everybody on here seems to agree with that. Then why does the data suggest the recession likely ended in June?

Jul 06 02:52 PM

[MatrixSurfer:]

Well I expect if you are right, then we will be just fine. My understanding is it took the Japanese government some 9 years to act; whereas we have acted rapidly and massively beyond all capacity of most handheld calculators to crunch. I just have to wonder how spending all this money to hire citizens dig holes and fill them up creates true productivity.


On Jul 06 02:29 PM American in Paris wrote:

> Japan is the classic example of a deflationary economy. It's useful
> because it suffered exactly what the US suffered: a huge asset bubble.
>
>
> Japan lost a decade and suffered deflation despite rapidly expanding
> money supply and significant fiscal stimulus.

Jul 06 02:55 PM

[MatrixSurfer:]

Which data was that? Just curious, I must have missed something. So that I can perform due diligence that is actually meaningful, I would be grateful for any non-governmental manipulated data that indicates the end of this recession. Thanks in advance.


On Jul 06 02:52 PM Stone Fox Capital wrote:

> yes, the recession will never end and everybody on here seems to
> agree with that. Then why does the data suggest the recession likely
> ended in June?

Jul 06 02:59 PM

[jhartz:]

To answer your question: The data is being rigged. It is hoped that consumer confidence will return and that people will get right back on that debt horse and ride it closer to the chasm of national bankruptcy. Hope isn't going to change reality though. We need to get down to addressing our real problems by first admitting what they are. Our government has, to date, refused to do that.


On Jul 06 02:52 PM Stone Fox Capital wrote:

> yes, the recession will never end and everybody on here seems to
> agree with that. Then why does the data suggest the recession likely
> ended in June?

Jul 06 03:07 PM

[MatrixSurfer:]

It is a substantiated fact that the U.S. government does not include the cost of energy and the cost of food in its CPI estimates for the obvious reason of minimizing increased COLA payments. It is also known that the government does not count people who have stopped looking for work in its unemployment figures. Please feel free to join us in the quest intelligent answers, if in fact that is what you seek. It seems more likely however that you simply enjoy baiting non-Parisian Americans and fiscal conservatives. Dang, fishhook, you got me.


On Jul 06 02:20 PM American in Paris wrote:

> Stop the nonsense about faked government statistics. This is an urban
> myth. Government statistics are solid.

Jul 06 03:22 PM

[robert.b.fe...:]

Damn! I was counting on all that hope and change. Now all I have left is some loose change I hope it lasts.


On Jul 06 03:07 PM jhartz wrote:

> To answer your question: The data is being rigged. It is hoped that
> consumer confidence will return and that people will get right back
> on that debt horse and ride it closer to the chasm of national bankruptcy.
> Hope isn't going to change reality though. We need to get down to
> addressing our real problems by first admitting what they are. Our
> government has, to date, refused to do that.

Jul 06 03:35 PM

[The Pragmat...:]

Stone,

There is nothing significant about the technical end of a recession. Positive GDP growth does not mean stock prices will be higher. In fact, as we saw with Japan, GDP remained relatively robust all thru the 90's, but the deleveraging and deflation occurring underneath the surface kept a lid on stock prices.

In other words if you're buying and selling stocks based on what the NBER says about a technical recession you're making an enormous mistake.


On Jul 06 02:52 PM Stone Fox Capital wrote:

> yes, the recession will never end and everybody on here seems to
> agree with that. Then why does the data suggest the recession likely
> ended in June?

Jul 06 04:00 PM

[robert.b.fe...:]

My bad that's Lounsburry.


On Jul 06 02:27 PM robert.b.ferguson wrote:

> Really? John Lounsberry did an excellent piece on unemployment numbers
> in today's editors picks. Please read it and then tell us how solid
> the numbers are.

Jul 06 04:30 PM

[437339:]

jhartz

You are correct . Alan Greenspan constructed " core inflation " CPI during the Clinton years , taking FOOD + energy increases out of the formula .GREAT messege for younger workers , ' work till your old + or disabled , + then you can starve + freeze too ". This administration does not know S*** re economics . Starve the Boomers in the US , whom have already lost their retirements in meltdowns 2000+2008 , + their home equity YOU can
FORGET about any recovery in the US . The Boomers were the economy . Don't forget it !

Jul 06 06:55 PM

[437339:]

matrix surfer

Is correct Clinton admin took Food + energy out of COLA adjustments.
Once retired in the US , you are no longer usefull , so no need to eat well + have adequate heat . Clinton ALSO pushed for NAFTA treaty , pushing copious jobs offshore .People think DEMOCRATS are in their best interest ? Dream on . Democrats / Republicans are on different sides of the SAME coin ! GOLDMAN SACHS contributed nearly 1 million to Obama campaine ! Save the Bankers is their mantra ! We need a 3rd party , independent party to Run this country .

Jul 06 07:36 PM

[bricki:]

The problem with rejecting Keynesian theory is that none of the postwar recessions turned into the depressions that were so common prior to the second world war. This is the best empirical evidence supporting use of fiscal policy to counteract economic downturns.

Another issue here is that applications of so-called supply side economics have all been accompanied by big deficits. So what do you say the benefits of supply side are caused by? Lower taxation or deficit spending? Or are there any real benefits?

Then there is the theory that deficits don't matter at all, a favorite of the past administration:

www.ontheissues.org/20...

Personally my theory is that government spending is the real concern. It removes capital from the private sector which is far better at allocation than the public sector. It really doesn't matter what "taxation" is because the REAL taxation is what government spends. If direct taxation is less than government spending then you will have indirect taxation in the form of inflation, higher cost of capital because you are competing with government in capital markets, etc. You can run a balanced budget if you stop playing games with taxes, and it won't matter one bit if spending is through the roof.

On Jul 06 02:41 PM MatrixSurfer wrote:

>
>
> I would appreciated ANY substiantated (read: un-manipulated), factual
> data that massive deficit spending by a government leads to prosperity.
> Thanks.

Jul 06 10:06 PM

[Michael Clark:]

I have to agree. If people are thinking in the old orthodox way, that Republicans are for Business, and Democrats for Workers, then they're in a time warp. That once may have been so -- and may be again some day. But for the past 20 years, ALL politicians have been out for themselves. Republican and democrat are the same today. I guess we need a NEW second party.


On Jul 06 07:36 PM 437339 wrote:

> matrix surfer
>
> Is correct Clinton admin took Food + energy out of COLA adjustments.
>
> Once retired in the US , you are no longer usefull , so no need
> to eat well + have adequate heat . Clinton ALSO pushed for NAFTA
> treaty , pushing copious jobs offshore .People think DEMOCRATS
> are in their best interest ? Dream on . Democrats / Republicans
> are on different sides of the SAME coin ! GOLDMAN SACHS contributed
> nearly 1 million to Obama campaine ! Save the Bankers is their mantra
> ! We need a 3rd party , independent party to Run this country .

Jul 07 12:13 AM

[derryl:]

Larrysyr wrote, "The governmental moves of the past year and a half have staved off complete disaster, which would have led to massive social unrest."

I know this is the spin Hank Paulson used to funnel the first $700 billion of taxpayer futures to his banker buddies, but is it true? What exactly has been prevented so far?

Some insolvent big banks were kept afloat with taxpayer capital, which prevented them from having to renege on billions of dollars of 'bonuses' promised for doing such good work destroying the financial system. Insolvent smaller banks have been allowed to fail, and insolvent non-financial businesses have been allowed to fail without a hint of a bailout. Insolvent homeowners are failing by the millions.

Real estate is a big chunk of bank asset portfolios, so when the value of mortgage collateral declines, including MBS and every other derivative based on mortgage debt, banks become even more insolvent. To 'prevent' this our trusty leaders commit trillions more taxpayer futures to buying these assets at inflated prices.

Meanwhile tent cities spring up, millions lose their jobs and homes and millions more are going to, bankrupt state and local governments are raising fees and taxes and cutting core services, and all the other good stuff that usually leads to "massive social unrest" is allowed to proceed without bailout.

I think we have been conned. I think the only thing that has been prevented is bankruptcy and dissolution of the Wall St banking cartel. What do you think?

Jul 07 02:26 AM

[Peter Cooper:]

So that would mean it is time to short the S&P, see:
arabianmoney.net/2009/.../
Or buy gold or bonds, although the inflation outlook argues against bonds.

Jul 07 06:22 AM

[John Bowman:]

Excellent topic....another commenter in a related thread noted that the Chinese are also manipulating their economic data toward the positive side.

The Chinese appear to be following the footsteps of the American government.

Jul 07 08:44 AM

[Alphameister:]

bricki said:

"Personally my theory is that government spending is the real concern. It removes capital from the private sector which is far better at allocation than the public sector. It really doesn't matter what "taxation" is because the REAL taxation is what government spends. If direct taxation is less than government spending then you will have indirect taxation in the form of inflation, higher cost of capital because you are competing with government in capital markets, etc."

Well, it's more than his personal theory. It happens to be a core principle of libertarian thought. Government spending is marked by inefficiency and corruption at all levels. As its share of GDP grows, a country's overall growth must suffer. A much more prompt and efficient stimulus package would have slashed business and personal taxes by a magnitude on the order of the government spending programs, but Obama, Pelosi et al are convinced they can do a better job of spending our money than we can.

Jul 07 09:01 AM

[lorddarley:]

Fooey on green shoots.

To get job growth, you don't throw money at failed businesses, make-work projects, pie-in-the sky "green" industry, and safety nets of long duration that discourage work at affordable rates.

You don't get job growth by imposing more federal and state mandates, and 15.3% employment taxes, on business that have proven models, which provide jobs, and which can still compete in overseas markets. All that reglation and tax just encourages employers who could provide jobs to lay off and relocate operations.

Is anyone surprised the first stimulus failed to stem unemployment?

We need to rebalance trade and promote export growth, and that means we need jobs at companies that are good enough to make and sell product that other countries want. And, let's get serious about "retraining." What we lack in this country is affordable labor. No politician will say the obvious. The rest of the world does not want to pay middle class wages for much of the US labor pool.

We can compete, but our best companies should be the ones getting the stimulus and encouragement from washington, not thefailures. Instead, the government keeps adding weight to employers. As they say in horse racing, enough weight will stop a train.

Jul 07 09:40 AM

[poorman:]

It isn't the government that grabbed my IRA. Think again.


On Jul 06 02:28 PM WS1835 wrote:

> On Jul 06 11:28 AM MGA_1 wrote:

Jul 07 10:31 AM

[wg:]

Pretty soon its gonna be 20%-25%-30%-50% "employment (FDIC) taxes," just to keep up with these wonderful new programs. Add the Cap& trade, regular income tax, state taxes, VAT tax and what the good ole US of A will pretty soon have to offer is 100% taxes in exchange for "free" housing, "free" food stamps, "free" medical care, "free" education and maybe a "free" minicar thrown in just to placate he masses. Whoever said our standard of living was going down?

Jul 07 10:35 AM

[Bull Run:]

My comments may repeat some of your previous posts; Economists seem to forget there is degrees of recession, that have different causes thus differenct effects. The 1) degree of recession is a simple recession led by lack of consumer spending, which can easily corrected by the Fed dropping rates. These recessions are usually short lived. The problem here lies is that the Fed, is now conditioned to believe that all recessions can be "pushed back" by keeping rates low, hence the backbone of US Fed policy. The 2nd) degree of recession is a Regional balance sheet recession. An example would be the Rust Belt recession in the Ohio valley, that led to much hardship and industries that after failling never recovered. The 3rd.) level of recession is a nation wide balance sheet recession, which is often led by Banks and Financials. This is the present day recession, and dropping rates has NO or little effect on a Balance sheet recession. Why? The answer is in the numbers. When people and companies are broke they save, not spend. just look at the savings rate, which is near record levels. No degree of rate drops is going to entice someone to buy more junk at Wall Mart or another pair of shoes, when they're losing their home. This degree of recession is of longer duration, and can have widespread effects. The degree of the recession is the degree of problems in a nation's balance sheet. US Banks and Financials are insolvent if it wasn't for the US Free printed money. US miiddle class is finding severe hardships over their personal balance sheet problems, noteable their home, it's price and their morgage.US companies are also very much overextended. The real problem America is facing, is that Balance Sheet recessions led by the Financials, have a real possiblity to fall into the "pit" or "abyss" of all recessions. The Currency/ Treasury failure recession, which there is NO recovery. An example would be Germany's recession in the 20's. The reason for concern is that Bank failures, often led to currency failures, because both are closely associated. People see banks and their money tied together. America is now on a knife edge, which way will it go? If the US dollar loses it's world currecny status, America will fall into the pit, and world G8,G20, BRIC, meetings continually discuss the alternatives to the US dollar. Maybe the world will be forced to come to a quickler conclusion.

Jul 07 10:40 AM

[John Lounsbury:]

Part 1 of my comment:

I have read many of the comments about government numbers being questionable and have to disagree, strongly. I have spent a lot of time studying the government survey numbers from agencies such as the Department of Labor, the Department of Commerce and the Census Bureau (and have published articles, including here on SA). This research is ongoing and consumes several hours week after week.

I have examined survey methods, measurement errors and analysis techniques. In all cases, my conclusion is that the numbers are solid, collected and tabulated by career professionals and free from political influence.

Part 2 of my comment:

How the numbers tabulated are used is a seperate issue. What many commenters refer to may be the use of the data. Here, the possibility of political influence must be recognized. In some cases, the way the interpretation of the data is reported is subject to criticism.

I have read a number of posts from Steve Hansen that have discussed the need to improve they way the data is reported in the GDP statistic. I have also spent months looking at GDP methodology, but have not published anything yet. A number of people (Jeff Miller and Jeff Fraenkel come to mind), including myself have been reviewing how employment numbers are interpretted. For example, I just published an article suggesting that there is a much more meaningful way to calculate the unemployment rate seekingalpha.com/artic...

In conclusion, I maintain that the government numbers are reliable, with uncertainties and measurement errors well characterized. We need to spend our time looking at how the numbers are interpretted, how they are used. That is where I feel improvements can be made.

Jul 07 10:47 AM

[ussmls7:]

Looks like a Waterfall recovery-_____________...

Jul 07 11:28 AM

[Stone Fox C...:]

Never made any suggestion to buy stocks based on what NBER says about the recession. My comments continue to be about the amount of negativity that exists. Its very contraian to suggest that the recession is over and that we might actually have a V shaped recovery. Which by the way all the data to this point suggests. It might get derailed if the market roils over, but so far so good.


On Jul 06 04:00 PM The Pragmatic Capitalist wrote:

> Stone,
>
> There is nothing significant about the technical end of a recession.
> Positive GDP growth does not mean stock prices will be higher. In
> fact, as we saw with Japan, GDP remained relatively robust all thru
> the 90's, but the deleveraging and deflation occurring underneath
> the surface kept a lid on stock prices.
>
> In other words if you're buying and selling stocks based on what
> the NBER says about a technical recession you're making an enormous
> mistake.

Jul 07 05:01 PM

[stev53e:]

You mean like the unemployment figures?
ROFLMAO


On Jul 06 02:20 PM American in Paris wrote:

> Stop the nonsense about faked government statistics. This is an urban
> myth. Government statistics are solid.

Jul 07 11:48 PM

[perceptions...:]

How long is a piece of string?

Sorry, I couldn't resist!

That said, the correct answer isn't much different.

The price of Oil will continue to rise and fall, as expectations of Global economic growth continue to rise & then fall.

The reason, investors are pretty much what the word implies, they are someone with an asset & they are looking to put that asset to work, to obtain a return, the best return possible.

That pretty much also means they are inherently optimists, as are most entrepreneurs & business owners.

So, the upshot of that is business & investors, will invariably look on the brighter side, they will continue, until the herd has unmistakeably turned and then some.

I expect that markets will re-test their March lows, this year, but the tussle will continue for sometime yet, possibly running as far out as 2012.

By way of example, the graph in the following link, could well represent what may happen, over the next few years, as Population & Peak Oil constrict the Global economy.

As indicated in the graph, a series of mini rallies, within an over downtrend.

However, sometime in between now and the end of 2012, the herd will wake up, one day, and come to the conclusion that the Boa Constrictor (commonly called Population Aging/Total & Peak Oil) has finally killed off the greatest Bull market in history and a long decline is upon them.

On that day, continents will collide and markets will collapse and the consequences that flow, will be a 9.9 quake!

Can I be more precise, sorry, I just look at likely outcomes, I don't have any crystal balls.

Link -
www.planbeconomics.com.../

Jul 08 12:07 AM

[Peter Cooper:]

My money is still on one last bull charge after this current correction. But this will be a blow-off top and an excellent shorting position, or time to exit the market entirely, see:
arabianmoney.net/2009/.../

Jul 08 12:40 AM

[nobby73:]

Private sector debt is too high and we are seeing deleveraging to bring this to a more manageable levels. However, to counter the drop in economic activity, which creates deflationary forces, which nullify the effects of deleveraging, and cause unemployment to rise, the government provides a stimulus package, which simply increases the debt burden by a different means.

The real question is whether deficit spending by the government on behalf of the people is more efficient than spending by the individual. I suppose the answer is, sometimes yes and sometimes no...

Jul 08 08:25 AM

[John Bowman:]

An old saying: "Figures don't lie, but liars figure"

Jul 08 09:13 AM

[disaster2008:]

Americans should now invest in natural capital and their local economy Grow your own food - plant a vegetable garden and fruit trees. Plant food-producing shade trees to cool your house in the summer. Improve your neighborhood - cleanup the vacant lot. Get rid of your TV and enjoy the outdoors - reconnect with nature. Walk or bike instead of drive to the store if you can - get some exerciseand save money on gas and car repairs - invest in the local economy. The investments will make you happy and pay off for future generations.

Jul 08 01:23 PM

[alex2:]

If you are in Paris stay there and stop using your keyboard! because your old fashion thinking on spending our way out of this economy cant happen. We have lost most of our Industry and manufacturing. Our people have no jobs and little hope. And are looking forward to more taxation.
How did the service economy work???
The Government is spending the stimulis money on their political friends to grow government and their own power. Liberals are forcing us to live a lesser life style. We like our cars and big screen tv's ect. Americans lost the American Dream because
over the years liberals have taken it from them.


On Jul 06 02:18 PM American in Paris wrote:

> To the contrary, without huge deficit spending there will be no recovery.
> I am amazed by these conservatives who still think a balanced budget
> in the midst of a severe recession is a good idea.

Jul 08 10:54 PM

[Michael Murphy:]

Can you explain why The Conference Board leading indicators are showing such strength? And why the ECRI Weekly Leading Indicator is so strong that they are pounding the table to tell their clients that the recession is ending now?

Also, you said: "There is nothing significant about the technical end of a recession. Positive GDP growth does not mean stock prices will be higher...In other words if you're buying and selling stocks based on what the NBER says about a technical recession you're making an enormous mistake."

Please cite a single case where a major recession ended but stock prices did not turn up sharply either in advance or very shortly after the recession ended.

Obviously, I completely disagree with your article. Watching the lagging indicators for signs of strength while the market takes off without you is not very pragmatic. The recession is over.

seekingalpha.com/artic...

Jul 09 04:10 AM

[Merigolden:]

Yes, our system desperately needs a third party and run off voting, plus real, not make believe - feel good campaign reform, since our representatives are bought and handsomely paid for. What real change are we seeing from Mr. Obama. Nada. We have traded Iraq for Afghanistan and when needed, we have plenty of off the record mercenaries (Blackwater, et al) to help us out in both places. While corporations win big time, the middle class is the biggest loser. Congratulations, we have gotten what the framers of the constitution glimpsed...a corporatocracy the likes of which has never been seen before. If American in Paris thinks Government Statistics are solid, and that American Media is not bought and paid for, wow, I find that kind of denial unbelievable and deeply troubling.


On Jul 07 12:13 AM Michael Clark wrote:

> I have to agree. If people are thinking in the old orthodox way,
> that Republicans are for Business, and Democrats for Workers, then
> they're in a time warp. That once may have been so -- and may be
> again some day. But for the past 20 years, ALL politicians have
> been out for themselves. Republican and democrat are the same today.
> I guess we need a NEW second party.

Jul 09 01:07 PM

[The Pragmat...:]

The recent leading indicators figures are almost entirely stock market returns. The stock market returns have contributed over 50% of the figures strength. It's mind boggling that so many "professionals" just read the headline figure without understanding the contributing components. This is nothing more than double counting. If you're using past stock market returns to gauge future economic strength you're in for some serious portfolio pain.

I cited Japan as the classic example where GDP turned up and the stock market continued sideways to down for years. Look at the data. Positive GDP does not necessarily mean company profits are going to soar.

It's quite obvious that you have fallen for the green shoots theory and completely fail to understand the magnitude of the deleveraging cycle that we are confronted with. Don't worry, almost every living person is making the same mistake because they haven't experienced this type of economic cycle. People are living in a dream where we just repeat the soft business recessions of the 80's and 90's. This is a totally different animal.


On Jul 09 04:10 AM Michael Murphy wrote:

> Can you explain why The Conference Board leading indicators are showing
> such strength? And why the ECRI Weekly Leading Indicator is so strong
> that they are pounding the table to tell their clients that the recession
> is ending now?
>
> Also, you said: "There is nothing significant about the technical
> end of a recession. Positive GDP growth does not mean stock prices
> will be higher...In other words if you're buying and selling stocks
> based on what the NBER says about a technical recession you're making
> an enormous mistake."
>
> Please cite a single case where a major recession ended but stock
> prices did not turn up sharply either in advance or very shortly
> after the recession ended.
>
> Obviously, I completely disagree with your article. Watching the
> lagging indicators for signs of strength while the market takes off
> without you is not very pragmatic. The recession is over.
>
> seekingalpha.com/artic...

Jul 09 02:09 PM

[RiskAverseA...:]

This may not be my father's recession, but it sure is his full-blown collapse.

Jul 12 12:03 AM

[Michael Murphy:]

"The recent leading indicators figures are almost entirely stock market returns. The stock market returns have contributed over 50% of the figures strength."

The latest (July 11) reading on the Weekly Leading Index from the ECRI came in at a 5.4% growth rate even after a down stock market for several weeks, so the economic recovery is accelerating. This is a two-year high in the growth rate for the WLI. The Managing Director of ECRI said: "It is increasingly evident that, despite widespread misgivings based on backward-looking economic data, the end of recession is at hand."

Do you think he lacks understanding of the contributing components?

Jul 14 03:37 PM