According to prize winning economist Robert Shiller there is now a 50-50 chance of a double dip recession.
He is wrong. We are already in a double dip and probably never left the first recession behind. When final GDP numbers are put out about two and a half years from now for 2009, they will be between 1.0% and 1.5%. And this year’s will be negative.
How do I know this? Simple – the number of people working. The last two and half years has seen the sharpest drop in employment since the end of the Second World War. The BLS says we lost 8.5 million jobs – take out the birth/death adjustment and it is north of 10 million and look at labor force participation rates and we have lost 12 million jobs. You cannot have real GDP growth, in the real world, with those kinds of numbers. The best treatment of this was in the Monday Wall Street Journal (here).
Why is everyone surprised? The same reason. Despite the ability to make a fortune shorting the market, market segments or stocks, most people on the Street are genetically programmed to be long. And economists with some exceptions are genetically programmed to be bullish about the economy. And the ones who are not bullish are so skillful with words – Mohamed El Erian comes to mind – tell us we are in deep yogurt but we leave the conversation not feeling too bad.
It is time to start feeling bad for we are not only in a recession, it is going to get worse before it gets better. We are in a period of radical asset deflation unmatched since the Depression.
Why the prediction of another deep recession? A gigantic drop-off in the workforce participation rate, leading to a fall in national income. A 75% drop in new home building (the source of more than 40% of new jobs between 2002 and 2007); massive credit contraction among consumers; more than two thirds of the economy and one in four homeowners underwater on their mortgages; more than six million foreclosures looming in the next 24-30 months; Europe about to go into an austerity driven recession; governments at all levels in the US facing voter demands for austerity, not stimulus; the Fed out of ammunition. I could go on.
Why do I see deflation as being here and now? Deflation is not just prices for bread and butter, it also involves prices for assets. Home prices down 35% plus stocks prices, for many, down the same amount; commercial real estate in many markets down more than 40%; 40% of worldwide auto making capacity unused; China adding more industrial workers every year than currently work in the US; and so on.
Bernanke wants to print money, that is clear. The Fed board of governors has mixed opinions. Bernanke learned from Geithner that you can only ask for radical action, i.e. the TARP, after a crisis blows up, not before (David Wessel’s treatment of this in the book In Fed We Trust is masterful). He will print money after the election and before some pseudo monetarists who have read the book flaps of Capitalism and Freedom and The Wealth of Nations, not the books, take their seats in Congress.
Printing money will not help the recession but it could fight off deflation, maybe. Our entire financial and economic system, and the policies we have in place of know something about, are based on an inflationary environment. We are in uncharted territory. The only thing I can safely predict is that a) the market follows corporate earnings, and they are going down b) the market hates uncertainty and c) there are no investors left in the market, just traders, and when they decide to run, watch out.