Consumption, Cacophony and Clarity 14 comments
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Wages/salaries, wealth/savings, credit access and cost, prices of basic goods and services are all moving against the consumer. Consumption was 71% of US GDP in 1Q2008. This explains the anemic GDP growth. Investment spending by firms, government spending and net exports (exports minus imports) round out the list.
Consumption and government spending were the "positive" elements in the most recent GDP numbers. Consumption, dubiously adjusted for modest inflation, increased by 1% on a quarter over quarter basis. Government spending turned in a robust 2% rate of quarter over quarter growth. Private investment spending was negative and net exports grew as a negative number despite Dollar weakness. Things are bad and continue to worsen.
We have entered into a negative feedback causal economic loop. This is presently widely mistaken for recovery. It is no such thing. Downward leadership is simply shifting as loss begets loss and weakness begets weakness. The consumer will lead us down, as he/she led us up. In the best of times wages/salaries are good and rising, costs are low, wealth/savings are growing and credit is available and unneeded. The last year has seen escalating trouble on all fronts.
Wages/salaries and employment have been a problem for years. The 2001-2008 "economic expansion" was defined by the lowest employment and wage growth in any economic recovery since WWII. CBPP data finds job growth- now negative for five months- was less than 1% per year on average during 2001-2008. Wage and salary growth barely kept pace with under-reported inflation measures, rising on average less than 2% across the last 7 years. We enter this recession without the employment or wage growth that traditionally act to cushion a fall. Wage and employment growth did not lead the boom and they will not lead the bust. This simple fact lies behind the less than usually dramatic wage and employment deterioration. Prolonged weakness is mistaken for strength in this area.
Wealth and savings over the last 7 years have been divergent. Wealth soared while savings were non-existent. Rising home and stock prices, anemic earnings and easy credit combined to produce Great Depression levels of private savings in American households. The average annual personal savings rate in American from 2001-2006 was 1.55% and fell across the period. In the 9 quarters between 1Q2006 and 1Q2008 the real savings rate from disposable personal income averaged .45%. In other words, no savings were done.
This complicates the downturn in several ways. We have been borrowing externally. We have been selling assets and we have not been saving. Consumers enter the present fray without a savings, earnings or employment cushion and with developed world anomalous external debt repayment burdens. This ties long-term Dollar pressure to the already begun consumer problems. Thankfully for us and sadly for them, we are still allowed to borrow in and deflate our currency. Unfortunately for long term dollar bulls the coming consumer weakness here will mean large external dollar repayment out-flows.
Wealth increases were huge and heavily skewed toward the already affluent. Total assets increased 49% or $23.669 trillion between 1Q2001 and 3Q2007. Wealth peaked in the third quarter of 2007 and has been falling since. In the last 2 quarters, 4Q2007-1Q2008, assets have declined by $1.9 trillion, or 2.6%. Real estate - at market price - also peaked in 3Q2007. Between 1Q2001 and peak value in 3Q2007, real estate prices increased $8.873 trillion, or 65%. Since 3Q2007 real estate has declined in value by $426billion, or 1.9%.
We are now running in reverse with plenty further to go. Much of the loss in wealth will be invisibly removed by increasing inflation. The rest of the loss will come as asset price decline. You may be tempted to see all this as just a slight correction of inflated asset prices. I would strongly suggest the asset bubble - already deflating - needs to be judged against the debt bubble that fueled it. We came to live on "wealth." Much of this wealth was produced by debt fueled asset inflation. Much of this wealth was foreign and lent in to sustain our borrowing and spending. Thus, the already evident confluence of asset deflation and rising general price inflation creates the possibility of a perfect storm.
All those much-celebrated paper wealth gains were fueled by a borrowing binge of truly epic proportion. 1Q2001-1Q2008 household liabilities increased $6.5trillion, or 80%. Mortgage debt increased by 99%, surging by $5.3trillion to $10.6 trillion. Indebtedness has continued to rise even as the houses and equities purchased steadily fall in value. What we owe is growing, what we bought is losing value. This is the fuel of the unfolding tragedy in many households, neighborhoods and states.
It is the national economic equivalent of the mortgage-backed security crisis. Consumer earnings were flat, employment growth was negligible and borrowing soared. More debts and no more way to pay those debts created the need for endless borrowing against endlessly rising house prices. When that ended, 3Q2007, the gig was up. Firms did well. Thus, many non-financial and international businesses enter the present downturn in decent shape. However, our firms have faced no sustained wage demands, shifted health care and retirement costs toward employees, faced declining tax collections, deregulation, opening international markets and no inflation.
There really was a sweet spot. It is over. In the end, for households it really was just the bubble supporting the bubble. It will be a long fall to earth. It will be harder and harder for American families to borrow less money. This will impact firms as well. After all, it is hard to be untouched by declining consumers, loss of globalization momentum, rising inflation and falling Dollars.
Falling employment, stagnant wages, rising debt, no savings and constricted access to credit are plenty to worry about. I wish I could end there. Rising costs are the final piece of the puzzle. Energy and food prices have joined medical costs, tuitions and housing on the out of America's reach list. The newest price numbers we have are from the Bureau of Labor Statistics release on May 2008 prices. Here we learn that since May 2007 fuel oil and other fuel prices rose 50.7%, food prices rose 5.1%, dairy prices rose 11.0%, utility prices rose 11%, education costs rose 5.7%, hospital and related services rose 7.5%. All of these increases are greater than the increase in household income and most of them are massaged down through season adjustments and other gimmicks.
Through the cacophony of reassurance and gyrating reports, America's true economic tone is very sad. Strong government spending and low-ball inflation numbers kept our recent quarterly GDP numbers above water. Our government has been spending far too much for far too long. Uncle Sam long ago came to rely on foreign creditors who are standing by holding declining dollar assets paying less than their national and our national inflation levels. Thus, it will be hard to use government spending, like we did last quarter, to push GDP above water.
Much like it has been hard for financial firms to move losses forward while waiting/praying to be bailed out by growth, so too will the state have problems. Foreign borrowing, inflation numbers and payment requirements on all that foreign borrowed debt stand as a challenge to long-term, Dollar bulls.
We have been down before and got back up. I believe we still have it in us. I don't believe that it is possible without admitting the situation and making major changes. I would also caution those who see American weakness - 20% of world GDP - as isolated or contained. Thus, America's relative position is far less poor than our absolute position. Like the housing securitization crisis, our present macro-structural problems will ramify globally.
We may be at the end of the beginning of these processes; we are not at the beginning of the end of them.
Disclosure: None
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This article has 14 comments:
What to do about it: I like energy, particularly coal, biofuels and prescription drugs. Other then that, stocking up on ammo and purchasing cabin 50 miles from major metro.
Why? If history ryhmes we will see another depression, rising of fascism and a repeat of world war II except this time with nukes. If we escape a large conflict, a dollar collapse is VERY likely and looting and martial law will be declared. I do not envision a long-term depressionary state. Ben Franklin said it was better to have it and not need it then need it and not have it.
I knew the future in June 2007, the numbers of a 'perfect storm' scenerio were available then. Did it surprise any of you to see the biggest investors pull there money out of the U.S. back in June and into commodities and emerging markets? This is a black swan event.
I predicted negative 20% GDP by 2011. I don't care about being a seer and being right, I used this knowledge to warn familiy and friends, educate government officials (those that would listen) and curtail my company exit strategy for summer of 2008. In between now and then, the government will act out as little children do when there cookie is stripped away that they robbed out of the cookie jar. America will get it back but the shocks are going to be brutal in the short term.
Commodities - Precious Metals, none precious metals, agricultural produce, timber, energy (uranium, oil, natural gas and King Coal.) Either directly (if you have skill) or by buying natural resource companies. Buy companies that have 'growing reserves' rather than depleting reserves.
Things that Americans make better than anyone else (and the chinese can't make) - technology - aircraft, machine tools, computer equip, hi tech electronic compenents.
Take a look at the US trade figures and focus on the industries where exports are rising.
Buy Asia and the middle east (the money is moving east.) Vietnam, China, India, etc.
Why
i) These economies are growing fast, they are raising productivity, making signficant business capital and infrastructure investment (25% of GDP) they have significant population.
They will i) consume more real stuff, ii) buy the stuff from America that they can't make themselves and iii) appreciate their currencies against the dollar as they get rich.
Energy (particularly nuclear,solar and wind), Technology, Asia, Agric, Metals and other real stuff.
What's preventing the US from doing the same, especially if Obama gets elected?
When formerly piss-poor Asian countries can afford to build up infrastructures like crazy, why can't we?
-20% GDP? Not in a fiat money superpower like the United States.
You self-loathing masochists need to go to China and Vietnam to see how bad things have already gotten there.
WWIII! Panic in the streets!!!! Run for your lives!!!!!
Have a nice day.
They can afford to build up infrastructure because they don't have any and a lot of people are dumping in money in the hopes of big returns. And despite being piss poor, their debt levels are minuscule compared to ours.
"-20% GDP? Not in a fiat money superpower like the United States."
Why do people keep bringing this up? Being a super-power means jack. Our GDP is the consumer. If the consumer isn't spending, then th GDP tanks. If our debt levels are so high no one wants to lend to us, our GDP tanks.
Nothing is "too big to fail". All it takes is a few decades of fiscal mismanagement and you can drive any country into the ground. Case and point: if it wasn't for countries like China buying up our bloated debt, our government would suffer a financial collapse. It's foreign debt buyers that are keeping our government running. Does this sound a like a "too big to fail" scenario?
On other comments, I don't see how financial collapse == WW3. That makes no sense. We'd probably see civil unrest and martial law. Maybe even a civil war. But nuking other countries just because we ran our own country into the ground doesn't even begin to make sense. That would just make things worse.
A US collapse would hurt the world economy quite a bit, but they would recover as the Asian consumers replace their US counterparts. The US however, without much more than the consumer supporting the economy, would be in really bad shape.
Right now, there are a lot fairly somber data coming out about the US economy, debt, and such. I think we will continue to see a slide. But a full on collapse is still at least 20 years away.
~X~
What you did not explain was why the Bush years have been so particularly bad compared to the Clinton years when taxes were higher. I would suggest that the accelerating losses of manufacturing jobs to China and the influx of Mexican illegals have sufficiently hollowed out the American economy that we are now collapsing inward.
In contrast, people in emerging economies have growing incomes, low debt and high savings rates. They are on the same path that the US was say 20 years ago.
There are fours main reasons for why now:
1. High valuations across all asset classes
2. Unsustainable debt burdens for most consumers
3. Flat income levels (negative adjusted for inflation)
4. High inflation fueled by rising affluece in emerging countries
I want to make one additional point about inflation. In years/decades past, inflation (particulary energy and food related) was kept in check by poorer countires where demand was tied to prices. Small increases in prices destroyed demand causing prices to fall. This dynamic has changed forever and the equillibrium has shifted. We need substantially higher prices to destroy demand now.
The question I have for people here - for both individuals and countries, What's wrong with living within your means?
Mismanagement and misfortune
The money supply has been increasing too rapidly for many years.
In normal times 'inflation' as defined by CPI would have increased and central planners would have had to tighten (either via interest rates or the reserve ratio.)
The misfortune (which was mistaken as fortune by people who should know better) is that CPI has remained low due to increased trade with low wage Asia. So tightening never happened. And the printing presses/credit engines rolled on.
And instead of the excess money going into CPI, it went into assets.
US Central Planners should have know better, they have economists (some of them are economists). Historically, there has been the debate amongst economists as to what inflation is. One camp defines inflation as increase in money supply faster than increase in goods and services and the too smart by far camp (and CNBC) defines it is the economy growing faster than natural capacity.
In hindsight it is obvious that more money was created but no more goods/services (other than those bought from asia) and the excess did not go into CPI but into asset prices (real estate and shares) and that the central planners were naïve in believing that it was not distorting resource allocation and that it did not matter.
So the first red flag (tightening labour markets) was removed, the second red flag (tightening asset markets i.e. soaring prices) was ignored, we are now having to deal with the next red flag (tightening natural resource markets), some would like to ignore this too and blame the speculators. Whilst they cheer lead Ben to keep printing?
So where is the US now?
It is certainly NOT collapsing, there are real people (with real skills, knowledge and experience) doing real work, utilising real capital to produce real goods and services.
All that is happening is that the economy is trying to purge the excesses (i.e. the fake people, doing fake work, selling things at fake prices, but getting real money) through a recession (recessions are as old as history, starting from Joseph the dream reader in Pharaoh’s time), they should not be feared and certainly not fought in the way that Bernanke and Greenspan have done, they are a time of belt tightening, and elimination of the excess (people and orgs who are not really contributing.)
They come as does winter and things are better in the spring.
What prevents the US (govn) doing the same (investing in the right things)?
A broken political system, which makes it difficult for leaders to make tough calls and take unpopular decisions. That is why politics really is the master science. smartinvestorafrica.co...