Howard Richman

Why U.S. GDP Will Decline in Q4

thiazole,

You will likely to get your chance to gloat in January when the first 4th Quarter results come in, but right now I get a chance to gloat. You wrote:

>> "3rd quarter will be revised up, not down. Initial post-recession GDP estimates are always lower than the final numbers end up showing."

The revision of the third quarter results that came out this morning lowered the estimated growth of GDP during the quarter from 3.5% to 2.8%

Howard

Why U.S. GDP Will Decline in Q4

David White,

Thank you for your thoughtful comments. You make a persuasive case. Your thinking is in line with the consensus prediction that the economy will grow by 2.9% during the fourth quarter, mine is not.

I am curious. What is your basis for expecting that the Government stimulus will be a bigger factor during the fourth quarter than the third? Do you have a way to track when the stimulus will be spent?

I am expecting exactly the opposite -- that government spending will have less impact during the fourth quarter than the third. I have two reasons:

1. Cash-for-clunkers and the subsidies to first-time home buyers had a big effect during the third quarter, partly by moving forward sales that would have taken place during later quarters.

2. I expect stimulus spending to be timed to help during elections, and there is no election coming up soon.

Howard

Why U.S. GDP Will Decline in Q4

Mr. G.,

I may indeed be wrong. When the actual data comes in, we will know. But I disagree with the three reasons that you gave as to why I am wrong.

1. Corporate Profits

You held that rising corporate earnings data indicate a strong recovery. I disagree. I think that they reflect the fact that corporations have done some significant cost cutting (partly by laying off less productive workers). For the best first indicator of whether I am correct, look for business sales figures for the fourth quarter. I expect lower sales in the automobile industry as compared to the third. Cash-for-Clunkers moved new auto sales that would have happened during the fourth quarter into the third quarter while removing used cars from auto repair shops.

2. Consumption

As far as the stimulus goes. It has already been shown not to have the Keynesian multiplier effect of increasing consumption by lowering consumer savings rates. We are in an unusual recession. During most recessions consumer savings rates go down, due to reduced income. During this recession they go up due to reduced consumer borrowing.

3. Is Government Stimulus working?

I am not saying that the stimulus isn't working at all. I'm just saying that it isn't increasing consumption in any permananent way. By not mentioning government spending in my analysis, I am implicitly *not* predicting increased government deficit spending during the fourth quarter as compared to the third. I don't expect increased government deficit spending until the second quarter of 2010. It will be timed in order to have the maximum effect on the 2010 elections.

Howard


On Nov 23 08:37 AM Mr. G wrote:

> The rise in corporate earnings does not support your conclusion.
> If your thesis is correct, the stimulus programs are not working.
> The GDP in part rests on consumption, at least in some sectors. I
> think it is to early to make a blanket conclusion. Lets talk again
> in January. GI

Why U.S. GDP Will Decline in Q4

U. of Maryland economist Peter Morici had his own GDP prediction (Expect Third Quarter GDP to be Revised Downward), also published by Seeking Alpha this morning:

seekingalpha.com/artic...

He agrees with the first of my points that third quarter GDP will be revised downward. He wrote:

>>> "Third quarter growth likely will be revised down to 2.8 percent from the 3.5 percent reported on October 29. The economy contracted 0.7 percent in the second quarter.

>>> "The downward revision for the third quarter is expected to reflect a smaller contribution from inventory investments and a larger trade deficit."

On the other hand, he doesn't agree with my prediction that GDP will actually decline in the fourth quarter because he doesn't expect an actual decline in residential housing investment, as I do, and he thinks that government spending will increase in the fourth quarter, as compared to the third.

He notes that the consensus estimate for GDP growth in the fourth quarter is 2.9%, which he thinks "may be optimistic."

I have gone out on a limb this time with a prediction that is at least 3.0% less than the consensus estimate!

U.S. Dollar Now Testing $1.50 Per Euro

Channon,

You are mistaken. I favor progressive consumption taxes including the FairTax and the USA Tax. See Chapter 8 of our book:

www.idealtaxes.com/tra...

Howard


On Oct 21 05:45 PM Channon wrote:

> You forgot "Scenario 4": Raise taxes on the highest income earners.
> It would help balance the budget without causing any meaningful reduction
> in consumer spending. The marginal propensity to consume among this
> group of individuals is extremely low. In the aggregate, it would
> likely be a wash when you factor in the positive wealth effect from
> the rising stock market and housing markets.
>
> You forgot this because (having read your older posts), you are opposed
> to progressive taxation, right?
>
> But, to your third scenario, the "collapse" of the dollar -- the
> US is NOT Brazil. We can still be a self-sufficient nation. We produce
> more food than we can consume, and we can still produce cars. We
> really only need oil. This prospect, of the US becoming self-sufficient,
> should scare the crap out of most nations on earth, as their economies
> rely on the US buying from them. They need the dollar to retain some
> value, as much as the consumer shopping for 52" TVs.

U.S. Dollar Now Testing $1.50 Per Euro

Dave,

You are correct that China has been stimulating consumption, but only for items that are made in China.

China is practicing mercantilism, the policy of maximizing exports and minimizing imports. Unilateral free trade still works when trade is balanced, but it doesn't work when your trading partner is practicing mercantilism. The way to fight mercantilism is to insist on balanced trade.

Howard


On Oct 21 08:31 AM Dave Wrixon wrote:

> China has been stimulating consumption, but it is not going to help
> if nobody actually wants to buy your stuff.
>
> But then you hypocritically want the US to stop free trade, even
> though you expect the Chinese to market your gear to their own people.
>
>
> Of course economic forces will redress the imbalances but it will
> take a lot more than a 20-30% devaluation to get the dollar roaring
> back. But it is likely to result in capital flight that will paralyze
> the economy for a decade. That is what happened in Japan. The Japanese
> took nearly twenty years to realize they could not solve their problems
> with a weak currency.

Asian Central Banks Resume Currency Manipulations

chap08,

I am in favor of the dollar falling, but I am pointing out that if the dollar fall turns into a crash, with the dollar falling to, say, 25% of its current value. Then the short-term consequences would be quite negative (although the long-term consequences would be very good).

Among the negatives:

1. Huge cut in American standard of living.

2. Sky-high prices of oil and gasoline rationing.

3. Much higher prices of all of those goods sold at Walmart.

4. A astronomical spike in US interest rates and inflation. .

5. A possible decision by our government to default or inflate away its debt.

Economists call this the hard-landing scenario.

Howard


On Oct 12 06:56 AM chap08 wrote:

> You say "balancing trade through a falling dollar right now could
> easily go too far".
>
> How? A dollar fall based on balancing trade can not go "too far".
> It would fall to balance trade. How can that be "too far"? It would
> only go too far if it was manipulated in the opposite way to which
> it is today.
>
> I guess what you're really saying, is that the true value of the
> dollar, based on a variety of factors, is way, way below current
> levels - and that frightens you. Well that's fair enough. But don't
> say that freely floating exchange rates would take the dollar "too
> far". If we'd had truly floating exchange rates over the last decade,
> then the extent of the dollar's problems would have been revealed
> before now, and we might have been forced to do something about it.

Good News: Dollar Headed Down

conceptwizzard,

You were correct in pointing out that we are a "70% consumer based economy", but that doesn't mean that we are not also a manufacturing economy. Consumers do 70% of the paying. But a lot of what they buy is manufactured goods.

Howard





On Sep 17 11:38 AM conceptwizard wrote:

> Not sure I agree with the dollar falling will lead us out of the
> recession. I agree that this will help our exports, but manufacturing
> is a small part of our GDP. The main issue for me here is the fact
> that our dollar is worth less so buys less on the import side. For
> a 70% consumer based economy I dont see how charging us more for
> goods when average income, weekly hours worked, house equity and
> portfolio values are still down 30% from their highs and U6 unemployment
> over 20% is going to supercharge consumers to buy more.
>
> The bulls are raging away, grabbing at each scrap of no news/good
> news/bad news and going along with the huge bubble that the FED is
> creating. While the average America is being foreclosed on, by the
> way which is one in every 7 seconds in the US, there will be no sustainable
> recovery.

Good News: Dollar Headed Down

tadpole76,

Like you, I agree with Jeff. The dollar is not and will not fall vs. the Chinese yuan. The acquiescence of the Obama administration to China's dollar peg is a scandal as well as a betrayal of his campaign promise in the final presidential debate when Obama said, "We should enforce rules against China manipulating its currency to make our exports more expensive and their exports to us cheaper."

I also agree with you that the falling dollar will reduce the purchasing power of the American consumer. Indeed I expect inflation to increase dramatically as the dollar falls.

However I disagree with your assessment that because of China, our overall exports won't increase as a result of the dollar falling vs. the euro and yen. Not only will we export more to Europe and Japan, but also many American goods will gain market share in their competition with European and Japanese goods in world markets.

Howard

On Sep 17 11:15 AM tadpole76 wrote:

> Yes, a falling US dollar makes our exports more competitive in the
> international market. But it also reduces the purchasing power of
> the US consumer. I agree with JeffDB. A falling US dollar will not
> close our trade deficit with China and the rest of the world. Over
> the last 15 years NAFTA has killed our domestic factory production
> base and led to offshoring of millions of jobs. Because more things
> are made abroad, the US consumer has had no choice but to buy more
> imported goods. Instead of a competitive devaluation of our currency
> to boost exports; a more responsible approach is to renegotiate NAFTA
> to reflect current realities, get everyone on a level playing field
> and incentivize US-based companies to bring their jobs back home.

How China and the U.S. Handle WTO Complaints

Recussent correctly objects to my word choice in a comment when I wrote that Obama is "trying" to make the our trade situation worse through "cap and trade." What I meant to say was that Obama is "trying" to pass Cap and Trade which would make our trade situation worse.

Incidentally, Obama's objection to the tariffs that the House put into the Cap and Trade Climate Bill does suggest the possible interpretation that he wants to give America's industries to China. But I attribute his statement to incompetence, rather than maliciousness. See:

www.americanthinker.co...

How China and the U.S. Handle WTO Complaints

Prudent Man,

I agree with you that President Obama is trying to make our trade situation worse with Cap and Trade. See my commentary pulbished Friday by American Thinker:

www.americanthinker.co...

How China and the U.S. Handle WTO Complaints

Ben Gee:

I disagree with your assessment that "The Richman Plan is a plan for economic suicide." Let me discuss your three points:

1. You wrote: "It will reduce trade by 50% with China that may not be so bad."

This aspect will be good for the U.S. in both the short and long run. More exports to China and fewer imports means more income for Americans to spend which pulls the US out of our short-term problem, the recession. Greatly increased investment in the American manufacturing sector pulls the US out of our long-term problem - our economic stagnation and huge foreign debt.

2. You continue, "It will reduce trade by a simular amount with oil producers. What is the US going to replace import oil with?"

The Richman plan does not apply to all oil producers, just those that are collecting dollars and using them to buy our assets instead of our products.

3. The rest of your comment is a thoughtful take on Obama's first WTO complaint. You began: "Did you hear the US is complaining China is NOT selling coke?..."

Howard

How China and the U.S. Handle WTO Complaints

Athena,

I agree with you that the dollar will eventually collapse, but I don't agree with your assessment that the collapse will cause China to see they have made a mistake. Although they will end up with some bad bonds, they will also end up with high GDP, high military power, and ownership of much of America. Moreover, will have weakened the power of their chief political adversary.

Howard

Obama Helps China in Preparation for a Dollar Collapse

Some commenters seemed to think that I was saying that Obama wants the dollar to collapse. Not true. A dollar collapse would be an unmitigated disaster for the Democratic Party. Obama's economic policies are sincere, but he has incompetent advisors. I recently analyzed what he is trying to do and why it will fail:

tradeandtaxes.blogspot...

Some commenters seemed to think that I am saying that China is about to pull the rug out from the dollar. Not true. It will probably take China quite some time to get the IMF to agree to accept China's dollar in return for SDRs. China will not intentionally pull the plug on the dollar until then.

But the dollar could still collapse. The most likely scenario starts with U.S. inflation. We have a description of what the dollar collapse will look like in our book Trading Away Our Future. See:

idealtaxes.com

Zhou's International Reform Proposal - We Can't Afford to Ignore It

ozzy43,

You are correct that governments claim to be enacting Keynesian strategies when they do massive deficit spending, but they neglect the fact that he had different advice for trade surplus and trade deficit countries.