FedUpUSA

Archive for August 18th, 2011

We’re done folks.

Responses to the Business Outlook Survey this month suggest that regional manufacturing activity has dipped significantly. The survey’s broad indicators for activity, shipments, and new orders all declined sharply from last month. Firms indicated that employment and average work hours are lower this month. Price indexes continued to show a trend of moderating price pressures. The broadest indicator of future activity also weakened markedly, but firms still expect overall growth in shipments, new orders, and employment over the next six months. The collection period for this month’s survey ran from August 8-16, overlapping a week of unusually high volatility in both domestic and international financial markets.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009 (see Chart).

This resulted in an immediate dive in the market, which was already down 300+, to more than -450.

The fraud and phony games are over.

The “Tea Party” claims to have taken the high ground.  They’re lying.

All I hear is Bachmann and others wrapping themselves in the “cause of the day” but failing to stop it, and the idea that somehow “Guns, Gays and God” will carry the day or that we should have “Dominionism” in the Federal Government is an outrage.  That’s utter and complete bullshit; having “dominion” over a smoking crater will be cold comfort in January of 2013.

Where the hell were these people in 2008?  Where were they in 2009?  Where was the attempt to stop Bush, Paulson or Kanjorski?  Oh I know, they were all elected in 2010.  Ok, it’s 2011 now and I’ll give you the benefit of the doubt in that you can’t do anything until you get into office (despite, I note, your utter refusal to run on these issues in 2010 – I did call you all out on that) so let’s start there.

Has anyone heard any demands to lock up the fraudsters stealing homes with fraudulent documents?  To break up the “too big to fail” banks and toss their executives in prison where they belong?  To put a stop to the fraudulent issuance of credit economy-wide?  To take Bernanke out behind the woodshed and stuff a sock in his mouth via adding an “or else” to The Federal Reserve Act so that he cannot debase the currency and he and his cohorts will all be imprisoned (or hang on The Mall, which seems more appropriate to me) if they do?  To enforce a zero-inflation mandate?  To end ZIRP and distortions in the bond market?  To balance the budget right damn now, and quit playing Ponzi with the Federal Budget, Medicare, Medicaid, Student Loans and more?  To tell the truth to our Seniors and everyone else – you will NOT GET what you were promised, because YOU CAN’T – the money does not exist!

No.

You have not heard any of this.  Not one damn word.

Oh sure, there are the token claims, such as those from Southerland and Bachmann.  That’s very nice, but it’s both insufficient and immaterial.  Without legislation and regulation, which means punishment for those who have screwed the American public serially for 30 years none of this will change and you will keep getting bent over the table and serially violated.

Unfortunately for Congress it’s too damn late now.  In 2007 I faxed a letter to all 535 members of Congress.  I urged them to set aside a couple hundred billion dollars – cash, not bogus credit – to provide “three hots and a cot” for up to 25% of the population for a period of at least one year.  NOT subsidy via unemployment, food stamps or any such thing.  A soup line, a bunch of cots in formerly-closed military base hangers and barracks, and a place to take a shower and a crap.  One quarter – or less – than what we would spend now on the same thing.  This would have allowed the housing market to collapse and subsequently clear, the banks would have blown to bits, but from the rubble entrepreneurs would have started new banks, houses would have been resold into the market to new owners and the economy would have cleared the bad debt on its own through bankruptcy and liquidation, which is the essential purpose of recession.

I was not only ignored I was called a lunatic and crazy, that things couldn’t get that bad.

Then 2008 happened and some eyes opened – a bit, because it sure looked like it might get that bad.  The response?  More fraud.

By 2009 the callers of “fool”, “lunatic”, “haha” and “clown” began again.

Well, how’s it look now folks?

Need it in pictures?  Here it is:

Gee, almost back to the depths-of-hell 2009 lows, eh?  So what’s this crap about “no recession”?

Oh wait – there’s no recession: This is a continuing Depression that our government, conspiring with the banksters and media, have intentionally and fraudulently covered up and it is no longer working.

Did you get back into the market America?

More to the point if you did get back in: Did you get out in time this time around or were you listening to “Tout TV” again?

Gee, all bad numbers in that table on the current situation.  New orders collapsed by twenty-six points, shipments collapsed by almost ten points, and both employee count and workweek collapsed by nearly 14 and 9 points, respectively.

Worse, on a forward basis inventories, delivery times, unfilled orders and the employee workweek collapsed on a six-month forward look, with employment numbers remaining only mildly positive.

This means that personal income is going to collapse as well and with it tax receipts, exactly as I have forecast.  The government’s revenue forecasts, to be blunt, are screwed.

To our government: Either get your arms around this now and consolidate, meaning massive cuts in spending and a fundamental reorganization of tax and trade policy (and no, not more “free trade” either), or we will go “overcenter” on that nasty little debt table I’ve been talking about – at which point there will be nothing you can do about it.

In a Washington Post report this week, the Obama Administration was said to have decided to adopted a proposal to continue a major government presence in financing mortgages.  The Treasury subsequently denied this report in a statement posted by Deputy Secretary Neal S. Wolin:

“The Obama Administration believes that the private sector – subject to strong oversight and consumer protection – should be the dominant provider of mortgage credit.  That’s why, in each of the three options we outlined in our report to Congress, the government’s footprint in the housing finance market will shrink substantially.  That’s why, in each of the options, any government support for housing finance will be targeted and limited. This will help ensure that taxpayers are protected and the private sector bears the burden for losses.”

Would that any of this were really true.  Let’s go through this statement and pick out some of the more notable canards and omissions of fact.  First and foremost is the idea that the private sector is willing to take a leading role in housing finance in the U.S.

Since the 1930s, the U.S. has used a full-faith-and-credit guarantee for housing finance to turn disparate home mortgage notes into commodities attractive to investors.  The private mortgage market prior to the Great Depression and the New Deal is not comparable to the government-sponsored market for agency securities today, investment paper that is a close surrogate for Treasury debt itself.

The largest portion of the market for residential mortgage backed securities or RMBS has been government sponsored for 80 years.  By extending guarantees to private mortgage paper, banks were able to package the notes from each home mortgage and sell securities to investors backed by these notes.  This virtuous cycle provided liquidity for the banks, which recovered their principal and then were able to make additional home loans.  That cycle is now broken.

The role of the private sector in the RMBS market has been limited at best with private investors buying significant quantities of non-guaranteed paper only during times of market exuberance in the past decade.  Today banks are avoiding “first loss” risk on U.S. real estate and instead write almost all of their loan production to be guaranteed by one of the three housing agencies — the FHA, Fannie Mae or Freddie Mac.  Almost all of this flow of “new” loan business is refinancing for better borrowers.

This brings us to the second fallacy in the debate over the future of the government role in housing, namely that the current policy is meant to protect the taxpayer and the public generally.  You may have noticed that the Obama Administration has started to talk about creating opportunities to turn foreclosed properties into rental housing, a common-sense initiative that is born of necessity.  Hold that thought.

Empty homes represent tens of billions in future losses to the Treasury.  When the house is sold, the government takes the loss.  Thus the last thing either the Treasury or the White House wants to see is any effort to move the restructuring of the housing sector or the largest banks before the 2012 election.  Delay means higher cost to the taxpayer.

We talked about the need to restructure Bank of America as a precursor to clearing the U.S. housing market in an earlier post on Reuters.com, “Uncertainty and indecision threaten Bank America and global markets.” But given the recent debate over the debt ceiling, President Obama does not want to tell Congress that he needs at least a $1 trillion in borrowing authority to fix the GSEs and the largest banks.  Politics is the chief obstacle to fixing the housing mess.

Attorney Fred Feldkamp reminds us that “we knew virtually all the Texas S&Ls and banks were broke by 1984, but we could not get Congress to permit enough coverage in the federal debt limits and restructuring costs to close the vast bulk of them until FIRREA was passed in August of 1989,” he recalls.  “Even then, Congress tried to renege on the 1988 deals that kept the S&L problem from becoming twice as large.  It wasn’t until 1996-2004 that the people who were promised the 1988 deals received what they bargained for.”

One of the reasons that I have pushed for an FDIC resolution of some of the huge housing exposures facing the largest banks is that the cost can be kept off the federal budget.  FDIC is an industry funded mutual insurance scheme with powerful receivership and debt issuing authority, especially with the Dodd-Frank legislation.  The U.S. banking industry, not the taxpayer, has always paid to clean up the mess in previous crises via the FDIC.  The present housing crisis demands a similar response.

If the banking industry were to use the FDIC to restructure BAC and other large lenders, then immediately spin the smaller, better capitalized banks back into private hands, this would not only help Washington to focus scarce public resources on the losses inside the major housing agencies but would also greatly rehabilitate the industry’s public image.

Americans need to see some good examples of civic action, instances of private people and companies moving with purpose to solve our national problems.  A private sector approach to the housing problem, using the industry funded vehicle at the FDIC to restructure some of the largest banks and breath life into moribund housing assets, could be a powerful tool to that end.  But do we have the courage and the vision to make it happen?

Chris Whalen, cofounder – Institutional Risk Analytics

If you thought that 2011 was a bad year for the world economy, just wait until you see what happens in 2012.  The U.S. and Europe are both dealing with unprecedented debt problems, the financial markets are flailing about wildly, austerity programs are being implemented all over the globe, prices on basics such as food are soaring and a lot of consumers are flat out scared right now.  Many analysts now fear that a “perfect storm” could be brewing and that we could actually be headed for an economic pocalypse in 2012.  Hopefully that will not happen.  Hopefully our leaders can keep the global economy from completely falling apart.  But right now, things don’t look good.  After a period of relative stability, things are starting to become unglued once again.  The next major financial panic could literally happen at any time.  Sadly, if we do see an economic apocalypse in 2012, it won’t be the wealthy that suffer the most.  It will be the poor, the unemployed, the homeless and the hungry that feel the most pain.

The following are 20 signs that we could be headed for an economic apocalypse in 2012….

#1 Back in 2008 we saw major rioting around the world due to soaring food prices, and now global food prices are on the rise again.  Global food prices in July were 33 percent higher than they were one year ago.  Price increases for staples such as maize (up 84 percent), sugar (up 62 percent) and wheat (up 55 percent) are absolutely devastating poverty-stricken communities all over the planet.  For example, one expert is warning that 800,000 children living in the Horn of Africa could die during this current famine.

#2 The producer price index in the U.S. has increased at an annual rate of at least 7.0% for the last three months in a row.  We are starting to see huge price increases all over the place.  For example, Starbucks recently jacked up the price of a bag of coffee by 17 percent.  If inflation keeps accelerating like this we could be facing some very serious problems by the time 2012 rolls around.

#3 The U.S. “Misery Index” (unemployment plus inflation) recently hit a 28 year high and many believe that it is going to go much, much higher.

#4 Jared Bernstein, the former chief economist for Vice President Joe Biden, says that the unemployment rate in this country will not go below 8% before the 2012 election.  In fact, Bernstein says that “the most optimistic forecast would be for about eight-and-a-half percent.”

#5 Working class jobs in the United States continue to disappear at an alarming rate.  Back in 1967, 97 percent of men with a high school degree between the ages of 30 and 50 had jobs.  Today, that figure is 76 percent.

#6 There are all kinds of indications that U.S. economic growth is about to slow down even further.  For example, pre-orders for Christmas toys from China are way down this year.

#7 One recent survey found that 9 out of 10 U.S. workers do not expect their wages to keep up with the rising cost of basics such as food and gasoline over the next year.

#8 U.S. consumer confidence is now at its lowest level in 30 years.

#9 Today, an all-time record 45.8 million Americans are on food stamps.  It is almost inconceivable that the largest economy on earth could have so many people dependent on the government for food.

#10 As the economy crumbles, we are also witnessing the fabric of society beginning to come apart.  The recent flash mob crimes that we are starting to see all over America are just one example of this.

#11 Some desperate Americans are already stealing anything that they can get their hands on.  For example, according to the American Kennel Club, dog thefts are up 32 percent this year.

#12 Small businesses all over the United States are having a really difficult time getting loans right now.  Perhaps if the Federal Reserve was not paying banks not to make loans things would be different.

#13 The U.S. national debt is like a giant boulder that our economy must constantly carry around on its back, and it is growing by billions of dollars every single day.  Right now the debt of the federal government is $14,592,242,215,641.90.  It has gone up by nearly 4 trillion dollars since Barack Obama took office.  S&P has already stripped the U.S. of its AAA credit rating, and more downgrades are certain to come if the U.S. does not get its act together.

#14 Tensions between the United States and China are rising again.  A new opinion piece on Chinadaily.com is calling for the Chinese government to use its holdings of U.S. debt as a “financial weapon” against the United States if the U.S. follows through with a plan to sell more arms to Taiwan.  The U.S. and China are the two biggest economies in the world, so any trouble between them would mean economic trouble for the rest of the globe as well.

#15 Most state and local governments in the U.S. are deep in debt and flat broke.  Many of them are slashing jobs at a feverish pace.  According to the Center on Budget and Policy Priorities, state and local governments have eliminated more than half a million jobs since August 2008.  UBS Investment research is projecting that state and local governments in the U.S. will cut 450,000 more jobs by the end of 2012.  How those jobs will be replaced is anyone’s guess.

#16 The U.S. dollar continues to get weaker and weaker.  This is renewing calls for a new global currency to be created to replace the U.S. dollar as the reserve currency of the world.

#17 The European sovereign debt crisis continues to get worse.  Countries like Portugal, Italy and Greece are on the verge of an economic apocalypse.  All of the financial problems in Europe are even beginning to affect the core European nations.  For example, German industrial production declined by 1.1% in June.  There are all kinds of signs that the economy of Europe is slowing down and is heading for a recession.  French President Nicolas Sarkozy and German Chancellor Angela Merkel are proposing that a new “economic government” for Europe be set up to oversee this debt crisis, but nothing that the Europeans have tried so far has done much to solve things.

#18 The Federal Reserve is so desperate to bring some sort of stability to financial markets that it has stated that it will likely keep interest rates near zero all the way until mid-2013.  The Federal Reserve is operating in “panic mode” almost constantly now and they are almost out of ammunition.  So what is going to happen when the real trouble starts?

#19 Central banks around the world certainly seem to be preparing for something.  According to the World Gold Council, central banks around the globe purchased more gold during the first half of 2011 than they did all of last year.

#20 Often perception very much influences reality. One recent survey found that 48 percent of Americans believe that it is likely that another great Depression will begin within the next 12 months.  If people expect that a depression is coming and they quit spending money that actually increases the chance that an economic downturn will occur.

There is already a tremendous amount of economic pain on the streets of America, but unfortunately it looks like things may get even worse in 2012.

The once great economic machine that was handed down to us by our forefathers is falling to pieces all around us and we are in debt up to our eyeballs.  The consequences of our bad economic decisions are hurting some of the most vulnerable members of our society the most.

As the following video shows, large numbers of formerly middle class Americans are now living in their cars or sleeping in the streets….

It is a crying shame what is happening out there on the streets of America today.

Please say a prayer for all of those that are sleeping in cars or tents or under bridges tonight.

Soon even more Americans will be joining them.

The Economic Collapse

The American middle class is furious and this is reflected in how people perceive their failed government but also a financial system that has largely profited from the failures of millions.  A recent Gallup poll shows that only 13 percent of Americans actually approve of Congress and the way they are handling their job.  This is a record low.  Of course the financial system for those too big to fail banks is doing just fine thanks to years of accommodative policy, taxpayer bailouts, and politicians that basically collect payroll checks from the HR department of these large financial institutions.  As we have noted and the media fails to report, the average per capita income in the United States is $25,000.  What is even more disturbing is that a recent poll found that 64 percent of Americans would not be able to shoulder even an unexpected expense of $1,000.  If a transmission on a car goes down or additional medical expenses hit, it will cost well over $1,000.  This is simply another reflection of how the crushing collapse of the middle class will not be televised.

$1,000 enough to crush many Americans

Source:  National Foundation for Credit Counseling

The fact that $1,000 of unexpected expenses would leave many Americans gasping for financial help is troubling enough but the even more disturbing methods of how families would deal with issues that go to the debt addicted psychology of the nation.  9 percent said they would take out a loan (assuming they could) to deal with the expense.  17 percent would borrow from friends or family.  Presumably these family members fall in the 36 percent category that actually have savings to deal adequately with a $1,000 unexpected expense.  Another 9 percent would take out a cash advance on their credit card which is one of the worst things you could possibly do.  12 percent would sell or pawn current assets assuming it had value enough to cover $1,000.  If that isn’t troubling enough, 17 percent would flat out disregard other monthly expenses.  Welcome to new reality for the working and middle class in our nation.

How in the world did we get to a point where $1,000 would be a crushing blow to most families?  All this coincides with the new gilded age mentality of our nation where financial oligarchs are protected at the expense of the middle class.  The media simply keeps singing their songs of praise.  We have another 46,000,000 Americans that are living day to day with food stamps, the highest percentage of Americans ever.  This does not sound like any sort of recovery to me.  To the contrary this sounds like a banking and government system simply trying to keep the public comfortable enough so they don’t realize the scandal that has taken place over the last decade.  It really has been a robbery.  The facts showing the top one percent income growth and no subsequent growth in the real economy highlight a twisted new system that we live in.  These large banking systems abjectly failed but were socialized into existence by taxpayers.  When I hear politicians ranting about working and middle class Americans needing to deal with austerity what about the financial system?  Why don’t we claw back some of the trillions of dollars the U.S. Treasury and Federal Reserve funneled their way?  Every time you hear that line think of this chart:

Read More At My Budget 360

But, but, but….. as Professor Kack (or is that “Hack”) said, there’s no indication of inflation:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in July on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.6 percent before seasonal adjustment.

This is “no indication of trouble”, right?  1.005 ^ 12 = 6.2% annualized inflation.

Not a problem, right?

What’s been flying upward?  Gasoline, clothing, electricity and groceries.

You don’t need to buy any of those, right?  You can hide out in things that aren’t going up much, like commodities less food and energy?

Yeah, right.

Oh, and Bernanke?  He claims he wants to see 1-2% inflation despite clear language in The Federal Reserve Act that mandates stable prices.  Well, how’s he doing?

The Consumer Price Index for All Urban Consumers (CPI-U) increased 3.6 percent over the last 12 months to an index level of 225.922 (1982-84=100). For the month, the index increased 0.1 percent prior to seasonal adjustment.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 4.1 percent over the last 12 months to an index level of 222.686 (1982-84=100). For the month, the index increased 0.1 percent prior to seasonal adjustment.

Why did we have The Coinage Act of 1792 again?  Oh that might be so that the common man doesn’t get screwed, blued and tattooed by those who would otherwise intentionally destroy his saved capital.

It’s time to bring it back, including the penalty clause, with sentences to be carried out in public on The National Mall.

First they cut the rating of the US, then the went and downgraded Google, now S&P is going for the “treason trifecta” by just releasing a report which literally takes the US to the toolshed. Among many other things, the rating agency just cut US growth for the next 3 years. To wit: “While July data finally showed a slight improvement in the U.S. economy, it’s not enough to support expectations that the second half of the year will see a bounce in growth. We now expect to see an even slower recovery than the half-speed we earlier expected.

We now expect just 1.9% growth in the third quarter and 1.8% in the fourth, to bring 2011 calendar year growth closer to 1.7% instead of 2.4% we earlier expected. We also downwardly revised growth expectations for 2012 and 2013, as a more drawn-out recovery is factored into our forecast.” We wonder how soon before the realization that the US is in fact contracting will force S&P to downgrade America even further, a move which will force Moodys and Fitch to come up with a AAAA rating for the US in order to keep the weighted average rating at current levels. It gets even worse though as S&P now openly brings the 2008 analogy: “The markets’ violent swings in early August resurrected fears of the market meltdown, such as the one in 2008 when Lehman Brothers went under and Reserve Fund broke the buck.

Currently, the crisis is considered to be much more severe, with U.S. sovereign debt at risk of default. The low Treasury yields indicated that markets were expecting Congress to come to its senses and reach a deal. However, the wait and the last-minute deal, which left a lot to be desired, only increased worries that the government will do more harm than good. Confidence in the recovery and in U.S. policymaking has hit new lows.

After U.S. sovereign debt lost its triple-A status and financial markets unwound, consumer confidence hit a 31-year low and manufacturing sentiment readings contracted.” And the kicker: S&P, yes S&P, makes fun of the Fed, and specifically the “transitory” nature of the economic collapse: “Continued weak growth after sharply downward GDP revisions has made the “temporary argument” a less plausible explanation for the slew of bad news for the first half of the year. At least the GDP revisions make the persistently high unemployment rate make more sense. But the revised data also indicate a much weaker outlook than we previously expected. As the boosts from rebuilding inventories and fiscal stimulus unwound, consumer spending and housing couldn’t cover the hole, because the former is still working off excess debts and the latter excess supply. The recovery comprised a first-half average growth of just 0.8%.” And that is how you respond to endless scapegoating that now blames the S&P for the collapse. Look for S&P to make the FBI’s most wanted list very shortly.

From S&P:

U.S. Economic Forecast: Still Treading Water

On August 5, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the U.S. to ‘AA+’ from ‘AAA’ and kept its negative rating outlook, which increased worries that the economic recovery has faltered. The downgrade and concerns that the eurozone sovereign debt crisis was spreading north to France caused markets to go into a tailspin last week. This likely forced the Federal Reserve to take more policy action, which helped calm markets.

However, while the market panic subsided, recovery concerns that helped launch it are still very real. After the recession officially ended two years ago, the outlook for growth is worsening and the U.S. economy is still treading water trying to stay afloat. The “temporary shocks” sound less convincing, even to the Fed, as an explanation of paltry growth during the last two quarters. The lack of underlying momentum was highlighted in second-quarter GDP report, where backward revisions showed not only how much worse the recession was, but how anemic the recovery really is.

While July data finally showed a slight improvement in the U.S. economy, it’s not enough to support expectations that the second half of the year will see a bounce in growth. We now expect to see an even slower recovery than the half-speed we earlier expected. We now expect just 1.9% growth in the third quarter and 1.8% in the fourth, to bring 2011 calendar year growth closer to 1.7% instead of 2.4% we earlier expected. We also downwardly revised growth expectations for 2012 and 2013, as a more drawn-out recovery is factored into our forecast.

It is disturbing that policymakers do not seem to have the weapons or the political resolve to fight the economic crisis. Those policy problems are a large reason why we believe the economy is more vulnerable to another recession. Once again the Fed is willing to step in, just like it did in 2008 when Congress refused to pass legislation (including TARP), as markets spiraled out of control. But this time, the Fed is confronting the collapse with a sling shot, not a bazooka, so its measures will have less bite.

We are not surprised that in the aftermath of the worst recession since the Great Depression, the recovery would be slow and uneven. As history has shown, financial crises are often followed by prolonged recessions, and after that, a long bout of sub-par growth. Several studies measure just how much damage a financial crisis can cause, and how long it can last. According to these studies, economic growth will be slower than normally expected, which most people won’t recognize as a recovery.

Just Like Old Times

The markets’ violent swings in early August resurrected fears of the market meltdown, such as the one in 2008 when Lehman Brothers went under and Reserve Fund broke the buck. Currently, the crisis is considered to be much more severe, with U.S. sovereign debt at risk of default. The low Treasury yields indicated that markets were expecting Congress to come to its senses and reach a deal. However, the wait and the last-minute deal, which left a lot to be desired, only increased worries that the government will do more harm than good.

Confidence in the recovery and in U.S. policymaking has hit new lows. After U.S. sovereign debt lost its triple-A status and financial markets unwound, consumer confidence hit a 31-year low and manufacturing sentiment readings contracted. While some hard data, such as the stronger-than-expected July retail sales and recent jobs report, show that not all news is bleak, the preponderance of evidence to the contrary explains the sour moods. Though we still expect weak growth, not a recession, the data indicate a more drawn-out, painful recovery than the half-speed one we earlier expected.

Continued weak growth after sharply downward GDP revisions has made the “temporary argument” a less plausible explanation for the slew of bad news for the first half of the year. At least the GDP revisions make the persistently high unemployment rate make more sense. But the revised data also indicate a much weaker outlook than we previously expected. As the boosts from rebuilding inventories and fiscal stimulus unwound, consumer spending and housing couldn’t cover the hole, because the former is still working off excess debts and the latter excess supply. The recovery comprised a first-half average growth of just 0.8%.

The storms that blanketed the U.S. this winter kept people away from the mall and Japan’s natural disaster supply-chain disruptions can only be partly blamed for lower sales. More importantly, the consumers have been squeezed by higher commodity prices which wiped out any benefit of the payroll-tax credit. The high unemployment rate, at 9.1%, kept people cautious, worried that even if they have a job, they may lose it next week. Amid sluggish job market and stagnant wages, the wallets are empty after people fill up their gas tanks.

There are some signs that the second half of 2011 won’t look as bad as the first; however, anything slightly better than a 0.8% average growth rate is not impressive. The jobs market will likely remain weak into 2013, so housing will remain soft. We expected some improvement in the jobs market to help revive household formation to absorb excess supply. So without that jobs-related boost, housing won’t contribute to the recovery. However, maybe it was retail therapy after all the sour news, but the July retail sales data showed that consumers began to spend more. Total sales jumped an upbeat 0.5% over June numbers, and it’s not because of a hefty price tag at the pump. Excluding autos, gas, and building materials, sales were up 0.3% in July after a 0.4% increase in June (sharply revised up from a 0.1% gain). This comes while the government payrolls report posted a better-than-expected 117,000 job gain and the unemployment rate slipped to 9.1% from 9.2% in June. The results by no means suggest that we are in the clear. But at least the economy is inching away from a double-dip recession.

 
Ready To Take Another Dip?

Does the Great Recession have company? Many think that another crisis will follow the Great Recession. The global stock-market plunge reflected fears that a double-dip recession is coming. The bad news during the last few months suggests that these fears may not be unfounded. The supply shock due to the earthquake in Japan, climbing energy prices, and massive storms have certainly contributed to the slowing U.S. economy. But even the Fed admitted that those events alone may not explain the extent of the decline. As I said in my last monthly forecast report, if a couple of one-offs can do so much damage, it shows just how fragile this recovery is.

As the economic data continue to disappoint, we have become more worried about the strength of the recovery. We have been expecting a half-speed recovery for some time. However, the onslaught of dismal news puts even that forecast at risk. We now expect below-potential growth through the end of next year. And while the numbers are still positive, the smaller they get, the greater the risk of dipping into another recession. On August 5, we increased the chance of a recession in the next year to 35% from 30% in June, and well above the 25% odds we expected in March.

Given a lag in the release of economic data, which is often revised, it’s hard to identify a recession in real time. It takes the National Bureau of Economic Research (NBER) many months to announce the start of a recession, and in case of the 2001 recession, it ended just when NBER declared that it began.  But markets still keep trying to predict. There are a lot of rules of thumb that the investment community uses to signal a recession. One, backed up by a Fed study, says that when real GDP growth drops below 2% year-over-year, a recession follows within a year roughly 70% of the time. Second-quarter GDP growth was 1.6% over last year, so we have a little more time. The three-month unemployment average rate is another important indicator. Since the Second World War, if unemployment rate climbs by more than 0.3%, a recession has always followed. We would need the three-month average rate to reach 9.3%, in order to top the 8.9% trough in March, to say with more certainty that recession has started. Given the July figure edged down 0.1% to 9.1%, we still haven’t arrived at that point. While a market sell-off is also watched, a plunge in stocks during the past three weeks doesn’t necessarily mean a new recession (the economy avoided a recession after the stock market crash of 1987). However, amid the fragile
economy, the shock of another stock market drop and resulting loss of wealth could be the tipping point.

Trying to use various rules of thumb to determine a coming recession can be dangerous. And in this case, where we have a very sluggish recovery, the normal rules may not apply. We may still be in a sustained, though weak, recovery with intermittent declines bringing the growth rate so close to zero, which would imply that the economy is falling into recession. But the signals are disturbing, and at a minimum they show an economy with very feeble growth prospects.

With the odds of a double dip at 35% and climbing every time stock market sells off, credit spreads widening, and consumer confidence dropping, when does a double dip becomes the most likely outcome for the U.S.? As the recovery is on a precipice, there are a few things to watch. Another shock to the economy, even a mild one, could push the recovery back into recession. We’d watch whether the deterioration in financial conditions persists or if leading economic data worsen. Another plunge in the stock market, a deeper contraction in already weak consumer confidence levels, one more spike in initial claims that holds, or sub-50 ISM readings for several months would push the recession gauge to the brink.

It’s Only Just Begun

Why are we surprised that in the aftermath of the worst recession since the Great Depression the recovery would also be slow and uneven? As history has shown, financial crises are often followed by prolonged recessions, which is followed by a long bout of sub-par growth. Several studies measure just how much damage a financial crisis can cause and how long it can last. According to these studies, recoveries from financial crises are typically a hard climb. The economic growth will be slower than normally expected and won’t be felt as a recovery by most.

The McKinsey report (Debt and deleveraging: The global credit bubble and its economic consequences, 2010) found 45 episodes of deleveraging since the Great Depression, of which 32 followed a financial crisis. The types of deleveraging the report documented included “belt tightening,” massive defaults, high inflation, or “growing out of debt” (through strong economic expansion, a war, or a “peace dividend”). The report found that the most common type of deleveraging after a major financial crisis is the “belt tightening” scenario, which is what the U.S. is now experiencing.

The McKinsey report said that if today’s economies were to follow that path, they would experience six-seven years of deleveraging where the debt-to-GDP ratio falls by about 25%. As the debt is paid down, GDP growth could be slower than it would have been otherwise, unemployment consistently high, and inflation low (or deflation for some), which unfortunately sounds all too similar to our current situation.

A paper by Carmen M. Reinhart and Vincent R. Reinhart (After the Fall, 2010) put numbers to the news. According to their study, during the decade following a severe financial crisis, real per capita GDP growth rates were “significantly lower” with the median post-financial crisis GDP growth declining about 1% in the five advanced economies. The study also found that in the 10 years following a severe financial crisis, unemployment rates are significantly higher than in the decade preceding the crisis, with the median unemployment rate for the five advanced economies of about 5% higher. They wrote that “In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis levels, not in the decade that followed now through end-2009.” These depressing results support our expectations that the U.S. unemployment rate will remain above 8.5% through 2013 and not reach the estimated 5.5% natural rate for another 10 years.

What’s Left In The Tool Box?

In a sharp departure from the usual protocol, the Federal Open Market Committee (FOMC) last week assigned a time frame to its “extended period” phrase. While the statement had the usual caveats, which gives the Fed a way out, it indicated that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” Nevertheless, it’s important to note that there were three dissenters to that opinion, which could lead to an interesting struggle between the doves and hawks for the remainder of 2011. In addition to the Fed’s pledge to essentially offer free money to markets for a few more years, the FOMC went on to say that it “discussed the range of policy tools available…” to strengthen the recovery, and “is prepared to employ these tools as appropriate.”

The statement noted that the Committee “now expects a somewhat slower pace of recovery over coming quarters” than it did before. The FOMC also finally indicated that not all the weakness in economic growth was transitory. And to no one’s surprise, the Committee said that downside risks have increased, suggesting that more easing is likely. We expect no rate hike from the Fed before 2014. Since the Fed has already played its best hand, it will likely attempt another program of quantitative easing similar to the last one, possibly later this year. Both measures should boost financial conditions, though they will only modestly support the economic growth. They will, however, prevent the risk of slipping into outright deflation. Given that the Fed has fewer effective ways to stop deflation but has numerous ways to tighten policy, the Fed will likely project the outlook to remain weak and fight deflation.

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