FedUpUSA

Archive for the ‘GDP’ Category

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.

ZeroHedge

Let’s start with whose fault it is not: S&P.

To recap:

• S&P warned early in the year that there was a risk of a downgrade.
• S&P, when the debate was entered in May, said that they needed to see $4 trillion in actual deficit reduction and that this was a “down payment” on the problem, not the entire solution (they’re right, incidentally.)
• S&P then re-iterated the warning when the debate got contentious.

That’s (at least) three separate warnings that were intentionally ignored.  S&P was not ambiguous nor did they blindside anyone.  They told the government exactly what they needed to see and when in order to avoid the downgrade.  They’re blameless.

So who’s to blame?

• CONgress, for it’s willing refusal to either clearly state that it didn’t care if the downgrade happened or complying with S&Ps demands. Pick one.  When you have a firm saying “do X or we do Y”, and that’s a legal act, you either do X or you expect Y.  It is the height of arrogance to try to shine someone on like this – yet Congress did – on both sides of the aisle. If you’re in Congress and you’re “offended” or “surprised” by this action, STFU.  You have no right to complain – you knew exactly what you had to do in order to avoid it, and you failed.  Eat your (rotten) peas.

• President Obama, for his belief that he could simply bully an independent business into not doing a lawful thing. Again, he is a President, not a King.  Go back to Chicago Obama where you belong, and where “kneecap politics” are the way of the world.  Illinois deserves you.  Once again, eat your own damn peas.  You too knew exactly what you had to do as a leader to avoid the downgrade, and you failed.

• We the people, for our refusal to accept that we cannot have services from our government we refuse to pay for in the present tense. This is a fact, whether we like it or not. Our incessant demands for that which we refuse to pay for do not make those goods and services magically appear forever.  We are acting like spoiled little brats and deserve the spanking we are receiving this evening (and over the last two weeks) in our 401ks and IRAs.  Worse, the damage tonight is a “love tap” – the belt of cold hard economic reality, applied with extreme vengeance, is headed toward our butts if we don’t cut our behavior out right now.

We have all squandered the three years of forbearance we received after the 2008/09 crash.  Instead of doing the right thing we did the wrong thing.  Instead of closing bankrupt institutions we turned formal accounting fraud (“mark to myth”) into a legal and accepted practice.  Instead of accepting that we had a bloated Federal government that was not being funded with tax revenues we insisted on “more free cheese” to “help people” without any means to pay for it.  We listened to people like Biden and Obama who claimed we had to “stimulate” the economy, when in fact we’d been deficit spending to the tune of about $500 billion every year since 2003.  In other words we were already massively distorting the economy – and in no small part that was why we had a housing bubble.  Our nation is addicted to debt and we’re all in denial.

We must either face our addiction and break it or it will break us.

Never mind the “supply side” delusion.  Oh sure, it sounds good.  It even looks good – initially.  But explain to me this – if you’re a supply-sider, then how come the debt addition and GDP addition chart, if it works to produce sustainable economic growth, looks like this?

There’s the outcome of “supply side” economics: It’s a scam and a fraud – the math always shows exactly what you did, no matter what you claim happened.

Here’s the question before us tonight folks: Are we ready to accept reality?

While the markets are down a good bit, they opened down much more.  The rebound has been reasonably impressive.  But it can all disappear – and a lot more – by morning.  It will too, if not tomorrow then in the coming weeks and months if we don’t cut the crap.

You’ve already seen your 401ks and IRAs get trashed.  The next time it will not bounce by 100% in 18 months – it will go down and stay down because we already played all the “new fraud” cards to create the pop we have just “enjoyed.”  This time there is no ability to bail out the banks – irrespective of political will.  We either do the right thing – now – or events will overtake us in a disorderly fashion.

The G7 and ECB statements today were quite weak.  Oh sure, the Fed and the rest of the Central Banks will point their “bazookas” at the “evil speculators” and blast away with more liquidity (debt) in the firehose.  But there’s no meaningful uptake.

The credit report last Friday was especially alarming.  It showed, for the first time in a long time, an uptick in credit card debt.  This would be thought of as good rather than bad except that the consumer income and spending were down.

So we have consumers who are not getting more money and not spending it – they’re shifting spending to add more debt and it is reasonable to assume that this shift is forced rather than voluntary.

That’s very bad folks.

As I have said a few times of late I do not think it’s September of 2008 – yet.  I think the analogue is more like Bear Stearns’ time.  This means we still have some months left before the various governments point their mighty bazookas (the most-powerful of which is simply their mouths) at the market and get a “click” rather than a “whoosh!” and “boom!”

But that day is coming folks – make no mistake.  I see no evidence from either political party in the Sunday shows today that either accepts what happened and why – nor any responsibility.  Instead we have everyone pointing fingers claiming the “other guy” did it.

Well, go back and read the top of this Ticker.  The terms for avoiding the downgrade were clear, they were published, they were consistent, and they were given with four to six months of warning, reiterated several times.  Congress and President Obama both gave the finger to S&P.

That’s fine – but they gave the finger back, and they had every right to do so on the objective facts.

We either face facts and fix what’s broken or we will have another Lehman 2008 moment, and much sooner than you think.

Since I do not believe the infestation in Washington DC are capable of acting like adults, as demonstrated by the fact that they just proved their inability for the entire world to see, I suggest that you be prepared for what is, in my opinion, the inevitable outcome.

Sorry guys, the clock has rung. It’s not ringing any more, it has rung and the spring-powered alarm has run out.

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent.

That’s a monstrous revision to the first quarter. For those who forgot, we were told it was 1.8% on April 28th.

Oops.

Why the major change? Annual revisions. The answer is this: What recovery? Now I have to go back and revise all my working tables.

There is no recovery to speak of. Four years into this the policies of the government and Fed have failed.

It gets worse:

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first Excluding food and energy prices, the price index for gross domestic purchases increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first.

Your standard of living is being shredded.

Real personal consumption expenditures increased 0.1 percent in the second quarter, compared
with an increase of 2.1 percent in the first.

Spending has effectively collapsed.

This puts into stark relief the reality of the government deficit spending – it is doing nothing more than covering up an economic Depression, and the so-called “exit plan” – that private consumption, investment and borrowing will “take the baton back” is not working.

The deficit spending must stop now before the tax base folds back and forces a disorderly collapse.

The Market Ticker

Discussion (registration required to post)

The root causes of global financial instability cannot be wished away or “solved” with modest policy tweaks: they are systemic.

Here’s how it all can come apart, and why Congress – and Obama – are both on the wrong track.

Note this story from Bloomberg:

Political wrangling over a plan to reduce the deficit may cost the U.S. its AAA rating, adding $100 billion a year to government costs while dragging down economic growth, according to Wall Street bond dealers.

A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 to 70 basis points over the “medium term,” JPMorgan Chase & Co.’s Terry Belton said today on a conference call hosted by the Securities Industry and Financial Markets Association.

But that’s just the start, you see.

Right now rates are at historic lows.  So let’s presume that the economy “improves”; if that happens then rates go up.  In fact, there was a hearing this afternoon in the House Banking Subcommittee talking about exactly that.

Here’s the current Treasury MTS; it shows total interest on the public debt last year was $355 billion, and this year thus far is $386 billion. This implies (on a grossed-up 8/12ths basis) that the blended interest rate on the debt is running about 4%.

Here’s the problem, in short: Rates have nowhere to go but up.

So is 70 basis points “realistic”?  No.  If the economy improves, they’ll go up double that or more just on their own on the short end. Then you get to add this “penalty” from the downgrade.

We have the government claiming they will “cut” about $1 trillion in real spending (the rest is gimmicks – the wind-down of the wars that were going to happen anyway) over the next ten years.

But if the economy improves the increased cost of the interest on the existing debt will be double that over the same ten years, and if we get downgraded you can double that again!

Each 100 basis points on $15 trillion in debt is $150 billion a year – every year – and the CBO says we’ll have $25 trillion in debt by 2020.

At a 5% blended interest rate this load on that $25 trillion will come to $1.25 trillion in interest annually – just 1 percent higher in interest than we’re paying now!

We will not get to 2020 folks; this is, in fact, exactly how the death spiral happens.

Interest expense as a percentage of government, this year, if the MTS thus far is 8/12ths of the total (through June), will run $579 billion.  This out of a budget of $3.8 trillion (approximately) is ~15% of the total federal budget.  To put this in perspective this is about 50% of the total receipts under federal income tax – just to pay interest!

Now I’m probably being pessimistic, because there’s a roughly $80 billion “whack” that comes from semi-annual coupon payments in the trust funds, and we’ve already gotten both of those.  So let’s be nice and call the trust fund interest accrued already, which means we now get $280 + $199, or $479ish, which is about 12% of the budget.

And that assumes that neither interest rates go up due to an improving economy or a downgrade.

What happens if that 4% blended rate goes up 70 basis points on a downgrade?  Oh that’s easy – just multiply that number by 117% and you’re close enough.  Call that $560, or ~$80 billion a year more.  Each and every year for the next ten, that’s $800 billion.

The problem is that the downgrade cannot be avoided without an actual credible $4 trillion in actual reductions in the deficit from the baseline. This means you can’t count anything that was already expected to happen like the wars being wound down.

It also means at least $400 billion in actual spending reductions for FY 2012 and then $400 billion more in each of the next three to four years! Or we can just do it in two – $750 now and $750 in FY2013.

We might get away with either of those plans, although the impact on the economy will be very significant – the exposure of the Depression we have been in since 2008 will occur with certainty.  GDP will contract and coverage – that is, the percentage of federal income that goes to interest – will actually go up for a while rather than down! It has to because as the economy adjusts to the lack of deficit spending GDP will contract and tax revenue will fall.

It is, in fact, precisely this inescapable mathematical reality that means that we must deal with this now rather than attempting to kick the can and have the market make these choices for us.

The outcome of taking our medicine will be bad.  Very bad.

But if we don’t do it – and do it now – it’s going to be worse.

Much worse.