View From Down Under

The Commerce Department released their latest figures on GDP last week – up 5.7% in the fourth quarter.  Big contributors were inventory additions (3.4%) and personal expenditures (1.4%).

Most economists I’ve read suggest we treat this with caution because of the high contribution from inventory growth, which is clearly not sustainable.  As true as this cautionary note is, the numbers are also full of upbeat results.

Personal expenditures are up.  This is in spite of a drop of 0.57% in motor vehicles (against a strong third quarter boosted by Cash for Clunkers).  Clothing and footwear spending is up for the first time in six quarters.

Overall fixed private investment is up for the first time in ten quarters.  You have to go all way back to June 07 to find the last up quarter in private investment.  This has been driven by growth in equipment and software.

Government spending was down 0.2% during the quarter as the stimulus spending stopped growing.  We should expect this to continue to decline as the stimulus plays out.  Remember the GDP numbers measure change quarter to quarter, not absolute level of spend, so as the stimulus spend starts to slow the impact on GDP growth will be negative.

The last bit of good news is that I think this number is likely to be revised up in the next month.  After getting the last one so wrong (initial announcement of 3.5% growth with a revised number of 2.2%), the BEA analysts have likely taken a very conservative view on their estimates this time.

The economy has not “recovered”, and there is a long way to go before the 7 million people who lost their jobs will be back at work.  But I continue to doubt the double dip thesis, and remain bullish on the prospects for the US economy in 2010.

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Back in November, I wrote that the recession was over – though it may not feel like it.

This week, the Conference Board released their data on leading indicators.  The index was up again in December, and has “risen steadily for for nine consecutive months.”  Here’s the chart:

The Coincident index has been rising as well, up for five of the last six months.  Building permits, stock prices, consumer expectations, business capital expenditure, industrial production, manufacturing sales – all up.

Interestingly, consumer confidence is lagging, and consumer assessment of the economy is decidedly bad.

A recent Gallup poll shows how pessimistic consumers are on the economic situation.  Asked the open-ended question “Just your best guess, how long do you think it will be before the US economy starts to recover?”  Remember that, from an economist’s perspective, recovery probably began in July/August last year.  Here’s the results:

Fully 85% of the people surveyed expected it would be one year or more before the economy starts to recover.  About half the survey expect it will be three years or more.  Put another way, half of the population thinks the US will be in recession for at least another two years.

Now, it’s possible (in fact, highly likely) that the average consumer’s definition of recovery is different to economic definitions, and the survey respondents are actually answering a different question.  They may think it will be two years before the economy is back to where it was in 2007 (which is also historically pessimistic).  Psychologically, the last 18-24 months experience is much more relevant to most people than experience prior to that.  Recent experience is still felt emotionally while more distant experience is only a memory.

Clearly, to most Americans, it does not feel like the recession is over.  And there are some highly acclaimed economists who are concerned about a ‘double dip’.  But with leading indicators climbing that dramatically, and the rest of the world pulling out of recession as well, a double dip looks less and less likely.

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A great friend of mine is not only quite well travelled, but also an extraordinary wordsmith.  While on a recent trip to France, she wrote this:

Having decided not to move here, I moved on in my head to attempting to describe all the countries I’ve been to in a few words.

…

America is brazenly self-confident, often irritatingly cheerful, and utterly naive in a very aggressive way. It carries within itself the full knowledge of its own superiority, as well as a creeping fear that this brings horrible dangers. It’s deeply caring and sympathetic, but lacks empathy for cultures incongruous with its own. In many ways, it is a 19 year old, charging around the world full of passion and idealism while doing everything it can to fill its room with as much stuff as it can fit in there. It covers itself in self-confidence like cheap cologne, and all the while doubt that maybe not everything can be fixed is eating at its insides.

…

Australia is young too, but it’s a rougher kind of young than America. Similar creation stories at similar times, but Australia is so much less idealistic than America. Our creation story has no Independence War, or Civil War or Thanksgiving myth. We made for ourselves myths and heroes out of Ned Kelly and the jolly swagman rather than Washington and Lincoln. Our heroes are people subverting the world around them simply to survive, America’s heroes are idealists who took radical action to make their ideals reality, and subverted reality for a “higher purpose”. America grew a nation out of a rich land, a land of brown loam and mountains, bountiful prairies and huge forests. Australia grew out of red dirt that was dead long before we got there, and forests of gum trees too crooked to build with.

We’re (Australians) a broad, rough, honest people. Irreverent and coarse, blunt and loud. Cynical without bitterness, sarcastic without meanness. Practical with a “that’ll-do” approach to that which we don’t think is that important. A hard creation myth that makes us feel as though we’ve weathered something, a weird cultural love of ‘larrikinism’ and a mass buying into of the myth of ‘mateship’. But buying into those myths makes them real in their outworking, so there’s a kind of glowing pride associated with surviving in a mostly dead country, and a love for the underdog, and a feeling of responsibility to each other as long as you’re ‘mates’. We have a fascination for other places, but never lose sight of our own personal sense of superiority. We’re young but like to think we’re old, and pretend to be less idealistic than we are or want to be. As wonderful as it is to not have to respect something simply because everyone else does, it is sad that we find it hard to respect anything at all. Irreverence as a habit isn’t always the best policy.

Very honest and perceptive descriptions, in my opinion.  Maybe some day, I’ll be able to write that well.

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The Labor department released its December employment situation update yesterday.   Non farm payroll down slightly (85,000).  Unemployment rate remained steady, as a result of people dropping out of the job market.

In the last two US recessions, unemployment has lagged economic recovery by much more than previous recessions.  From an article by Mark Thoma in November comes this interesting graph:

The delay in unemployment reduction led both the last two recoveries to be labelled jobless recoveries.  I believe this one will be as well.

Improvement in technology has changed the way much work is performed.  However, most companies do not lay off employees when they improve their systems and processes.  Instead, they tend to either redeploy them or fail to completely capture the benefit of the upgrades.  During a recession, companies are forced to reduce staff.  Often they find that there is the ability to stretch productivity during this time, and as the economy recovers they manage to keep pace with the recovery with a smaller staff.  This process has accelerated since the 1981-82 recession, and I believe is one of the key reasons for the jobless recoveries (although there are other reasons also).

The view from down under is not as pessimistic as many economists (including many much more qualified and eloquent than I), but the prospects for major reductions in unemployment before the mid term elections next November looks grim.

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2009 was clearly the year of stimulus.  Governments around the world responded to the financial crisis with very strong fiscal and monetary stimulus programs.  The year also validated stimulus as an effective method of helping economies out of a recession.  This was true in Australia, China, much of Europe, and even the US (although the US stimulus was relatively light and the impact less pronounced).

All of the world’s economies are likely now out of technical recession – with the possible exception of Iceland and one or two others.  However, that does not mean the world’s economies are out of danger.  The possibility of slipping back into negative GDP territory is still real – as was demonstrated when Singapore shrank 6.8% in the fourth quarter vs growth of 14.9% in the third.

The big challenge for 2010 will be how to unwind the stimulus programs without pushing the economy back into recession.  Nobel prize winning economist (and self confessed liberal) Paul Krugman believes the likelihood that the US gets this wrong is “better than even”.  Other economists are also concerned that low underlying growth and withdrawal of stimulus will cause a double dip recession.

There are some lessons from other countries’ efforts to unwind their stimulus.  Australia, which had the mildest recession of any OECD country, has already raised interest rates three times and their fiscal stimulus programs are largely finished.  Stimulus programs included reducing interest rates (by 4% from September 08 to February 09) and cash handouts to low and middle income families in October and December 2008.  Reducing interest rates has a bigger impact in Australia than the US because about 80% of Australian households have variable rate mortgages.  As you can see below, the impact on retail sales was pronounced, spiking as the cash payments were received.  However, since April and the withdrawal of stimulus, retail sales have been slightly negative overall.  (Fortunately, Australian GDP does not depend entirely on retail sales, but it is a major component.)

Clearly the removal of all stimulus for the US economy now would cause the economy to slip back into recession.  That won’t happen, but there is a likelihood that without further stimulus the economy will still falter.  Personally I am more bullish about the odds than Mr Krugman, but the Fed and Congress need to manage the process carefully and some further fiscal stimulus may well be appropriate.

With a bit of luck, the year of stimulus will be followed by year of the gradual unwind.

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