Slow First Quarter GDP Growth

The BEA announced today that growth in the first quarter is estimated to be .6%, though that figure could be (and probably will be) revised later.

There is a lot of discussion  about whether this means we can say the economy is in a recession or not (Hamilton, Ritholtz, Krugman). Call it want you want - some people use the term growth recession to describe the current situation - but whatever we call it, a growth rate of .6% is slow (see Krugman's comments on employment as well).

The report was better than many people expected, but this isn't good news:

The U.S. economy didn't slump in the first quarter as some had feared it would, but its weak climb was the product of a likely unintended inventory buildup.

This isn't good news either:

Nonresidential fixed investment contributed -0.3%; a small factor in the total, but a development that worries Calculated Risk.

And a warning that there can be considerable lags in the adjustment process:

Four mega-dangers international financial markets face, by Dennis J Snower, Vox EU: Day after day new, alarming news emerges from the world’s financial markets, and day after day the public is surprised by how bad it is. But instead of wringing our hands, let’s ask ourselves an important, unconventional question: What is more surprising: that financial markets have turned from bad to worse, or that we continue to be surprised by each successive piece of adverse news?

I suggest that our repeated surprise should be more surprising. This issue is important, because if we were better at recognising the financial risks we face, we could do more to avoid them. If banks, investment houses, and American homeowners had done a better job in recognising the risks in the subprime mortgage market, we could have spared ourselves the current crisis.

Why does the public repeatedly underestimate the repercussions of the present financial crisis? The answer is simple: most of us are short-sighted; we can’t imagine a future that is radically different from the present. In particular, most of us don’t understand that economic events often unfold gradually due to the operation of important lagged adjustment processes embedded in the economy. The public, the media and politicians would do well to give them close attention. Lagged adjustment processes. After the Titanic’s hull was punctured, it took hours for its hull to fill with water; thus the passengers couldn’t imagine that it would sink.

In my judgment, there are currently four major dangers facing the world economy, and all of them are currently obscured by the fact they play themselves out slowly.

Four dangers The first danger we have witnessed since August 2007: The subprime mortgage crisis gave rise to a liquidity crisis in the international banking system, due to uncertainty about who holds the losses. This is leading to reduced lending to firms and households. But that is not the end of the story, because the reduced lending will lead to reduced consumption and investment. With a lag, reduced sales of goods and services will reduce stock market valuations. And, with another lag, the lower stock market prices will – in the absence of any favourable fortuitous events – intensify the banks’ liquidity crisis.

The second danger lies in the dynamics of U.S. house prices. As more and more U.S. households find themselves unable to repay their mortgages, foreclosures are on the rise, more houses are put on the market, the price of houses falls further – with further lags – this leads to more foreclosures and declines in housing wealth. This dynamic process plays itself out only gradually, as households face progressively more stringent credit conditions and house sales gradually lead to lower house prices.

The third danger results from the interaction between wealth, spending and employment. As U.S. households’ wealth – in the housing market and the stock market – falls, their consumption is beginning to fall and will continue to do so, again with a lag. This decline in consumption is leading to a decline in profits, of which more is on the way, which in turn will lead to a decline in investment. The combined decline in consumption and investment spending will eventually lead to a decline in employment, as firms begin to recognise that their labour is insufficiently utilised. The decline in employment, in turn, means a drop in labour income, which, with a lag, leads to a further drop in consumption.

And that leaves the fourth (and possibly the nastiest) of the dangers, one that concerns the latitude for monetary policy intervention. As the Fed reduces interest rates to combat the crisis, the dollar is falling. This is leading to higher import prices and oil prices in the United States, putting upward pressure on inflation. The greater this inflationary pressure – which is currently in excess of 4 percent – the more difficult it will be for the Fed to reduce interest rates in the future, without running a serious risk of inflaming inflationary expectations and starting a wage-price spiral. U.S. firms and households will gradually recognise this dilemma and the bleak prospect of little future interest rate relief will further dampen consumption and investment spending.

Eventually, of course, the decline in spending will lead to a decline in inflation, but this will only happen with a lag. The longer the lag turns out to be, the longer the period over which the U.S. economy will endure stagflation, that is, a cruel combination of rising prices and falling aggregate demand. Much hinges on how persistent U.S. inflation is. More persistent inflation will inevitably give rise to higher inflationary expectations, leading gradually to higher inflation, and so on. It took central banks over a decade, in the 1980s and early 1990s, to get inflationary expectations under control, and the fruits of this battle are now in danger of being lost.

Global implications The international financial crisis and the decline in the U.S. economy will inevitably have an adverse effect on the growth of the world economy. Europe and the emerging markets of Latin America and the Far East cannot fill the gap that the U.S. economy leaves. There exists no economic mechanism whereby a drop in the U.S. aggregate demand will be matched by a correspondingly large increase in aggregate demand elsewhere. Germany and other European economies highly exposed to the vagaries of international trade will certainly feel the pinch.

In the longer run, the prospects for the world economy look much brighter. Eventually U.S. house prices will stabilise, rising exports will help the U.S. economy recover, the fall in world demand for goods and services will reduce the price of raw materials, U.S. households will learn the importance of saving, and global imbalances will correct themselves. These rosy prospects lie in the mists of the future. Meanwhile, however, we are well advised to stay focused on the four dangers.

Comments

[anne]

http://www.epi.org/printer.cfm?id=2967&content_type=1&nice_name=webfeatures_econindicators_gdppict_20080430

April 30, 2008

GDP Growth Anemic Again: Since When Is 0.6% Growth Good News?
By L. Josh Bivens

Today's Commerce Department report on gross domestic product (GDP) growth in the first quarter of 2008 provided mixed signals on the U.S. economy. Despite rising GDP—up 0.6%, same as in the fourth quarter of 2007—the underlying data in the report are actually flashing "recession." Furthermore, given underlying population and productivity growth trends, any sustained period of GDP growth below 2.5% is a recipe for rising unemployment and sluggish wage growth.

Almost every indicator (except federal government spending and inventory changes) deteriorated relative to the already-weak results of the previous quarter. Declines in consumption spending, investment in equipment and software, residential and non-residential construction, exports, and imports all contributed to a deceleration in overall growth; in fact, some areas saw outright contraction.

Residential investment fell for the 9th straight quarter, and, its 26.7% drop was the largest quarterly change since the decline began. Given that the recent data on 20 of the largest metropolitan areas show home prices falling at an annual rate of 23% in the last three months, it seems that there is more fall out to come in the residential investment market.

Non-residential investment, as predicted, finally followed residential investment and shrank this quarter as well, falling by 6.2%. Investment in equipment and software fell for the first time in over a year, posting a 0.7% decline.

This broad weakness can be seen most clearly in final sales (GDP excluding the effects of inventories), which shrank by 0.2% after rising 2.4% in the previous quarter. Given the volatility of inventory investment, the final sales number is often thought of as a clearer measure of the underlying strength of the U.S. economy. Domestic demand growth (final sales to purchasers located within the United States) shrank even more, falling 0.4%.

Some rare good news was found in reported inflation. The market-based "core" measure (that is, excluding food and energy costs) of price growth in personal consumption rose only 1.7% in the past year, down from 1.9% growth in the previous quarter. While food and energy inflation is every bit the danger to family budgets as other costs, inflation in food and energy is generally driven by the supply-side influences (a rising global price of fuel, for example), and not by overheating in the domestic economy. This tame measure of core inflation gives the Federal Reserve plenty of room to attack the current economic softening without any danger of setting off broader inflationary pressures.

While GDP did not outright shrink this quarter, this does not mean that the U.S. economy has dodged a bullet. The economy may well be in recession currently, and the 0.6% growth in the last three months of 2007 was followed by three straight months of negative job growth (totaling 232,000 jobs lost so far in 2008). There is little reason to expect this quarter's qualitatively worse performance to change this unfortunate trend. Given that employment must rise by roughly 1.1% annually to absorb a growing working-age population, and that productivity in the U.S. economy has grown roughly 1.4% in the very recent past, GDP growth essentially has to exceed 2.5% to keep unemployment from rising and to keep the resulting labor market slack from smothering wage growth....

[Bruce Wilder]

Very interesting.

Snower's "the fourth (and possibly the nastiest) of the dangers" appears to be inflation or stagflation. No where does he confront the reality that the U.S. standard of living is going to have to decline, measured in consumption terms, by something on the order of a minimum of 6% and probably more. In fact, he notes, almost gleefully, as a brighter prospect, "U.S. households will learn the importance of saving, and global imbalances will correct themselves." I don't necessarily disagree with the assessment of reality behind his view, but the moral interpretation seems to me to reflect a hard and nasty moral blindness. Inflation becomes an abstract moral wrong -- a mortal sin, and the real standard of living of masses of people disappear behind an analytic blindspot miles wide. It is an odd, common and, I expect, destructive way of thinking.

[Bruce Wilder]

Regarding Snower's lags, two stand out for me, from now daily reading of Calculated Risk.

First, the slippery slope on which many of the world's major banks appear to be founded. The equity capital, which is the financial foundation of any bank, is eroded by the (lagged) losses, and the banks must raise new capital. It looks very much like a house, whose foundation rests on one of Southern California's muddy hills, and just as prone to sliding away. Each quarter, the big banks must raise more additional capital, to offset these multi-billion dollars losses. As housing prices decline and foreclosures mount and the ratings agencies reclassify, the mortgage securities must be marked to market, and new losses must be declared. And, new capital raised.

And, who wants to buy stock in a bank, whose capital is being systematically wiped out? Via Calculated Risk and the Wall St Journal, I see that the HBOS (aka Bank of Scotland) is raising $8 billion in a new share offering. And, oh joy, what a surprise -- the new offering comes in 45% below the closing share price. HBOS cuts its own stock price by 45%!!!

Commercial real estate must surely follow where residential real estate pioneers (commercial RE, Calculated Risk helpfully informs me this morning, typically lags 4-5 months behind). Commercial RE did not have as large a bubble, but, with consumption spending expected to cause a wave of retail bankruptcies and business closings, commercial RE will fall considerably, and the bank loan losses are typically worse in commercial foreclosings -- the loss on a commercial construction loan (which the FDIC has already warned are way too numerous in mid-sized banks) is usually pretty much total.

My point is that the banks, on the most optimistic estimates of economic inertia, must surely go through at least two more quarterly rounds of multi-billion dollar loss declarations and capital raisings. Each share offering depresses the market value of existing shares, so, while the banks may be able to bolster balance sheet values enough to survive, the actual market value of the bank's capital is declining. Eventually, the hillside under one or more of these banks will collapse in a great slide.

[Bruce Wilder]

Watching cable and broadcast television news, one of the things which has been really impressive to me is the sheer number of stories being run giving tips to people about how to economize on household expenses.

The falling dollar combined with the rise in commodity prices means that the U.S. consumer, long privileged in world markets, is being asked to bear the brunt. Snowner's concern that "Germany and other European economies highly exposed to the vagaries of international trade will certainly feel the pinch" seems oddly misplaced. Median German real incomes must surely be above those in the U.S., and their exposure to rising oil and food prices is moderated, not exacerbated, by stronger currencies; they are not pissing away 5% of GDP feeding the excesses of a greedy, faulty medical insurance establishment, another 3% of GDP on a pointless war; their business CEOs are not claiming $100 million bonuses for running their companies into the ground.

[save_the_rustbelt]

I don't believe the "growth" number much more than I believe some of the unemployment numbers I have seen the past four years.

(Technical question for the smarter participants: could the dramatic rise in energy and food prices cause the appearance of growth when there is none, or does the calculation factor inflation, productivity, etc.?)

[anne]

"Technical question for the smarter participants: could the dramatic rise in energy and food prices cause the appearance of growth when there is none, or does the calculation factor inflation, productivity, etc.?"

No.

[Bruce Webb]

.6 Q1 GDP is not a good number in itself. But it suggests that we may be a long way from Roubini-land.

These are very serious times that too often are being informed by analysts who start from conclusions and then work back. 'No one ever expects the Spanish Inquistion!'. Except the Chicken Littles who continually insist the inquisitors are just around the corner. Shorts and bears are always right, eventually. But when you are in what is in my opinion a primarily confidence driven slowdown doom and gloomism can become self-fulfilling.

We can, and at AB continually do, argue about the relation between labor participation and official unemployment measures, and point out how in percentage terms foreclosures are up sharply on a y-o-y basis, and point out with alarm and perhaps alarum at food and energy prices but there seems to me to be a real danger of losing perspective. Most regular posters here are old enough to have lived through much more challenging times. Perhaps things will really go in the crapper and deliver us Reagan era double digit unemployment and 14% interest mortgages, but somehow I doubt it, I suspect we will muddle through.

And while it is true that hope is not a plan, hope and a couple of data points is all I got. With luck it will be enough.

[Barkley Rosser]

Save the rustbelt,

The numbers are believable. What is propping things up is the falling dollar, increasing net exports, why the Fed has not been too upset about that falling dollar. The unexpected rise in inventories is clearly a concern for the future.

However, we do see falling employment and rising unemployment, which is consistent with a positive growth rate of this low a level. After all, with both the labor force expanding and labor productivity rising, one needs more like 1-2% GDP growth to at least stabilize employment. This low rate of growth is consistent with the sorts of declines in employment we are seeing, steady, but not catastrophic so far.

[Bruce Wilder]

Bruce Webb: "a primarily confidence driven slowdown"

A thirty percent decline in housing prices, combined with $4/gallon gas does tend to undermine confidence a little.

[Bruce Wilder]

Last Summer I tended to share the view that the numbers indicated a coming recession, but a relatively mild one. In a sense, relative to a catastrophe-junky and perma-bear like Roubini, I discounted the effect exposure of structural weaknesses would have on "confidence". Now I am thinking I should revise my view. Am I just being carried along by the pessimism of the crowd? Or, am I finally taking into account the full effects of the well-justified pessimism of the crowd?

Maybe exports will rescue employment. Maybe the Visa IPO will rescue some banks. Maybe the stimulus checks will rescue retail.

Then, I read a piece like DeLong's on the prospects of a McCain Presidency, and I think about the wreckage, which is the U.S. economy: Life Among the Ruins of Empire, at the dawn of the age of peak oil, global warming and perpetual environmental crisis, where Meet the Press has become Meet Tim Russert and that typifies our public discourse. And, I almost hope for the Worst; we may not be headed for the 12 plagues of Egypt, but we surely deserve them. Pessimism becomes a perverse form of wishful thinking. Yuck!

[hari]

Bruce Wilder -

You are more than accurate in using modest language to describe a stagnant economy with way too much deadweight to throw overboard in seas swelling up to 10-12 meters or more.
But take courage there will be a light out of the tunnel but not before 2009 or later. Structural adjustments are seriously advised/required to get the vessel sailing again with full sails. You're right about developments inside EU, but we shall face a bit of slow down but not as severe.

[spencer]

I'm not really surprised by the data. I have been arguing for some time that the economy is entering an extended period of stagnation. In any given quarter real gdp may be up or down, but in a way that is not the important point. In many ways all the discussion about recessions is misleading. Even if we are in a recession we are not in a classic inventory correction recession that people tend to think of when the say we are in a recession. Moreover, a classic inventory recession is a self-correcting mechanism that does not have a very large or long lasting impact and sets the stage for a strong rebound or recovery. But if you do not have a downturn, you do not set the stage for a strong rebound. Consequently, an extended stagnation scenario is a much more bearish scenario then a recession scenario because it is not self correcting and does not set the stage for a normal cyclical economic rebound.

[robertdfeinman]

There is really only one interesting question that can be asked about the current situation: is it going to have any effect on how business operates in the future?

It took quite awhile until legislation was put in place to rein in the excesses of the first Gilded Age. It also took quite awhile until the types of misbehavior revealed by the muckrakers was addressed.

I think the reaction to 1929 was a bit faster, most of it happening within the following decade.

We now have the trifecta: the control of congress by business "trusts" as with the railroads, unsafe consumer products as with the "Jungle" and a financial system built on speculation and fraud as in 1929.

Since there seems to be little interest in substantive change in regulation in any of these areas in the US, perhaps the changes will be forced on America by international pressure. If this is so it will be yet another indication that the US is rapidly become the former "world's only superpower".

[Cynthia]

Bruce (Webb) writes,

"But when you are in what is in my opinion a primarily confidence driven slowdown, doom amd gloomism can become self-fulfilling."

Maybe it's simply the case that my confidence in pharmaceuticals isn't up to snuff here, but I'm having a really hard time believing that merely upping the dose of uppers will make the doom and gloom go away -- thus making the slowdown go away, too!

[Detlef]

Anne,

Are you sure? Stupid question?

"Technical question for the smarter participants: could the dramatic rise in energy and food prices cause the appearance of growth when there is none, or does the calculation factor inflation, productivity, etc.?"

No.

I mean, I might buy less because prices are rising.
Still, higher prices might lead to somewhat higher revenues while actual sales of "real things" might be down?

Simple example.
If the price of bread rolls doubles, I might buy two instead of three. In the end, I might still pay more today for two than I paid for three in the past.
Are you saying that my expenses - be it for two or three rolls - don´t count for GDP growth?

[anne]

http://www.epi.org/printer.cfm?id=2967&content_type=1&nice_name=webfeatures_econindicators_gdppict_20080430

"The market-based 'core' measure (that is, excluding food and energy costs) of price growth in personal consumption rose only 1.7% in the past year, down from 1.9% growth in the previous quarter...."

[anne]

http://www.nytimes.com/2008/04/29/health/policy/29kaiser.html

April 29, 2008

Study Warns Job Losses Will Strain Government Health Programs
By KEVIN SACK

Leading health researchers projected Monday that each percentage-point rise in unemployment during the economic downturn would swell the uninsured by 1.1 million, stoking demand for government health coverage just as states face pressure to cut benefits.

While governments at all levels have faced a similar situation in past recessions, the researchers warned that the impact of this downturn might be worsened by its proximity to the last recession, in 2001, and by the cumulative effect of rising health costs.

"You could have more people at the tipping point, so we could be underestimating things a little bit," said John F. Holahan, director of health policy for the Urban Institute, which conducted the study for the Kaiser Family Foundation.

The number of uninsured Americans has grown relentlessly in good times and bad this decade, and now stands at 47 million, or 16 percent of the population. Mr. Holahan said the increase projected by his team would be in addition to the growth normally expected from rising insurance costs and the erosion of employer-sponsored coverage.

The unemployment rate has increased by seven-tenths of 1 percent since March 2007. But Mr. Holahan said job losses often accelerated late in a recessionary cycle. "The heaviest hit is still likely to come," he said.

The study projected that each rise in unemployment of one percentage point would also add 600,000 children and 400,000 adults to the two primary state and federal health insurance programs for the low-income uninsured. That would require an additional $3.4 billion for Medicaid and the State Children's Health Insurance Program, with $1.4 billion of it from the states.

The money will not be easy to find. A percentage point increase in unemployment typically translates into a drop in state general fund revenues of 3 percent to 4 percent, the Urban Institute said. A survey found that 27 states and the District of Columbia were forecasting budget deficits for the coming year, collectively exceeding $39 billion. Cuts to Medicaid or the children's health program have been proposed in 13 states. "Because of state balanced-budget requirements, Medicaid and other assistance is most likely to be cut when state residents have the greatest need for help," the study concluded....

[anne]

http://www.nytimes.com/2008/04/29/health/policy/29kaiser.html

The downturn is already having an impact on the economics of health care. The Kaiser foundation found in a poll this month that nearly 3 in 10 of those surveyed said they or their families had a serious problem paying for health care because of the economy. The frustration was evident at all levels, with 28 percent of middle-income respondents saying health costs had become a serious problem.

In the poll of 2,003 adults, which had a margin of error of plus or minus three percentage points, 42 percent of respondents said that in the past year they or a household member had forgone some kind of medical care because of cost. Twenty-four percent said they had skipped a recommended test or treatment, up from 17 percent in 2005....

[johnchx]

Detlef asks: Still, higher prices might lead to somewhat higher revenues while actual sales of "real things" might be down?

The key distinction is between "real" GDP and "nominal" (a.k.a. "current dollar") GDP. Nominal GDP counts what you actually pay out of your pocket for stuff, and therefore can rise when prices rise, even if actual quantities purchased fall, as you illustrate in your bread roll example. Real GDP is adjusted for price changes (to the extent possible -- there are measurement issues), so it should not be affected by inflation; it should be a measure of the "real quantity" of stuff produced and sold.

The headline figure that everyone is discussing -- the 0.6% seasonally adjusted annual growth rate -- is the rate for real GDP, so it shouldn't be affected by inflation. The rate of growth in nominal GDP (which appears in the BEA press release, but which isn't widely discussed precisely because it is influenced by price changes) was 3.2%.

On an unrelated note, I'd suggest that everyone keep in mind that this is an advance release (i.e. it's not even the preliminary figure yet), and that the average (absolute) change from advance to prelim (for real GDP growth rates) is 0.6 percentage points, with another average (absolute) change of 0.3 percentage points from prelim to final. So we shouldn't be very surprised if ultimate "correct" number wound up anywhere between, say, zero and 1.2%.

[Bruce Webb]

Wilder in my opinion Case-Shiller is a junk index. People smarter than me disagree but neither the ten city or twenty city lists seem representative of the actual national market.

Outside the identified bubble markets of the Inland Empire, Las Vegas, Phoenix and Miami is there actual evidence of a average 30% decline? When you check out the markets included in C-S and those excluded the methodology immediately looks suspect. When you see three top ten MSAs excluded and no 36 included you begin to wonder WTF is going on. Call me a nut (it wouldn't be the first time) but C-S seems to me to be a model in service to a preformed conclusion. Who exactly decided that Philly, DC, Indy, and St Louis simply don't count? Or upstate NY? Or all of Texas outside Dallas? Or Ohio outside Cleveland? To take C-S seriously you have to decide that none of the cities on either the Ohio or Missouri River valleys matter and that the Mississippi River valley South of Minneapolis is a howling wilderness.

To me C-S is the equivalent of covering one eye while squinting the other trying to examine a data set through a fogged lens. Color me unconvinced. Exclude stable markets and include every extreme volatile market and you just get an amplification of noise to signal. The internals are important and I have yet to be convinced that Case-Shiller is valid.

Show-me. And I am not even from Missouri. A state that apparently doesnt exist per C-S.

[john c. halasz]

Er... from -.3% to 1.5%, and that's presuming the GDP deflator is at all realistic. And even so, the positive figure was entirely attributed to inventory build-up, which bodes ill for subsequent output. And further revisions to both output and inflation guestimates will occur in subsequent months and years. And GDP is a crude accounting measure of current flows/economic activity. It says nothing per se about the sources of those flows and how current expectations/delusions might be sustained.

[Detlef]

johnchx,

Thanks for your explanation.
So "real GDP is adjusted for price changes".
So which price changes count? Just dimly remembering that the widely published US core inflation rate doesn´t include food and gas price increases?

I know that we - Europe - do have a core inflation rate too. But the number most published here in Germany (at least) does include food and gasoline. That´s what we have to pay after all.

Copying Wolfgang Muenchau at the FT here:

But if some of the criticisms of the modern inflation indicators are even remotely correct, it would not only mean that we are about to return to a 1970s period of stagflation, with its double-digits inflation rates in the US and in some European countries. With the Fed now swamping the market with cheap money as though there is no tomorrow, it could be a lot worse than that.

One reader wrote to me that the 8% estimate for US inflation is probably still too optimistic, as it does not fully take into account the rise in wheat and other commodity prices, for example. Another important side effect of a potentially misjudged inflation series is that US growth is actually not higher than European growth - a claim that has lead to much soul-searching over here - as we are deflating nominal GDP growth by an excessively modest indicator. As for the apparently superior performance of the British economy, just try to deflate all those nominal prices by RPI, not the actual GDP-deflator used, and the economic miracle disappears.

There is surely some of this going on in the euro area as well, but the effect is probably less extreme, I think. At the very least, the ECB is not taking oil and food out of the price index, but I think we do use hedonistic pricing too. I have not seen any estimate of German or French inflation in 1980s, or early 1990s terms, and would be very interested if readers could alert me if such estimates exist. My gut instinct tells me that our inflation rate also understates the true rate of inflation, but perhaps to a lesser degree than in the US. But that assertion only cries out to be verified, or to be dismissed.

[john c. halasz]

Bruce Webb:

The quarterly Case-Shiller index is a national index, and, IIRC, those areas of low population density,- (which are also areas of low proportional "value" density),- are plugged in using OFFEO index numbers. And the point is not just to track residential real estate values, but the interaction of the former with the overall financial system, not to mention household budgets in the real economy.

[Patricia Shannon]

I don't know what is happening to housing prices in metro Atlanta, because I'm not looking to buy or sell. But I know several people who want to sell their houses and haven't been able to do so. Nobody has mentioned buying a house in a long time.

[Patricia Shannon]

I'm happy for FDIC insurance.
Most of my money is in Suntrust bank.
http://www.ajc.com/services/content/business/stories/2008/04/29/suntrust_0429.html?cxtype=rss&cxsvc=7&cxcat=6
By PÉRALTE C. PAUL
The Atlanta Journal-Constitution
Published on: 04/29/08

SunTrust Banks has had it bad, too, though the Atlanta-based company has managed to eke out a profit despite the downturn. In the most recent quarter, the company's profits slid 44 percent following a 99 percent plunge in the last three months of 2007.

So it's still making a profit, but the profit is down 99.44 % over the last two quarters. (The 99% decrease in the first quarter caused the last two digits to be the same as the digits in the 2nd quarter decrease, a neat pattern).

[Lafayette]

Sword of Damocles

WSJ: The U.S. economy didn't slump in the first quarter as some had feared it would, but its weak climb was the product of a likely unintended inventory buildup.

There are probably good reasons that the need of two successive downside quarters was chosen as the arbiter of a recession. Another is the non-monetized factor of recession, namely consumer sentiment as translatable into propensity to consume.

The inventory increases certainly shows that companies did not restrain production and the lessening of demand resulted in the build-up. However, in an increasingly services-oriented society that fact must be given a conditional weighting.

The more perturbing stat will be yet another increase in unemployment claims fro April, which the BLS will divulge around the 4th of May. Will it go up another 0.3% as in March, or remain steady?

The reluctance in propensity to consume is a psychological factor that has no macroeconomic means of assessment – except for consumer attitude surveys. There is sufficient evidence to presume that consumers, imo, are “on hold”, to see what happens in terms of media coverage of “the mess” and also stock market behaviour.

IF the former dwindles to acceptable proportions, meaning the talking-head Cassandras tire or predicting the imminent doom of “our way of life” and IF unemployment does not head south in a dramatic fashion, then we should see May figures showing a bit more growth.

It’s not Mission Impossible, and there is no light at the end of the tunnel. But, the banks are clearing off the toxic debt in an orderly fashion and the Fed is helping as much as possible to make operations fluent by means of a further reduction of the discount rate.

If there were a Magic Button called “Propensity to Spend Booster”, it would have been punched long ago. But, there ain’t. Lead-head deactivated it by cutting taxes perilously and there is no leeway left in fiscal policy – with the chronic deficit hanging like the Sword of Damocles over the dollar exchange rate.

[Lafayette]

Or, did they?

PS: I'm happy for FDIC insurance

I wonder if FDIC is equipped to cope with massive chaos. It was intended, I think, to handle a few individual bank failures. But, not the kind of bank failure that the Subprime Mess was menacing.

Not that I mean to spoil your day, but had the subprime mess provoked the same insanity as the Wall Street stock market crash of the 1930's, then the FDIC would probably only be paying some fraction of the total.

We should be happy that this mess happened when an individual who had a deep insight of the 1930's calamity was chosen as head of the Fed. It seems almost fortuitous prescience that he was selected.

I can't believe anybody really knew that the Toxic Waste was coming. Or, did they?

[Bruce Wilder]

Bruce Webb: "Wilder in my opinion Case-Shiller is a junk index. People smarter than me disagree but neither the ten city or twenty city lists seem representative of the actual national market.

"Outside the identified bubble markets of the Inland Empire, Las Vegas, Phoenix and Miami is there actual evidence of a average 30% decline?"

I'm not the guy, who can address the merits of Case-Shiller. I can tell you that there is no "national" market for homes and no measure of central tendency for the nation as a whole is going to be all that useful. There is a national market for mortgages, and therein lies a tale, but it is a tale of skew, and not central tendency.

[Cyrille]

"I can't believe anybody really knew that the Toxic Waste was coming. Or, did they?"

Well, since I read warnings that it would at least six months before it did (but even in 2006 if I recall correctly), I guess some people did.

For instance, Jerome a Paris' "Anglo disease" series talked about it all along.

[anne]

http://krugman.blogs.nytimes.com/2008/04/30/about-that-gdp-report/

April 30, 2008

About That GDP Report
By Paul Krugman

I've had time to look at it a bit more closely — and it's much weaker than the headline number suggests (and MUCH weaker than the previous quarter, even though the growth rate was the same.) It's not just that final sales fell, so that the economy grew only because of inventory accumulation. If you look at consumer spending, purchases of goods actually fell substantially. Only service purchases rose — and much of that was housing and medical care. As Michael Mandel at Business Week has pointed out, those aren't "really" consumer decisions: housing "consumption" is largely imputed rents on owner-occupied homes, and medical care is mostly paid for by insurance.

So this really does look like an economy at stall speed, not an economy skirting past the edge of recession (whatever recession means).

[Lafayette]

Krugman: It's not just that final sales fell, so that the economy grew only because of inventory accumulation.

Inventory accumulation reflects finished-goods industrial expansion or contraction. A service-oriented economy would show far less such contraction, since services do not enter into inventories.

Also, consider this from the US Census Bureau's Quarterly Service Survey (here): The private non-good producing industries account for approximately 70% of total economic activity in the United States. These non-good producing industries include retail trade, wholesale trade, and the service industries.

As I interpret these sectors, Retail & Wholesale represent commerce/trade whilst Service Industries means services performed for both consumers and across industries.

The first quarter of 2008 is yet to be published, however, that of 4Q07 (same site as given above) shows a year on year increase of between 5 and 7 % in the Information Industries, Professional and Health Care service sectors. (The only sectors reported that I could find upon a summary inspection of stats available.)

Which does not indicate, I suggest, any real diminution in activity. Moreover, I suggest that Service Sector figures are leading indicators. As happens in Retail and Trade, inevitably finished-goods manufacturing follows.

It would be a bit more conclusive to see 1Q08 figures when the come out -- but there is typically a quarter's delay in the stats appearing.

[Lafayette]

Behind Closed Doors

Cy: I guess some people did.

Surely. But, my question was a bit more pernicious -- it meant to ask "which people?". I wonder if Bernanke's selection was not predicated on the assumption that the Melt Down would inevitably happen.

Given that fact, then, who was the best person to manage it? Not Bill Gates, I might suggest. Meaning someone with specific credentials in the matter.

I am not privy to such decision-making, but it could be that some people had a powerful influence on lead-head to take the "right" decision. Maybe Paulson. Maybe Greenspan himself.

Let's remember, these people speak with forked tongues. One side with well-chosen words for the General Public and the other, perhaps nuanced quite differently, amongst themselves Behind Closed Doors.

[Patricia Shannon]

A clarification about my comment on Atlanta housing prices. Some people, like one of my current co-workers, are trying to sell their houses because they want to buy another one, maybe closer to work. They can't buy until they sell their current house. My co-worker has had her house for sale for several weeks at least, and I heard her say a couple of days ago that no one has even come to look at her house. Co-workers at my previous job wanted to sell their house so they could afford to relocate to get a job to replace the one they were losing to outsourcing to India.

[Productivity]

"As U.S. households’ wealth – in the housing market and the stock market –"

Er, homes don't actually produce anything. Investing in homes does not increase national productivity. Something is wrong with this strategy. What works for individuals does not work for the nation as a whole. As a nation, we need to change from investing in homes to investing in productivity enhancing activities.

[Gerard MacDonell]

I have a completely different take on this. We have whacked the economy with an oil shock, a residential investment spending collapse, a home price collapse (ongoing) and at least some tightening of credit. In reaction this this, the economy has slowed, to around flat in the latest quarter and to around 2.5% over the past year. A year ago, were you guys looking for 2.5% growth in the economy? You saw housing well. Did you see that?

The idea that the real economy is just a lot more stable than it was is thereby reinforced, so far as I can tell. This is not to disparage the great importance of developments in the financial system and energy market, which may sink us yet. But there is nothing in the trajectory of the real data that I find the least bit troubling, relative to what I would have already expected. Had you telegraphed the financial and energy shocks to me a year ago, I would have expected much much worse in the real economy.

To me, the REAL economy continues to amaze with its resilience. I know if you were to strip out trade or assume away the Fed's reaction, things would look worse. But I don't know why you would do that. The pessimists seem to underestimate the force of STABILIZING feedback loops in the system. Or to ignore them when confronted with them.

Bear Stearns was scary. Case Shiller is scary. OPEC to China is scary. We are not out of the woods yet. But to fret over that mundane GDP report is to show a bias, in my view.

[kharris]

Rusty,

I think I must be misreading your question, because as I read it, I think you already know the answer. But just in case, yeah, I'm pretty sure a bigger rise in prices makes the real GDP data less reliable than a smaller rise.

It is a truism that higher inflation is also more variable. Greater variability in inflation makes it more likely to be mismeasured. The slop associated with price variability can easily slip into the price-adjustment process. We can only be as certain about the level of "real" output as we are about the accuracy of price changes.

This is not as big a problem for discreet, measured units of goods and services as it is for imputed services. When imputing housing value, for instance, you don't have the luxury of a price tag that you can look at. Housing services include a pretty big energy component. If rapid inflation in energy prices means less accuracy in measuring changes in energy prices, you can mess up imputed housing services.

That doesn't mean you are more prone to overstate GDP than understate it, but I'm pretty sure you are more prone to misstate GDP in a higher inflation environment.

By the way, this has nothing to do with complaints that inflation is being understated. That is an entirely different argument. Ignoring that argument, and accepting that the current inflation rate is measured correctly, then the good news is that inflation isn't that high, and isn't going to screw up measurement all that much, except where energy is involved. Energy inflation has been high, and energy is an input to just about everything except my thought processes.

[Bruce Webb]

Halasz I am no statistical genius but sampling matters. Bad sample, suspect results. Calling C-S national because it extends from Boston to San Diego while ignoring certain very, very large markets including the no 4 largest MSA (Philly) makes me a little doubtful. I have dabbled around at the C-S website and not seen a principled explanation of why they I include and exclude particular markets. Absent that I am not willing to give its raw numbers any actual predictive value outside its selected 10 MSA/20 MSA model.

[Bruce Webb]

Wilder: paraphrasing: "I can tell you there is no national market for homes" etc.

Which didn't stop you from using such a number. Analysis of housing has been marked by an astonishing lack of rigor. Personally my favorite school of pictoral art is Impressionism.

For economic art? Not so much. Numbers with statistical validity? Bring 'em.

[Lafayette]

BW: Personally my favorite school of pictoral art is Impressionism.

Excellent choice. The market for Impressions Art is doing very nicely.

Much better than the housing market. 8^)