How Do We Get Out of This Economic Mess, Pt. II
Before we move into today's information, let's backtrack over last week's GDP report. In the previous article I expressed a high degree of bearishness regarding consumer spending. Yet in the latest GDP report personal consumption expenditures increased 2.1%. This was largely due to a 9.1% increase in durable goods purchases. However, as this chart shows
total real durable goods expenditures jumped from a low level in December to a higher level in January but have since dropped in each of the last two months. In addition, notice that the first quarter totals are still below the September and October levels. Finally, consider this:
The major automobile makers on Friday posted further sales declines in April, punctuating a brutal week for an industry that saw one of its icons plunge into bankruptcy and signs that a similar fate awaits its biggest U.S. player.
Simply put, I still don't see how consumer spending can continue increase at a meaningful rate when real estate is still dropping, job losses are compounding, household debt levels are still high and stock market losses are still deep. At minimum we need at least one more quarter of data before we should start celebrating.
That being said, let's move onto the the second area of GDP -- total domestic investment. This comprises 11.21% of total GDP. Here is a chart of the percentage change in total gross investment:
It has dropped in 9 of the last 12 quarters -- and one of the quarters where we saw in incease was only an increase of .4%. In addition, last quarter saw a decrease of 51.8% from the preceding quarter. Simply put, that number is terrible.
Let's break this number down into its sub-parts -- residential investment, non-residential investment and equipment and software investment.
Residential
Do we really need any more houses? No. (Thanks to Calculated Risk for the graphs)
The existing home inventory is still at very high levels. And this number does not include the "shadow inventory" of houses in foreclosure that are still on bank's balance sheets.
While the new home inventory is down to a more normal level
The months of available supply are current sales levels is still at sky high levels. In addition,
The vacancy rate is still at abnormally high levels, indicating we're not using all the houses we've built. As a result:
Housing starts are at multi-decade lows. In other words, we're not building our way out of this recession.
Non-residential
Here is a chart of the percentage change from the preceding quarter in non-residential structure investment.
Last quarter this number dropped by 44.2%. Also note this number continued to increase until the 4Q08. In other words, this area of the economy is just starting to contract. Considering the severity of last months drop and the continued tight credit conditions it's difficult to see this area of the economy picking up any time soon.
Software and equipment
Here is a chart of the percentage change from the preceding quarter in software and equipment investment:
This number has been weak since 2Q02 and has continued to drop at increasing levels for the last 4 quarters. This is because:
Industrial production has been dropping at fast rates on a year over year basis. In addtion,
Capacity utilizaiton is at its lowest level in over 40 years.
In conclusion, it's difficult to see investment pulling us out of a recession. Housing is already overstocked. Non-residential spending recently ended a building spree and low industrial production and capacity utilization indicates business has a lot of excess capacity to bring back on line before we add new capacity.
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I agree with the analysis and conclusion for the most part. At some point, probably in another two to three months, we'll need to replenish inventories and factories will ramp up again. Second, the stimulus plan will start kicking in, and the tax rebates, in particular, should result in some kind of increase to retail sales. Third, some good numbers have come out of China recently which lends at least some support to the commodity complex and some manufacturers. The bad news with growth in China is higher commodity prices, which could cut into incomes and spending in the US.
THIS ONE ACTION COULD SOLVE ALL THE U.S. GOVERNMENTS PROBLEMS !!!!!!
The U.S. Government should buy up all mortages, all of them !!!
From that point on the U.S. Government thru Fannie and Freedie would be the sole lender on property loans in the USA.
This would give the banks enough money to revcover and it would also prevent the banks from ever harming the U.S. Economy with consumer loans on homes again.
This would also give the U.S. Government many things. The Government would get control over how much farm land is used each year to build sub divisions and industrial parks.
This would most of all give the U.S. Government an income stream that would pay off the National Debt and be able to reduce taxes accross the board to all Americans in the future.
It would also reduce the need for regulations and the con games played to grab land by states and local governments that is a constant pain for property owners around the USA.
FORCE BANKS TO COMPETE IN THE BUSINESS WORLD BY TAKING AWAY THE EASY MONEY OF HOME LOANS AND COMMERICAL BUILDING LOANS !!!
The collapsing economy and financial system foretells the virtual demise of international trade and present trade agreements. Countries such as Russia are placing draconian tariffs on manufacturing products to protect their own manufacturing. Other countries are considering import restrictions.
The United States has been fatally damaged by predatory, mercantelistic trade, such that we are at the mercy of foreign governments.
I predict that the United States will place restrictions on basic industrial products and maybe across the board. Other trade-deficit countries will follow suit. The only question is the timing. Will it be done under the rule of law and Constitution or under the stern direction of a man (or woman) on a white horse.
The mantra of “Free Trade” recited by those in power and/or controlled by the corporate interests that reap its benefits will not go quietly. There is much which must be done prior to any serious alterations in the fabric of the one way trade policies. In the 1980s the Japanese were increasingly taking market share in the automobile industry. Pressure on the Reagan Administration became great enough for some tough sounding rhetoric on the subject. You might remember that Reagan’s economic policies of borrow, spend and rebate taxes to the wealthy required massive deficit financing. Much of this came from the Japanese. Treasury Bills and Notes were auctioned off weekly. When the Japanese didn’t put in their weekly bid panic broke out and a quick phone call reassuring them that the trade toughness talk was all bark and no bite yielded the desired loans.
So long as the US financial house is upside down there will be no recourse over trade. We will send them our jobs and they will loan us our money back. One of two things will happen. We either man up cut spending AND raise taxes (even on the precious middle class) or when China believes that their internal economy is strong enough to maintain its production base they will drop us into the pit of economic Hades.
The Japanese increased market share in the US auto market because Americans chose to buy more Japanese cars at the expense of American cars. That is not a trade policy issue. The trade deficits of the late to mid-90s were virtually eliminated in the late 1980s after the Geneva Accords by the way. That was an agreement to weaken the dollar and strengthen the yen and German mark at the same time. I believe it also involved a cut in interest in those two countries to promote consumption as well. The trade deficit really began to be a problem in the late 90s when Americans dramatically over-spent during the tech boom and during the housing boom when asset values exploded and interest rates were low. The tremendous debt and spending boom from 1998-2008 also brought inflation in commodities, particularly oil which has made up half the total trade deficit. It's also important to note that in the late 90s Asia was in a nasty recession and Europe was relatively weak which meant there was no boom in exports to match the huge boom in imports.
As long as unfair trade agreements continue, then our economy will not recover. Geithner claims the trade is fair and necessary but he is outright lieing. He claims China does not manipulate their currency to increase exports and gain US market share. Until Obama insists on balanced trade, everything else is a waste of time.
Stimulous money is being used to buy steal from India even while our producers are hurting for business.!
The manufacturing in America will continue to be lost to foreign competition. This is evident in the way the Chrysler Bankruptcy
After the dollar drops to Half its value in the next 36 months, Chrysler will not be able to ramp up production to reclaim market share because Wall Street's mismanagemnent of our auto industry. This means the trade imbalance will not correct even after the dollar devaluation and Obama will still have to beg China to buy Dollars.
Home mortgages will continue to reset to higher monthly payments through 2011 to 2012. This means forclosures will continue their downward pressure on prices as well as continued new financial pressure on consumers until 2013.
Commercial real estate loans on upside down investments are coming up for renegotiation through 2013. This means the Commercial Real estate bankruptcies will ramp up and continue for the next 5 years.
Well, it is tax return season. So these numbers are even worse than we would expect.
Can you give us some insight on bond payments coming due in May and June? I have a feeling that is when we will really own the banks, but do you think they can afford to pay off those bonds?
The 2001 Recession is the only recession where new housing starts didn't slow down. That should be your first sign that the bubble was going to be bad.
Investment will pull us out of the depression; unfortunately the government isn't allowing there to be private investment. They continually crowd out private activity with the "stimulus" plans, encourage people to spend rather than save and accumulate money through low interest rates, and aren't allowing the incompetent companies or bad debts to liquidate. Government spending this year will be over one quarter of GDP. That's completely destructive.
The Great Depression didn't end until 1946, when producers could finally build cars and people could finally buy cars because the war rationing was over. That's 17 years! The only benefit of the rationing was that it at least allowed for capital formation, although that capital couldn't be used because of the government crowding out the private market with war production.
Investment in what? How many liquidations have occurred since 2005?
This is the worst post I have seen.
Investment will not pull us out because capacity utilization is the lowest on record.
The Government is doing everything in its power to shore up the banks to STIMULATE INVESTMENTS!
The incentive to invest is to capture profits from sales; no spending equals no sales equals no profits equals no investments. That’s how the stimulus and capitalism operate, it provides customers for businesses.
Low interest rates are intended to stimulate investment of BORROWED money. There are trillions of dollars on the side lines receiving low interest rates. That encourages lending at higher risks for higher rates. The savings already exist.
Bankruptcies are rising (see Chrysler) and their creditors will take a bath.
Government spending is rising just to maintain the status quo. If not the recession would intensify. Nothing in the private sector is picking up the slack; it’s called a downturn, look at any chart.
Automobile production rebounded to pre Depression levels in 1936; three years after Roosevelt’s New Deal was launched. Read and learn before making erroneous statements
Things are going to be bad until at least 2011 or 2012. In Texas (yes, supposedly the only state still producing jobs), the tax revenues are expected to be down in most counties. That means that county and local govts won't be cutting hours until at least the end of this year or 2010. The bigger cities will probably try unpaid days off, but the state govt will probably just fire people.
As the number of unemployed continues to grow, consumer spending will continue to drop off. All those stores going out of business, and small businesses doing the same will keep expanding the number of empty storefronts which means commercial real estate continues to default.
The main thing we have going for us is that the country, by and large, still believe in Obama and are prepared to wait for his policies to work. If the Rethugs somehow get back in power, we are in for a long, long economic downturn. Taking money away from govt will cause cuts in all social programs, which will result in either dramatic increases in the homeless, starving or civil unrest (or all of these).
Unemployment is rising in Texas now that the oil boom has busted. I have been told by relatives living there that jobs are becoming scarce and cutbacks are occuring. We might want to take Rick up on his offer and not send any flu vaccine or money to Texas.
celebrate what? being at the bottom of the bottomless hole?
1 more quarter is far too optimistic, try 1 more decade
try the end of civilization.
What Olephart provides are the actual dismal statistics that are always more discouraging then the government's statistics. A government that lies to its people is a dismal government. No doubt, Olephart could provide more statistics that indicate that the assessment of "a dismal government" is understating the stark reality.
The scientific, objective Olephart is denied access to the leaders in power? Why? The last thing they want to be provided is empirical data and accurate information. Their minds have already been conditioned. Their goals have been cast in concrete. The financial interests are America's interests. The broken and unemployed are low priority statistics. They must get by on their own.
Thanks for the plug. I have done more research and found that some disagree with the referenced negative statistics below. I was going to note it there but here is fine. Shadow Stats is more reliable and they do calculate a much lower GDP so all in all it is worse, to some degree, than is commonly stated. My advice is to hang tight, minimize expenses, diversify and don't believe everything you see (on CNBC) or read (on blogs). Gold and silver are like life insurance, you may need some but don't look forward to cashing the policy.
I did not see the part II...How do we get out of this mess.... the picture of the car wreck was great... but what about the repair shop?
Regards
I think that the building construction chart shows something interesting. What it indicates is that this consumer/service economy of ours relied heavily on the building industry for economic stability and growth; real growth, not the bank creations of securities which relied on a healthy construction market. An example of a vicious circle scenario that became less stable with each revolution. Speaking of revolution .... let's hope that there are some real revolutionary thinkers working beside our new president besides the bank-friendly advisers he's presently got working on the economy.
Just a note, your charts under estimate the severity of the decline:
“An explanation about why the decline in imports is helping GDP growth. As you know, imports are subtracted from GDP. Because imports are declining in absolute terms, you get a positive effect from a negative negative. Just to be clear as to what this chart is telling us: the drop in imports contributed 6.05 percentage points to the GDP growth rate.
What this means is that without the contribution from imports, GDP declined at 12.15% annual rate in Q1. In other words, all of the domestic activity was, as the employment numbers suggested, in free fall!"
Robert F. Dieli, Ph.D. is a longtime observer of Wall Street and the Economy. His site is No Spin Forecast,
Also, this article backs out imports from 2008Q4 and indicates a 9+% fall in GDP.
Ole, you never cease to amaze me.
given that any visible means of support for the economy and a recovery are not visible i think what we may be looking at is a shift in the demand curve(for everything) because of the withdrawal of available credit exacerbated by the normal contraction in credit during a recession. the danger of the cascading effect is possibly exponential. add to this the need for an extra 200 bil/mo to support the us economy and the current account deficit at around 50 bil creating a 150 bil/mo gap in financing and dante comes to mind. if, as recent reports have suggested, buyers of our debt are withdrawing support, the buyer of last resort becomes usa .gov. if this becomes a cascading reality then the hyper inflation end is near for the usa. i fear the usa will not go quietly into the night once the dollar begins a vertical, unstoppable collapse.
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