The "Fits and Starts" Recovery

Now that I'm on record as saying the recession is over, it's time to look at the recovery.

First, the following has been my position regarding the expansion:

I am also on record as saying growth will be weak, printing somewhere in the 1% to 2% range with high unemployment. It's extremely important to remember where certain numbers were just recently. For example, an economy that loses over 600,000 jobs over a series of months is not going to print a positive jobs number for some time. That's simply the way an economy the size of the US's works. To expect otherwise is very unrealistic.

The traditional view is for the expansion to "ramp up" from a slow bottom and then increase speed until the economy as a whole gets to maximum potential. In other words, ideally GDP will increase from 0% to 1% to 2% to 3% etc... I don't see that happening right now. That's why the next wave of the expansion will be the "fits and starts" expansion.

Let's look at the various pieces that will play a part.

Consumer spending

The general opinion of the US consumer is that he will change his overall behavior from one of spending to one of savings and frugality. This in fact has already occurred to an extreme degree. There are several reasons for this. Unemployment is high and will remain at that level for the foreseeable future. When a person does not think he will be able to find a job if he losses his current job than he will spend less today. In addition, household debt is at very high levels and the consumer -- who has been paying down debt and shunning new debt -- will continue to do so. This will lead to an increase in savings which will lower consumption.

However, there has been an underlying assumption to this argument that the US consumer will stop buying to such a degree as to be a non-factor in GDP. In other words, the consumer will move from a position of being a fundamental driver of US growth to having little to no impact. That is a radical view -- and one I believe to be incorrect for two reasons. First, from a practical side things wear out and need to be replaced. The US consumer cannot eliminate the need to replace things. In addition, as the consumer holds onto goods longer, other items need to be purchased -- replacement parts and the services to fix items. In addition, the economy will not always be in its current position; at some point the unemployment rate will return to manageable levels, salaries will increase and asset valuations will be stable. When this occurs the consumer will feel more confident and will be more willing to spend on goods and services. However, the old consumer -- the one who spent wildly on everything -- will not return.

Instead, a new consumer will emerge. On June 1 of this year, Barron's had a cover story on the new consumer, which in general was described thusly:

As savings rise and the market rallies, however, a new consumer is emerging, seeking a sensible middle ground between the gross excesses of the mid-2000s and the privations of the past year. He -- and more often, she -- is likely to find it in companies that offer great products, excellent service and outstanding value, which, by the way, doesn't always mean the lowest price.

For now I disagree with the price issue. However, the rest makes a great deal of sense. Consumers will become far more selective about what they buy and purchase.

Regarding the actual pace of personal consumption expenditures, here is a chart of the year over year percentage change in real personal consumption expenditures:

Notice that during the most recent expansions there has been a sweet spot of year over year percentage change between 2.5% an 5%. Interestingly enough that number has never consistently been between 0% and 2.5% during an expansion. Yet there is nothing that says the year over year percentage change can't be at that level; it just never has.

Here is a chart of the quarter to quarter percentage change of personal consumption expenditures that goes back to 1990:

The median quarterly change in PCEs for this period was 3.2%. Notice how in the last two expansions the quarter to quarter PCE percentage change ranged from (in general) 2% to 4%. There is nothing indicating that rate of change couldn't be between 0% and 2%.

Therefore, while the consumer will not spend like he used to, the practical side of the equation means the consumer will eventually be forced to spend on items. This leads to the following conclusions:

1.) The consumer's situation (high levels of debt) and the economic situation (higher unemployment) will lead to lower consumption expenditures.

2.) The consumer will extend the life of most durable goods (cars and major appliances) by spending on parts and service.

3.) While the consumer will be spending less on items, when he does spend he will want more for his money. Instead of walking into a store, purchasing an item and leaving, the consumer will do more up-front research into items and want more service when he does purchase.

4.) The current drop in consumer spending is very much a by-product of low consumer confidence brought on by the worst recession of the last 60 years. As the economy emerges from this, consumer confidence will rise and spending will increase. However, spending will not increase to previous levels. Instead, we can expect the consumer to increase his personal consumption expenditures in the 0%-2% range of quarter to quarter growth.

The next question is where will the money come from. The first answer to that is that while income has been dropping, it appears to be stabilizing. Here is a chart of the last 6 months of total wages and salary disbursements.

Notice that over the last 4 months, this number as stabilized in a range beween $6.441 billion and $6.213 billion. In other words, this number appears to the stabilizing. In addition,

Real disposable income has actually been increasing. A large reason for this increase is an increase in government transfer payments which in turn have gone to increased savings. However, the point is the money is available for increased consumption when consumer sentiment picks-up to a point where it can increase.

Inventory adjustments

Consider this chart of total US inventories:

Inventories have dropped like a stone for roughly a year. At some point these will need to be replaced. While there is no indication the bottom has occurred yet at some point it will. And when that happens, another item of growth will be added to the equation.

Stimulus Spending

Next year the real impact of the stimulus starts to hit. The CBO studied the Stimulus package and stated that:

Assuming enactment in mid-February, CBO estimates that the bill would increase outlays by $92 billion during the remaining several months of fiscal year 2009, by $225 billion in fiscal year 2010 (which begins on October 1), by $159 billion in 2011, and by a total of $604 billion over the 2009-2019 period. That spending includes outlays from discretionary appropriations in Division A of the bill and direct spending resulting from Division B.

The spending will occur over a variety of different governmental programs such as rural broadband development, homeland security, infrastructure, increases in unemployment benefits and a host of other programs.

In addition, there were tax provisions in the bill which would produce the following effects:

In addition, CBO and the Joint Committee on Taxation (JCT) estimate that enacting the provisions in Division B would reduce revenues by $76 billion in fiscal year 2009, by $131 billion in fiscal year 2010, and by a net of $212 billion over the 2009-2019 period.

So, between actual spending and tax reductions, 2010 should see the direct impact of roughly $350 billion ($225 in spending and $131 in tax reduction). The real issue here is the multiplier effect -- how much of a larger effect will the spending have. Frankly, we won't know until the money is spent. But next year we'll see the ripple effect of the combination of tax cuts and spending. This will help growth.

Asian Consumers/Growth

There's a great myth that goes around the Internet: the US doesn't make things anymore. If that were true, then we would have exported $1.8 trillion dollars of goods in 2008. And in 2008, we exported $108 billion of foods and beverages, $388 billion of industrial supplies, $457 billion of capital goods, $121 of automotive products and $161 billion of consumer goods. In other words, exports account for about 13% of GDP. And they may become far more important to US growth:

In the process of gorging on overseas goods and services, the US by happenstance fired up emerging economies such as China, Korea, Taiwan, India, Brazil and Mexico to build their productive capacities and spawn their own middle classes and consumer cultures. Paulsen has long called this trend the US's "emerging-market Marshall Plan."

As US consumer spending slows we will import less, thereby lowering the total amount of imports in the trade deficit formula. At the same time, Emerging economies have seen a growing middle class which will want to buy more goods and services. And some of those will come from the US.

Manufacturing

Consider these charts. First, the empire state index from the New York Federal Reserve:

Next we have the Philadelphia Fed Manufacturing Index

And finally we have the Richmond Fed Manufacturing Index

All three of these indexes tell the same story: manufacturing is picking up. This sector will contribute to GDP growth.

Conclusion

First of all, it's important to remember where we are in the economic cycle. At the beginning of this year GDP was dropping precipitously and we were bleeding jobs at a 600,000/month rate. Given those two numbers it's important to realize we're not going to rebound to a 3% growth rate in a few months; that is just not going to happen. However, we did get massive federal intervention from the Federal Reserve and the Federal Government. We are currently benefiting from both of those actions. In other words, we're in the middle of a pure Keynesian economy, benefiting from government spending and policies when other parts of the economy have broken down.

I find it funny that a large number of people who argued for the stimulus are now saying the current economic activity can't continue because it's largely government based. In fact -- it's supposed to be a government based economy right now. The government intervention is supposed to act like a bridge between the last expansion and the upcoming expansion. That's what Keynes argued for. And with the spending increasing next year and then tapering off in 2011 we have some time for the rest of the economy to find its footing.

I describe the initial phase of the next expansion the "fits and starts" expansion because not one of the four elements outlined about will lead completely or continually. I think it's far more likely we'll see an increase in consumer spending one quarter followed by increased stimulus spending and an increase in exports the next quarter. In other words, various economic sectors will take the lead one quarter and then fall back. In other words, we'll see fits and starts from the above sectors.

Comments

[DuganS1]

Japan Government Debt vs. Economic Recovery

By weakening the private economy, government borrowing is not an inflationary threat. Much light on matter can be shed by examining Japan from 1988 to 2008 and the U.S. from 1929 to 1941. In the case of Japan government debt to GDP ratio surged from 50% to almost 170%. So, if large increases in government debt were the key to economic prosperity, Japan would be in the greatest boom of all time. Instead, their economy is in shambles. After two decades of repeated disappointments, Japan is in the midst of its worst recession since the end of World War II. In the
fourth quarter, their GDP declined almost twice as fast as that of the U.S. or the EU. The huge increase in Japanese government debt was created when it provided funds to salvage failing banks, insurance and other companies, plus transitory tax relief and make-work projects.

In 2008, after two decades of massive debt increases, the Nikkei 225 average was 77% lower than in
1989, and the yield on long Japanese Government Bonds was less than 1.5% (Chart 6). As the Government Debt to GDP ratio surged, interest rates and stock prices fell,
reflecting the negative consequences of the transfer of financial resources from the private to the public sector. Thus, the fiscal largesse did not restore Japan to prosperity. The deprivation of private sector funds suggested that these policy actions served to impede, rather than facilitate, economic activity.

[HansBrinker]

I enjoyed your article a lot. Your analysis seems middle-or-the-road and standard.

To address some of the comments here:
- Jobs are the last ones to go in a recession. Companies are actually slow in firing people. But jobs are also the last ones to pick up. Companies are also slow in hiring people (they need to sell first).
- I agree that the influence of the financial sector was left out in the posting. I am interested in how Mr. Bonddad looks at that.
- Most economists seem to have calculated that the influence of the stimulus on inflation in the future will be low (see for instance Krugman's blog).
- I do not understand how anybody would prefer enormous unemployment and breakdown of social structures now over a little extra inflation in the future. That chaos would contribute also a lot to future deficit and inflation.
- The question is not *if* a recovery will happen, but *when*. Nobody has been able to find a way to prevent waves of ups and downs in any economy, but Keynes has pointed to a way to dampen the oscillations. In that way the bottom is not as bad as it would have been otherwise.
- It doesn't help much to scream that we wouldn't like to be in this situation. We need to get out of it. In general the (standard) road of the Obama administration seems to work. I believe that this is what the article by Bonddad also

[WritusMaximus]

In sum, those that don't see a recovery is upon us are those that are underemplo­yed/unempl­oyed! The term is JOBLESS recovery, for crying out loud! They should be happy that Wall Street is back on its feet and stop complaining, for Trickle Down Economics approach of the Geithner/S­ummers/Ber­nanke/Obam­a administration will surely make available some tasty scraps for the under/unemployed! The term is TRICKLE down economics, for crying out loud, so a trickle you all should expect!

[xlntcat]

"Trinkle down economics" is the GOP economic plan. How do you like the results? Like it or not Wall Street which is a reflection of companies that provide jobs solvency has to recover before any expectation of new jobs. "Snarky" is passe. Try informing yourself and rendering information that if useful in ways other than stroking your own eqo.

[bramapanzer]

Nonsense, Job Solvency is a made up term. 80% of all employed individuals are employed by non-publicly traded firms (ie. not on wall street) therefore, any recovery involving wall street only, means that only ~20% of the economy is benefiting. It just so happens those 20% are roughly the wealthiest and so we SHOULD expect "trickle down economics" even though all of us know it doesn't work. Pissed yet?

[WritusMaximus]

But, but, the stock market is up! Remember, jobless recovery is just that, a recovery without jobs! Let's all congratulate the fine folks in Washington DC and the gurus on Wall Street for the uptick in stock prices and call it a day! Remember, them banksters, er, bank executives have repaid the US Treasury and with interest, so good times are here again!

Apologies necessary on my part, and nobody elses. Yeah, the word "bankster" keeps bouncing off the walls of my brain, so sorry I am about the slip I made.

[Chip W]

The consumer is becoming a more responsible consumer? We'll see.
We gotta buy that stuff, then more stuff. That's the American way. Is that going to change?

Everyone's hoping for the economy to return to growth. That's what we gotta have - perpetual growth. Forget that that's not possible (we'll run out of planet).
GDP is negative? Horrors!

There are advantages to less economic activity, though I may be the only one who thinks so. Less consumerism, which means less materialism. Fine. Let's move away from our distorted value system. Less economic activity means we're destroying the planet at a slower rate. Good news to me.

But no, let's return to economic growth and an ever increasing standard of living, and pretend for as long as we can that it all makes sense and it's sustainable.

[xlntcat]

Buying stuff and then more stuff has only become the American way of the current generation. My parents bought what they could pay for and we did without what couldn't be paid for. My children grew up getting all they needed and pretty much everything they wanted but the only thing that went on a credit card was paid in full at the end of the month,

There is a problem with over consumption. There is a problem with consumers driving the economy. There is a problem with a two decade decline in education, healthcare, manufactuing, and trade. When you produce nothing except houses and mortgage securities, common sense should cause a re-evaluation of your place in the world and if it could possibly be sustainable.

[BurtonOerney]

If population is increasing, the economy has to grow so the new people can have jobs. It has nothing to do with the standard of living.

[bramapanzer]

Wonderful insight, some times common sense is fleeting around here.

[Chip W]

Graphs, pie charts, bar charts, statistical information up the wazoo.
Is anything analyzed more than money?

[doogiedude]

As some other posters have essentially said, if we're going to put up graphs to depict the state of the economy, let's put up graphs of personal bankruptcy rates, foreclousure rates, unemployment rates, tax burden rates by class, consumer credit availability, average income, etc...

The graph showing disposable income increase is very suspect. Per the department of Commerce: "Disposable personal income is personal income less personal current taxes. It is the income available to persons for spending or saving." It appears this does not take into account price increaes, and therefore is a misleading metric of money available for consumers to increase spending as a percentage of their income.
http://www.bea.gov/national/pdf/nipaguid.pdf

I guess if the desire is to assess economic recovery from the wealthy perspective, "bonddad" appears to be correct. For the remaining 99% of Americans, I'm not so sure.

[BurtonOerney]

Inflation is at historic lows right now. What price increases are you talking about?

[doogiedude]

How about price per :

500 KWH of electricity: Dec 1999= $45.38, Dec 2008=$65.50

100 therms of city natural gas: Dec 1999= $68.50, Dec 2008=$135.44

1 lb of white bread: Dec 1999= $.90, Dec 2008=$1.42

dozen large Grade A eggs: Dec 1999= $.92, Dec 2008=$1.83

http://data.bls.gov/cgi-bin/surveymost

[bramapanzer]

Inflation is not the only cause of price fluctuations, see: decline of dollar. We have lost about 15% of the buying power of the dollar over the last year.

[userw014]

"First of all, it is important to remember where we are in the economic cycle"

You say this like there's some natural, physical law involved here. This is just people screwing up over and over again.

Some months ago, I suggested that things won't get better until the people at the top (CEOs, CFOs, etc.) are removed - either by retirement, incarceration, or firing. Well, some of them are gone, but most linger on.

[BurtonOerney]

Yes. Jail everybody that makes more money than you do. That should help.

[RenoSage]

It was predicted that the job market would be the last to recover, after the financial and durable goods
sectors.
I fear that the stimulus, instead of stimulating grand projects like the Hoover Dam under FDR, are
being "managed" by the governors to their own benefit. But the road projects are just beginning,
and fresh hemorhaging of jobs has ceased.
The financial sector is showing a profit, and repaying their tarp money with interest. I fear that the
lesson that should have been learned about worthless stuff like "default bundles', derivatives, etc.
failed, and that further regulation MUST be done to prevent a repetition of the meltdown.

[xlntcat]

Regulation is in committee and the lobbiest are circling. We need to hold congress accountable for imposing strong regulation on the financial sector. A huge factor that isn't being dealt with is rise of huge monopolies that throughout history kill competition and destroy economy. It is a major factor in the health insurance industry and has allowed them to engage in racketeering and corruption as they bought up all the small competitors. If you are too big to fail, then congress need to look at why you were allowed to get so big that you can hold the nations economy for ransom. Too big to fail means too big to exist.

[BurtonOerney]

I completely agree with both of you. I see no reason to worry that the president - after the credit bill of rights and the attempted mortgage cram-down, cash for clunkers, billions to rewrite underwater mortgages, the original large percentage of the bailout directed to state budget gaps, etc. - won't support legislation that breaks up monopolies. I do worry that there aren't enough congressional votes to support the president.

[nightwind928]

Economic recovery is relative. If you are a Wall Street banker and receiving your six figure bonus about now, things are good. If your a person standing in a six hour line for a job fair who hasn't worked in a year, things are not so rosy. You don't need a wealthy blog host to tell you whats real in your life, you already have a pretty good grasp of it when you have to dodge those nasty calls at supper time from the professional bill collectors. The same academics that couldn't predict the big collapse say good times are just around the corner... but they don't have the credibility with most of us that they used to anymore. It really about employment. And we don't have the jobs to put people back to work anymore. We outsourced, cut back, mechanized and hi tech'd all those jobs away a long time ago. The truth is we don't produce much of anything but hamburgers in America anymore. And what we do produce is actually just assembling foreign made parts into a marketable product. We don't actually manufacture anything of significance thats wholly American anymore. The green job promise is a nice concept but it's a small band aid on a big wound and is years away. Where on earth are these millions of jobs to fill all the needs of the army of unemployed going to come from? They certainly aren't in my town. Are they in yours?

[BurtonOerney]

13% of the american economy is exports. That percentage has increased this year. I'm sorry that doesn't support your 'argument' (which, I think, is that everything sucks.)

[DuganS1]

Bonddad still doesn't consider the monetary stimulus, which is interesting. The monetary stimulus is 10x more important than the fiscal stimulus. He also doesn't mention that a large percentage of the stimulus has been simply used by the states to fill budget gaps, and those states will continue to do so going forward. The infrastructure spending thus far has been small and virtually worthless.

I want to know what Bonddad believes will happen in the treasury and bond markets when the Fed buying of mortgage backed securities and treasuries ends.?? Will yields go up? If so, how much? And won't that hurt the corporate bond market and in turn equities? Won't it hurt the housing recovery? Won't it hurt the auto recovery? The only way I see that this problem being contained is if the savings rate in the US continues to go up, as the lions share will be used to buy treasuries, and the recovery is investment led (rather than consumer led) and very very gradual.

[BurtonOerney]

Do you think it costs more for an employed person to see their doctor of for the same person to visit the emergency room? Jail a 21-year-old or educate him at 10? The holes filled in state budgets go to health and education. The multiplier on that is pretty high.

[DuganS1]

Money spent on health care and education doesn't create wealth like it does in the private sector, particularly spending on education; nor does such spending have much of a multiplier. A large amount of a state budget also goes to prisons, which is a substantial drain on resources. Spending on state govt bureaucrats is a drain on resources as well, as it requires draining money from the private sector via tax collections to fund it, money that otherwise would be used for wealth creating enterprises. Even a large share of state funded construction is wasteful, as it involves the construction of buildings not used for profitable enterprises, and will require an increase in future tax collections to subsidize the employees who work in the unprofitable wealth-draining enterprise. Much construction is also done that doesn't increase economic productivity, but is rather done for political reasons.

[realpolitic]

I think it goes without seeing that our successful recovery from the severe recession tells the story that Keynesian economics works and is necessary at a time of recession. After all, banks were not lending and soon small businesses would not have been able to borrow even to cover their payrolls. it would have been another Great Depression. Instead, soon we will see roads and bridges rebuilt and a necessary infrastructure repair, although it may be not nearly what is needed. I would like to know how long Hale thinks the recession will be slow going or explained by "fits and starts." Will we get back to, say, five percent unemployment within the next five years? Should the government have a cash-for-durable goods program, like refrigerators, for people to get newer, greener appliances as it did the cash-for-clunkers program? Getting people to spend directly seems to be a government program that works, although it may be unfair for those who can not afford to buy a new car or appliances.

[wpmiller]

Isn’t it time to step back and take a broader view of the cultural and economic changes that are transpiring here? It really looks like there’s a paradigm shift underway that will affect fundamentals like the monetary system, the market system, the dependence on “jobs” as a means to allocate wealth and resources, the role of government, and the relations between people, from local to international.

Yet most of the discussions continue to obsess about growth, consumption, and recovery of a system that really seems to be in the senescence phase. Further, shouldn’t the typical citizen be considered more than a “consumer”, whose sole function is to “buy sh*t” -- the only debate being over the rate at which sh*t-buying will recover?

The growth economy appears to have crested five or more years ago -- the illusion of growth maintained by companies cannibalizing their employees, their product quality, their customer base, and each other (thru mergers). C’mon, we live in a closed system, with finite resources and carrying capacity. Growth can’t continue to infinity. Let's consider shifting from "growth" and "quantity" as a measures of health to a steady-state world where quality of life for the greatest number of people is the prime indicator of success.

We’ve probably all heard by now the Einstein quote that “Problems can’t be solved from the same level of thinking that created them.” Amen!

[realpolitic]

I think much of the growth we have seen, especially during the Bush years, was due to companies cannibalizing their employees, one another, and their product quality. After all, workers are more vulnerable han ever and increases in productivity are not going in the worker's pocket, but to the bottom line. CEO's profit with enormous salaries entirely disproportional to the average worker and paid whether the company flourishes or totally fails. It is an economy desired by conservatives that has no fairness or rules.

[userw014]

Take a look at the second graph, "PCE 1990 - 2009 Percentage Change from Preceding Quarter" and try to argue again that the word "growth" can be applied to the Bush years. It was cannibalism through and through.

[DenisElliott]

The is helpful, but what drives me nuts about economic reporting is what doesn't get said - and prevents the info. from taking hold with average Americans. Most folks are clueless about their economic situations, or realize that the Dow Jones average - has almost nothing to do with their situation. It's an average of BLUE CHIP stocks - hardly representative of the economy overall. Alas, people see when the Dow is trending up & incorrectly believe that their own personal situation is just a "break" or two from becoming rosy.

Which leads me to the second point:

Neither regular MSM "journalists" or economic experts state (though they should - again & again) economic reality. Ask yourself how many Americans make 40K per year - even back in the 1990s. The truth is, over eight in ten workers make LESS than 40k. Household income? Most COUPLES make LESS than 50k per year! Not that you'd know it when from econominc "reporting." They always portray some couple with two or three kids making 75-90K as "average." That's why so many regular folks (i.e. Joe the Plumber) swallow the GOP's b.s. about how the opportunity to live the good life is there for the taking.

Reality is quite different. It's possible, but the odds are daunting and have grown worse over the past 30 years. It's only when most, if not all economic reporting includes CONTEXT average folks can understand that the knowledge needed to choose/elect our leaders wisely.

[BurtonOerney]

The average is the average. You can look it up on the department of labor and industries website. If the average household income is greater then 50K/yr, than most couples make more than 50K/yr. Wages have gone down but we're not in a feudal state.

[wilsonveteran]

There are a couple of items Mr. Stewart failed to mention. What will the economy do once the high interest and high inflation hits? It will go into another recession or what is referred to as a double dip recession. The last time Keynesian economics was used on this scale, actually a smaller scale, in this country was the Carter years. it resulted in double digit inflation, interest rates, and unemployment.
Second as stated in this article that all the money spent is going toward government projects which at best are short term employment and does very little to stimulate the economy in the long run. It just causes more government spending that causes the effects of the above.
Now you couple this with more spending with Health Care and more taxes with Cap and Trade you are asking for a disaster. Unfortunately I think that is what Obama wants because with more unemployment more people are dependent on the government which gives the government more power. Less industry or more government controlled industry means more power to the government. This is changing America where the government has all the power and we have nothing not even our freedoms.

[BurtonOerney]

Put a time line on your hyperinflation scenario. We already have pumped huge amounts of money into the economy. Shouldn't the increase in the money supply have already caused SOME inflation? When is this going to happen?