Historical Perspective – Employment And Output

February 8th, 2010

Here are two charts from the Minneapolis Fed site:

http://www.minneapolisfed.org/publications_papers/studies/recession_perspective/index.cfm

They show, from a historical context, how declines in employment and output during this period of economic weakness (which FRB Minneapolis refers to as a recession) compare to those of previous recessions.

First, the employment chart.  Here are two notes regarding this chart:

1. Employment is nonfarm payroll employment calculated by the Bureau of Labor Statistics.
2. Postwar recessions include the 10 recessions as defined by the NBER that started between 1946 and 2006.

Second, the output chart.  A couple of notes regarding this chart:

1. Output is gross domestic product adjusted for inflation as calculated by the Bureau of Economic Analysis.
2. Postwar recessions include the 10 recessions as defined by the NBER that started between 1946 and 2006.

There are other pertinent notes on the FRB Minneapolis page, as seen below:

Background on Recession/Recovery in Perspective

This page places the current economic downturn and recovery into historical (post-WWII) perspective. It compares output and employment changes from the 2007-2009 recession and subsequent recovery with the same data for the 10 previous recessions and recoveries that have occurred since 1946.

This page provides a current assessment of ‘how bad’ the 2007-2009 recession was relative to past recessions, and of how quickly the economy is recovering relative to past recoveries. It will continue to be updated as new data are released. This page does not provide forecasts, and the information should not be interpreted as such.

The charts provide information about the length and depth of recessions, and the robustness of recoveries.

Post-WWII Recessions

The Business Cycle Dating Committee of the National Bureau of Economic Research determines the beginning and ending dates of U.S. recessions. http://www.nber.org/cycles.html
It has determined that the U.S. economy experienced 10 recessions from 1946 through 2006. The committee determined that the 2007-2009 recession began in December 2007. The ending date has not yet been determined. Ending dates are typically announced several months after the recession officially ends.
http://www.nber.org/cycles/dec2008.html

Length of Recessions

The 10 previous postwar recessions ranged in length from 6 months to 16 months, averaging about 10 1/2 months. The 2007-09 recession was almost certainly the longest recession in the postwar period. But the total length of the recession will only be known when the Business Cycle Dating Committee retrospectively determines the final month of the recession.

Depth of Recessions

The severity of a recession is determined in part by its length; perhaps even more important is the magnitude of the decline in economic activity. That is, how much do employment and output fall?

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The Deficit And Federal Expenditures

February 7th, 2010

With the recent unveiling of the proposed FY2011 budget, I would like to make a few comments with regard to budget deficits and federal expenditures.

Here is a historical chart of federal expenditures.  This chart is from the St. Louis Federal Reserve website.  This chart helps one put rising government expenditures in a historical context:

A February 1 Wall Street Journal article concerning the FY2011 proposed budget noted the deficit in the proposed budget would shrink from $1.6 trillion this year to $700 billion (4% of GDP) in 2013.

Various underlying economic assumptions from which this future deficit figure is derived can be found here:

http://www.whitehouse.gov/omb/budget/fy2011/assets/econ_analyses.pdf

I believe these assumptions are rather sanguine – even if one believes that we are in a sustainable recovery.

Our nation has a long history of being far too optimistic during budgeting.  This appears to be yet another example in-the-making.  What is particularly disconcerting in this instance is that even if these economic assumptions are met, there is still a $700 billion shortfall in 2013.  This deficit level does not continue to decrease after 2013, as seen in the budget.

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SIGTARP Comments

February 4th, 2010

I found some interesting comments in the SIGTARP January 30 2010 Report to Congress:

http://www.sigtarp.gov/reports/congress/2010/January2010_Quarterly_Report_to_Congress.pdf

From the Executive Summary, which begins on Page 5:

“Many of TARP’s stated goals, however, have simply not been met. Despite the fact that the explicit goal of the Capital Purchase Program (“CPP”) was to increase financing to U.S. businesses and consumers, lending continues to decrease, month after month, and the TARP program designed specifically to address small-business lending — announced in March 2009 — has still not been implemented by Treasury. Notwithstanding the fact that preserving homeownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 (“EESA”), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is
the highest it has been in a generation. Whether these goals can effectively be met through existing TARP programs is very much an open question at this time. And to the extent that the Government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP.”

also:

“….The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.  It is hard to see how any of the fundamental problems in the system have been addressed to date.

• To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.

• To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.

• To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.

• To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.”

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Two Other Views Of The Gold Price

February 3rd, 2010

I find a periodic review of Gold’s price relative to the Dow Jones Industrials’ and to Crude Oil’s interesting.

Below is a long-term monthly chart of the Dow Jones Industrial Average price relative to that of Gold’s.  As one can see, Gold has been outperforming since roughly 2001, after underperforming from roughly 1981-2000:

chart courtesy of StockCharts.com

Below is a long-term monthly chart of the Crude Oil price relative to that of Gold’s.  As one can see, the Gold price has been bouncing around in a range since 1990, and is now at a slightly subdued level:

chart courtesy of StockCharts.com

One can infer many different things from these two charts.  With regard to the first chart, one way to view this is to see how “hard assets” are performing relative to “paper assets.”  With regard to the above chart, one can see how Gold is performing to another commodity, crude oil.  From this crude oil to Gold price comparison, one may interpret Gold’s unique “safe haven” value.  If one chooses to view the chart in this manner, one could draw the conclusion that from a “safe haven” standpoint, Gold’s price is not reflecting much of a “safe haven” value.  This view is consistent with previous comments I have made with regard to Gold.

I strongly believe that the strongest driver of Gold’s price (especially relative to other assets) will be if/when it is viewed as the ultimate “safe haven” asset.  This condition would likely occur concomitant to a repudiation of “paper” assets.

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Another Economic Outlook Index

February 2nd, 2010

I came upon another economic outlook index, this one titled “USA TODAY/IHS Global Insight Economic Outlook Index.”  The link is found here:

http://www.usatoday.com/money/economy/economic-outlook.htm

The index is designed to predict real GDP growth and is a composite of 11 indicators.

Currently the chart shows a prediction for each month in 2010 up through June.  The June 2010 value is 2.3%.

From the article accompanying the index graphic: “The USA TODAY/IHS Global Insight Economic Outlook Index shows moderating but firm growth in the first half of 2010 after a strong recovery in the second half of 2009.”

I’ll add this index to the other economic outlook indicators that I occasionally update.  The last update was on January 11.

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“Bonus For Bernanke?” Commentary

February 1st, 2010

I came across this commentary from Fareed Zakaria on CNN yesterday.  It is titled “Bonus For Bernanke?” :

http://www.cnn.com/video/#/video/us/2010/01/31/gps.bernanke.bonus.cnn?iref=allsearch

I mildly or strongly disagree with most of the assertions made by Fareed Zakaria in this piece.   The reason that I post it is that it contains a very good, concise representation of ideas from supporters of Ben Bernanke’s performance.

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4Q Corporate Revenues

January 29th, 2010

I have been looking at the revenue figures posted for a variety of diversified manufacturers and distributors.  These are well-respected, S&P500 firms.

One would expect these firms to be posting decent revenue gains, especially as compared to the very weak year-ago period (4Q2008).  Additionally, these firms stand to benefit from the prevailing economic climate due to their size, global sales, high accessibility to credit at favorable terms, access to stimulus business, etc.  In essence, whatever general economic strength is existent, and then some, should certainly be reflected in their revenues.

Instead of strong or at least a decent 4Q 2009 revenue results, most of these companies are reporting continued percentage sales declines when compared to year-ago results.  These declines have ranged in value but are significantly negative, with some being double-digit declines.

This result is not significantly better than the similar comparisons that I have previously  commented upon for 3Q2009 results.

This lack of revenue growth is very notable and has many implications.  It seems to at least partially belie claims of economic recovery.  As well, it would explain why (net) hiring is rather nonexistent.

Of course, there are other implications as well.  Among these implications is that the lack of revenue growth weakens any fundamental valuation one may choose to assign to the stocks of these companies.

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The State of the Union Address – A Few Comments

January 28th, 2010

I found plenty of noteworthy comments in last night’s State of the Union Address.   Here is the link to the transcript:

http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address

Here are a couple of my thoughts:

First, many stimulus initiatives were mentioned.  Some of these were new ideas.  That stimulus ideas are proliferating should not be a surprise, as many in our country believe they represent a sensible solution to our many economic difficulties.   I will comment on many of these initiatives when more details are available and/or they are enacted.  For now, I will say that before we, as a nation, enact more stimulus bills, we need to analyze the results of the many stimulus efforts previously and currently enacted.  Then, we need to assess the unintended consequences and risks these stimulus efforts hold, of which I have previously mentioned on this blog.

Second, the employment situation was mentioned.  This, of course, is not a surprise and is a very popular topic among all politicians – and for very good reason.

President Obama during the speech last night made the following comment:

“But the truth is, these steps won’t make up for the seven million jobs that we’ve lost over the last two years.”

I believe that our unemployment problems, both current and ongoing, encompass a population many multiples of seven million.   Our unemployment problems will most likely not be solved by any easily enacted solution, unfortunately.

For those unaware, I previously wrote a series of blog posts on unemployment, can be found here:

http://www.economicgreenfield.com/2009/07/24/why-arent-companies-hiring/

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Roubini Interview Concerning Bubbles

January 27th, 2010

Here is a link to an interview today with Nouriel Roubini in which he discusses bubbles:

http://www.cnbc.com/id/35078010

I would argue against those who believe that bubbles could start to form or that they are just beginning to form.  I strongly believe that there are many bubbles in existence right now, and the implications of such are massive.

Over the last few months I have written quite a few posts on bubbles, and those posts can be found on in the “Bubbles” category listed on the right-hand side of the home page.

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Article On Strategic Defaults

January 26th, 2010

I ran across this article from U.S. News & World Report, dated 1/19/10 concerning “strategic defaults”:

http://www.usnews.com/money/personal-finance/real-estate/articles/2010/01/19/strategic-defaults-and-the-foreclosure-crisis.html

The article is interesting in that it summarizes various facets of the “strategic default” situation and presents an interesting example of the dynamics that one “underwater” homeowner faces. 

I have mentioned “strategic defaults” on numerous occasions.  It is a very important “wildcard” in the residential real estate equation.

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