Transcript Is the Recession Over?

Is the Recession Over?
Daryl Montgomery
August 2009
Copyright 2009, All Rights Reserved
“The Depression is Over”
-Herbert Hoover, June 1930
U.S economic activity bottomed in
March 1933
The negative effects of the Depression
lasted many more years.
Where Have We Seen this Picture Before?
• Because of a massive real estate bubble in Japan in the
1980s, many major Japanese banks became insolvent.
• The government kept them running by subsidizing
them and many businesses, which prevented the
problem from being solved. Known as zombies.
• Central bank dropped rates to zero.
• Government engaged in one stimulus program after
another to revive economy. GDP went up with
stimulus. Once it was removed, GDP turned down.
• First there was an initial recession from 1991 to 1993.
Japan had Negative GDP in the
following Quarters
1997 – Q2, Q3 (recession)
1998 – Q1, Q2 (recession)
1999 - Q1, Q3 (not technically a recession)
2001 – Q2, Q3, Q4 (recession)
2003 – Q1
2004 – Q2, Q4 (not technically a recession)
2008 – Q3, Q4 (recession)
2009 - Q1 (-14.2% decline)
Claims That U.S. Recession is Over
• 87% of U.S. economists think Q3 will be the end
of the recession.
• Economists average prediction of Q3 GDP growth
is 3%, some as high as 6%.
• For a long time Bernanke has said recession will
end by the fall.
• There have been a number of media articles
stating recession is over.
• There have been media articles claiming real
estate has bottomed.
How is the Economy Doing?
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Home sales are supposedly improving.
Manufacturing improving.
Exports Improving.
NOT improving:
Consumer spending (72% of economy)
Service sector (79% of economy)
Bank lending (key to future growth)
Employment and income
Real Estate Deconstructed
• Sales have supposedly gone up 3 months in a row and
prices 2 months in a row (NAR).
• Employment and income deteriorating (down 4.7% yr
over yr). Mortgages hard to get. So who’s buying?
• 32.2% of mortgages in the U.S. are for more than the
value of the underlying property –this is where potential
foreclosures come from.
• Estimates: only 4% of mortgages will be foreclosed.
• Foreclosures up 7% last month, 32% last year, despite a
number of federal and state programs to prevent them
and banks not foreclosing to keep them off their books.
Manufacturing
• ISM July report 48.9 (50 or above expansion)
– 6 of 18 industries reported growth.
• ‘Cash for Clunkers’ program stimulating auto
industry (probably the worst hit) in Q3.
• Auto employment increased 28,000 in July!
Autos added 0.2% to Q2 GDP! (And pigs can fly)
• Increased exports help, even if internal demand
remains weak (happened in Japan in Q2).
• Likely to turn positive in August or September.
Exports
• Exports hit bottom (so far) in April and have
risen for 2 months.
• U.S. trade deficit increased to $27 billion in
June from $26 billion in May because
imports rose faster.
• Biggest U.S. trade deficit was July 2008 at
$65 billion when oil peaked.
• Trade deficit very dependent on price of oil.
• Lower the trade deficit, the higher GDP.
Bank Lending Getting Worse
• Banks improved earnings were the result of
accounting changes (caused much better
trading results).
• Loan portfolios deteriorated and loan loss
reserves had to be increased (core business).
• Bankrupt, nationalized, and derivatives poster
child AIG had positive earnings.
• Fannie Mae still lost $14.8 billion in Q2.
• 77 Banks have failed so far this year. 305
banks now on troubled list. 25 failed in 2008.
The GDP Numbers Can’t be Trusted
• Prior to July 31, 2009, the BLS had 2008 U.S.
GDP up by $450 billion or around 3.0%.
• The U.S. was in a severe recession for all of
2008. A recession is when economic output
declines. GDP measures economic output. How
could GDP go up during a severe recession?
• Revisions now have 2008 GDP up 0.4% in 2008.
It should be down probably 3% to 5%.
• Total official GDP of $14.15 trillion could really
be as low as $10 trillion.
Debt Prevents Sustainable Economic
Recovery
• U.S. household debt (mortgages, credit cards,
auto loans, etc) is $14 trillion.
• Corporate debt is $9 trillion.
• Official U.S. National Debt is $11.4 trillion.
• Unfunded Medicare and Social Security
liability is $42 trillion (indexed for inflation).
• As of Feb 2009, at least $11 trillion was
allocated for Credit Crisis bailouts (very little
of this included in National Debt).
Conclusion
• Just as in Japan in the 1990s, conditions for a
sustainable economic recovery don’t exist in the U.S.
today.
• Increased consumer spending is key to better U.S. GDP.
Need debt level to be reduced and jobs and income
increased (economists not predicting this soon).
• Any given quarter can have positive GDP if enough
government stimulus takes place. This doesn’t mean the
recession is over (but the media will say it is).
• When stimulus is withdrawn GDP will fall back down.
• Continual stimulus will be paid for with more money
printing – and this will be inflationary.