Tyler Cowen sums up what a lot of us are feeling right now:
The housing sector is down twenty percent and the price of oil is flirting with $90 a barrel, maybe $100 to come. Yet the quarterly growth rate was just reported at 3.9%:The economy expanded faster than expected in the third quarter, led by a surge in consumer spending and exports, the government reported today.It is wrong to think we have turned the corner, but it is also wrong to think the doomsayers understand what is going on.
I have been expecting a recession for several quarters now. So far, I have been consistently wrong.
Politically, I think this is going to make things very interesting. I presume a Democrat will be elected in 2008. The longer we go without a recession now, the more likely it is that whatever Democrat we elect will have a deep recession during their presidency, something that hasn't happened to them since Carter. Cactus may think the Democrats have some magic economic mojo, but I'm betting on the business cycle. Don't get me wrong--we've still got a year to go, and I think it's more likely that Bush will catch the end of the current expansion than his successor.
The next term is going to be pretty interesting, in terms of watching what wonks say about presidential impacts on the economy. If Bush doesn't end up with a recession on his watch, the next person in office will almost certainly catch a nasty twofer: a deepening hole opening up in the budget due to entitlements, and a recession that will make any such problems desperately worse. I expect a neat (and amusing) flip between Democrats proclaiming that deficits don't matter, and anyway, the president has limited power over the economy; and Republicans righteously screaming about fiscal responsibility.
Don't feel bad - remember, economists have predicted seven of the last three recessions...
Huh, I thought it was nine of the last five recessions.
But remember that, to Democrats, the 2001 recession was Bush's fault and proved that his policies were wrong, but a recession on a Democrat president's watch would only prove that Democrat economic policies are all the more needed.
We're only at the end of the sixth year of an economic expansion. The 1990's expansion lasted 10 years, and the 80's one went 8 years. Neither of the recessions that ended them were very deep either.
Contrast this just ending quarter century (1983-2007) performance, with the immediately preceding one (1958-82), with its SIX recessions.
If Bush doesn't end up with a recession on his watch, the next person in office will almost certainly catch a nasty twofer...
Maybe so. But I think it's all about when in the term the recession occurs. If I were president Clintbama, I'd rather get my recession over with early, and so head to the polls in 2012 during a robust recovery, in Ronald Reagan (or indeed in George W. Bush) fashion.
a deepening hole opening up in the budget due to entitlements
You mean due to large tax cuts for the rich and an ongoing war, right? Just pointing out the obvious.
a deepening hole opening up in the budget due to entitlements
You mean due to large tax cuts for the rich and an ongoing war, right? Just pointing out the obvious.
Nope, the budget is nearly balanced now, and probably will be in balance when Bush leaves office, barring recession. The change in the budget will be explained by the change in inflows and outflows to SS/Medicare, which at any rate dwarf the annual cost of the war, and will soon dwarf war+tax cuts.
"The change in the budget will be explained by the change in inflows and outflows to SS/Medicare, which at any rate dwarf the annual cost of the war, and will soon dwarf war+tax cuts."
"Dwarf" is not an accurate word.
The Iraq war will wind up with a bulk purchase price of about $1.6 trillion. If we don't touch the nut, and just pay the vig, at 6%, that's about $100 billion per year. That is lower than, but same order of magnitude as either social security or medicair which are about $550billion and $400 billion per year each.
The entitlements are a lot of money, true, but they seem a much better buy to me than the Iraq war. If I spend 90% of my pay on food, clothing and shelter, and 20% on prostitutes, what would you say broke my budget?
Njorl,
"Dwarf" is an accurate word. We're spending about $800 billion per year now on Medicare, Medicaid, and Social Security, and the amount we spend goes up steadily every year.
Megan,
I can understand your prediction of a recession in the next year or two, but what makes you think it will be a deep one? The last two recessions have been fairly short and shallow.
Hmm. A balanced budget, a growing economy, a peaceful Iraq, Saddam executed, the Taliban overthrown, no terrorist attacks on American soil, and no one burned up in assaults by the Justice Department. Remind me again why Bush and the Republicans are so awful?
y81 -
Could you tell me how to get to your universe?
"Cactus may think the Democrats have some magic economic mojo, but I'm betting on the business cycle."
cactus thinks nothing of the sort. I've mentioned that in my opinion, the Dems do a better job (e.g., much less time spent in recession since Ike took office) because they put some effort into planning what to do in the economy rather than having simple knee-jerk prescriptions.
But having a D after the President's name doesn't make the economy recession proof - Jimmy Carter is evidence of that.
freelunch: balanced budget, growing economy and peaceful Iraq are from this blog. I don't think anyone will dispute the last four.
"Hmm. A balanced budget, a growing economy, a peaceful Iraq, Saddam executed, the Taliban overthrown, no terrorist attacks on American soil, and no one burned up in assaults by the Justice Department. Remind me again why Bush and the Republicans are so awful?'
I feel very confident that Saddam Hussein is going to stay dead. That's about it.
The budget isn't balanced.
Growth is the normal state of affairs There was as much growth in GDP under 4 years of Carter as the first 6 years under Bush.
Why don't you go move to that "peaceful" Iraq.
The Taliban is not yet defeated. After 6 years, if we leave Afghanistan, they will still probably take over. Even the outgoing Republican Senate Majority leader, Bill Frist thought so.
You're seriously stating that 9/11 happened before Bush took office?!?!?
The Justice Department were incompetent observers when the nuts at Waco incinerated themselves in a mess created by their Republican predecessors. Now they are active participants in torture.
Is that enough reminding? There's a lot more.
Could you tell me how to get to your universe?
It's as easy as opening one's eyes and looking around, but in some cases that requires first removing eight inches of jade with a chissel.
We actually do live in pretty good times, as evidenced by the fact that countless hours of blog-n-comment time around here have been put into arguments over whether public education needs more competition, and where to draw the line on funding healthcare for low-income demographics.
Njorl wrote: The Justice Department were incompetent observers when the nuts at Waco incinerated themselves in a mess created by their Republican predecessors. Now they are active participants in torture.
Hey, his assessment was overly optimistic and probably deserved a little swatting around, but do you really want to go there? Reno's JD was Reno's JD; Waco was merely a symptom of the same mentality that later produced the Elian Gonzales fiasco.
But assuming we want to play whack-a-mole in deciding which administrations are at fault for creating situations that only came to fruition after a different administration was in power, let's go back and review 9/11 some more -- that ought to be fun.
You watch too many made for TV movies anony-mouse.
Whoa, the party line on Waco sure has changed. When I was young, it was a courageous, well-advised decision by that steely heroine, Janet Reno. Now it's all the Republicans' fault?!
Tarzan - The costs of the war, while certainly significant, are a fraction of the cost of entitlement programs. And that's per year. The war will end at some point, the entitlement programs will go on (and cost much more than they do now) long after we stop fighting any way in Iraq.
As for the cost of the tax cuts. Well to the economy as a whole the cost is negative (or to put it another way they are a net benefit, not a cost. There is almost certainly a net cost to the federal government, but that cost is lower than the gain to the private sector, as cutting taxes reduces dead weight loss, and increases economic growth.
Also as Megan points out the budget is getting close to balance now. In the short run the fiscal situation is fine. But for the future we have a looming large problem with the massive planned spending on entitlement programs.
There are a lot of Republicans screaming about financial responsibility NOW. Unfortunately, none of us are in Congress. :p
Ooops - My last comment was to Tom, not Tarzan.
Njorl - what's wrong with prostitutes? Man does not live by bread alone.
Could you tell me how to get to your universe?
You could start by opening your eyes.
The GDP is rapidly attaining CPI status as a completely meaningless government-spawned metric. Since the GDP's "inflation correction" is based on the CPI, it grossly understates the impact of real inflation (currently running at 2-3X the "official" estimates). A lot of the consumer spending "surge" is based on the fact that gas, energy and food prices started climbing again; retail sales growth was pretty unimpressive. Exports have grown dramatically, primarily because the dollar has depreciated ~9% against other currencies in the last 4 months; unfortunately, this also means that dollar-denominated paper assets start looking a whole lot less attractive. I know that I'm getting out of US$ securities as fast as I can, and I think that the Chinese, Japanese and Arabs will follow suit. The stock market melt-up is based mostly on hedge fund tape-painting and corporate LBOS, and that kind of "hot money" can disappear as quickly as it arrived. The US is going to have a hard time covering its current account deficits in the next year, export growth or no export growth.
The 6-year economic "expansion" has been in reality a credit bubble of unprecedented proportions, and a lot of folks in the financial sector are frantically trying to keep the bubble inflated with the help of their pal Bernanke. They may be able to keep the thing afloat for the next few months, but I don't see the liquidity squeeze going away anytime soon, and in fact we're only beginning to see how pervasive reckless risk exposure was throughout the financial world. I'd recommend fastening your seat belts, because 2008 promises to be a very bumpy ride.
"in fact we're only beginning to see how pervasively reckless risk exposure was throughout the financial world."
CHARLOTTE, N.C. - Bank of America Corp.'s plunging profits shocked Wall Street Thursday and prompted a clearly frustrated chief executive Kenneth Lewis to say that changes loom in its investment banking business.
"I've had all of the fun I can stand in investment banking at the moment," said Lewis, who heads up the nation's second largest bank. "So to get bigger in it is not something I really want to do."
As the last of the nation's top three banks to report results this week, Bank of America's news suggests that the problems in the credit market may yet be closer to the beginning than an end. But while Lewis blamed some of his bank's problems on those market conditions, he admitted his traders also made plenty of mistakes.
"What I can't say is that we'll stay the course," Lewis said on a call with analysts, after his company posted a 32 percent profit drop in the third quarter. "The probability of changes and eliminations of some businesses and infrastructure ... is very high."
http://news.yahoo.com/s/ap/20071018/ap_on_bi_ge/earns_banks
also, notice that these 'bank' stories, as above, are seemingly trickled out one by one...
Oct. 31 (Bloomberg) -- New York state and city each predicted widening budget shortfalls as Wall Street profits plunge and the real estate market cools.
Mayor Michael Bloomberg yesterday ordered department heads to freeze hiring and cut spending this year and next in anticipation of less revenue. State financial officials reduced their estimates for personal tax collections, while state Budget Director Paul Francis said he plans to hold spending to no more than the growth in personal income.
``People are starting to get real,'' said Charles Brecher, research director for the Citizens Budget Commission, a non- profit, business-funded fiscal monitoring group. ``We don't know where the economy is going, but what's interesting is the directional change, and facing up to the fact that times are going to get tougher.''
http://www.bloomberg.com/apps/news?pid=20601109&sid=aFMLlE4u40eE&refer=exclusive
btw, way to be awake mabman..
Since the GDP's "inflation correction" is based on the CPI, it grossly understates the impact of real inflation (currently running at 2-3X the "official" estimates).
Crank alert! Crank alert!
"CPI's Lie on Household Inflation Doesn't Wash:" John F. Wasik
Sept. 24 (Bloomberg) -- The U.S. consumer price index continues to be a testament to the art of economic spin.
Since wages, Social Security cost-of-living increases and some agency budgets are tied to it, the government has a vested interest in keeping it as low as possible.
Yet your real cost of living -- what you keep after taxes, medical bills, college expenses and other household costs -- is probably much higher than the 2 percent annual rate the government reported in July, showing a slight decline.
Millions are falling behind inflation because wage increases aren't keeping pace with the cost of medical care, lost employment benefits, homeownership expenses, energy and transportation."
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2SUCQ3Bslk0
"We have long railed against the absurdity of the CPI data. The ridiculous adjustments, the lack of correlation between CPI prices and reality, as well as the Fed focus on the core (inflation ex-inflation).
For the most part, the media has dutifully reported the nonsensical CPI data as if it were scripture. This drumbeat of criticism -- both here and elsewhere -- has begun to penetrate the MSM. We've seen a few critical columns over the past year or so. But I never expected to see this kind of critical reporting in a mainstream outlet: CPI's Lie on Household Inflation Doesn't Wash."--Barry Ritholtz
http://seekingalpha.com/article/48440-bloomberg-cpi-inflation-data-is-a-lie
from seekingalpha link, above:
"We've already discussed the increases in energy, and other commodities. And we have painfully detailed the specifics of Agflation. Let's expand on some of those examples from the Bloomberg column:
• Since 2001, health premiums have risen 78%; Wages have gained 19% over the same period. CPI inflation measure? 17%.
• Housing is the single-largest expense for most Americans -- as much as a third of total cash outlays. The Labor Department's Bureau of Labor Statistics only tracks "owner's equivalent rent" (OER). Housing costs/Owners’ Equivalent Rent is 23.158% of CPI.
• During the housing boom, OFHEO had housing prices increasing 13% per year; Non-government foundations had real estate taxes increasing about 6%; Over the same period, BLS measured ‘housing cost increases’ at 4% -- about half of its actual price increases.
• Median real-estate taxes on owner-occupied housing went from $1,614 in 2005 to $1,742 in 2006, an increase of 7.93%. (That's more than double CPI inflation rate).Oh, and ‘Owners’ Equivalent Rent’ doesn’t account for real estate taxes.
A real CPI would’ve eradicated most it not all of GDP during that period. And the more realistic GDP figure would be more in line with the lack of growth in real income and ‘real’ jobs."
...
"As reflected in the plummeting dollar, many of the gains of the past few years were purely inflation driven, nominal asset price increases -- not real (after inflation) gains. "
And the more realistic GDP figure would be more in line with the lack of growth in real income
That is, with income adjusted for the same inflation rate the crank has just finished telling us is bogus. Oh dear, oh dear.
"A real CPI would’ve eradicated most it not all of GDP during that period. And the more realistic GDP figure would be more in line with the lack of growth in real income and ‘real’ jobs."
Paul,
I read that as: a real(higher) CPI would have downwardly adjusted(after inflation) the GDP #s...the lower GDP #s( "more realistic" ) would be...in line with the lack of growth in real income and ‘real’ jobs."
How do you see it?
Wow, this is real tinfoil hat territory. I have to do some actual work today (though God knows the credit markets aren't that busy), so I will keep this short and simple. Both housing prices and interest rates rise and fall, but those items aren't part of the GDP deflator, because GDP measures what is produced (Gross Domestic Product, get it?). Nothing is produced when the price of your house rises or falls or when the interest rate on your mortgage rises or falls. It isn't some vast black helicopter conspiracy, it's Econ 101. (Well, maybe Econ 102, Introduction to Macro.)
"An economic metric that accounts for inflation by converting output measured at current prices into constant-dollar GDP. The GDP deflator shows how much a change in the base year's GDP relies upon changes in the price level. Also known as the "GDP implicit price deflator". "
http://www.investopedia.com/terms/g/gdppricedeflator.asp
y81 would have us forget that prices are generated at the margin(-al demand), too, if he could...
The way I see it is: if you think you've got a discrepancy between real GDP and real income, substituting a "better" inflation measure does nothing to resolve it-- the same correction gets applied to both sides of the equation.
MEH,
I think y81 and Paul have covered the basics, but let me add my 2 cents as well.
Health care premiums (and health costs in general) are a terrible yardstick for measuring real wage gains. First of all, many firms include health care in their benefits package, so the increased cost is passed along as increased compensation to a significant fraction of the country.
Second, there is not some fixed amount of "health" available to be divided up and which those nasty pharmaceutical companies are charging us more for every year. Rather the variety and effectiveness of treatments available is increasing every year (also the population is aging), so people are consuming more health care.
This is not inflation, which means that the price rises but consumption does not. What we are experiencing in health care is abundance.
MEH: I'm going to ask you the same thing I ask anyone else who claims inflation is understated:
"Name the basket of securities I can buy that will and has appreciated consistently at the rate you claim inflation truly is."
It's pleasing to think the government is understating inflation, but that has real implications for how one should invest, and if you're correct, I'm interested in knowing how to exploit that information. Until you can do so, I have to accept that the stated numbers are accurate.
Njorl wrote: If I spend 90% of my pay on food, clothing and shelter, and 20% on prostitutes, what would you say broke my budget?
Depends on whether you were patronizing the prostitutes or buying them remedial education for alternate career training.
And regardless of which one it actually was, if the other 90% seemed to have a habit of buying Dom Perignon and Armani suits, I think it's fair to say that working girls are only part of a substantially greater problem in your ability to prioritize your investing and spending habits.
As always, the whole is a sum of parts and needs to be considered in the sum context, not just the parts that don't match your priorities-of-the-moment.
I don't know why we place (any) trust in these numbers. The government doesn't have a set of books like businesses do. Nor is any agency in the government free of the challenges and (dis) incentives that have sustained continuous disasters in other agencies and departments. If we didn't know Saddam was lying about WMD, I don't think we actually know about the level of "investment surplus" (sometimes called trade deficit) we have. Or budget deficit. Or our nation's NPV. etc. We're blessed that the invisible hand could care less that all these metrics of a command economy are just that.
re: recession on the Dem's watch.
Reminds me that the 2006 election couldn't have turned out much better for Mr. Bush and the RNC going into 2008. Examine the alternate histories had the Pubs won by a small amount. Especially since the Dems refused to run on the war.
"The longer we go without a recession now, the more likely it is that whatever Democrat we elect will have a deep recession during their presidency"
Why do you think that? I don't think most professional macro-economists would agree with you. Maybe you should ask you friend Doctor Goolsbee.
Person,
this: "Name the basket of securities I can buy that will and has appreciated consistently at the rate you claim inflation truly is."
isn't the way it would work out, the market doesn't care what I think, in specific, the inflation rate 'really' is. the market will only show you what is performing, relatively, better.
try: http://www.nasdaq.com/indexshares/index_shares_sector.stm
for starters.
also, if you have Q's try: http://www.itulip.com
and its forum.
in short, though, the trade has been Short things financed with credit and its paper, and Long things(commodities) and their producers.
in my view, this trade/trend/cycle continues.
MEH: So what you're saying is, goods are consistently increasing in prices MUCH faster than 3% per year, but you can't actually buy stuff whose price consistently increases MUCH faster than 3% a year.
If you can't understand why I have a hard time believing that, you don't possess the requisite IQ to understand any explanation I would give.
Person-dude,
How you get: "So what you're saying is,...", and still have the ability to speak of my "IQ", is a true puzzler.
What I did say was: "in short, though, the trade has been Short things financed with credit and its paper, and Long things(commodities) and their producers." Or, IOW, Short Paper, Long Things.
Right. You didn't tell me a basket of securities (and futures on commodities are a kind of security) that consistently appreciates at the "true" inflation level, far above the official inflation level. All you did was note that "things" are going up fast.
Gee, thanks.