The U.S. economy contracted at a 3.8% annualized rate in the fourth quarter but the decline would have been worse except that the government counts an unwanted buildup of goods on store shelves as growth.A clearer picture of the scope of the weakness in the fourth quarter, which excludes the inventory buildup, contracted at a 5.1% pace, the weakest in 28 years.
Even with inventories, the growth rate is the worst since 1982.
. . .
The economy has grown just 1.3% in the past year, the weakest growth rate since 2001.
The business cycle committee of the National Bureau of Economic Research said the recession began in late 2007. But this is the first two quarter decline in GDP.
Consumer spending fell 3.5% in the fourth quarter after a 3.8% drop in the third.
Of course, last quarter had a massive financial contraction. But the real resetting of expectations downwards is just taking place now, as layoffs hit and people begin to emotionally grapple with the fact that it's not temporary. I'm more pessimistic than most commenters about the possibility that we will emerge from the mire to any great extent over the next two quarters.
Especially not because we are apparently now eye-to-eye, toe-to-toe with deflation:
There was a sea-change in the inflation picture. The core price index (excluding food and energy) retreated to a 0.6% annual rate in the fourth quarter from 2.4% in the third, leaving the annual rate at a 2.2% gain.
But headline consumer inflation fell at a 5.5% annual rate, the biggest drop on record.
Given the drop in inflation, real disposable income rose 3.3% annualized in the fourth quarter, after falling 8.8% in the third quarter. The savings rate was 2.9% in the fourth quarter, up from 1.2% in the third.
This is one of the little ironies of a severe, deflationary recession: they actually increase the real income of most wage earners, because wages are sticky downwards. In strictly material terms, the Great Depression probably increased the purchasing power of people who were in work. It's just that it did so at the expense of a great deal of suffering on the part of the unlucky 20%, and the pervasive fear everyone else experienced. We'll probably see much the same over the next few years: if you can keep your job, it will become easier to buy a house, pay for fuel, go on trips. But no one is going to want to do any of these things, because they're too afraid of losing their jobs.
As a friend, another journalist, just told me, "I am slightly concerned that everything, here and around the world, really may go to some serious [expletive deleted] this year".
Weren't wages a lot less sticky during the Depression? My grandfather, a typesetter, stayed employed but, even with a union, said he endured several paycuts during the 30's. During the last recession, my employer cut wages 10% for management and 5% for non-exempts, rather than do layoffs. None of the really outstanding employees left and it allowed us to keep our fully trained staff intact and morale up.
I can has job, American dream?
I keep thinking of what Lileks said last year:
"I’m worried most about a recession, massive deflation AND a jolly round of trade wars,"
There, fixed that for you.
What about the industrial workers? The auto workers, steelworkers, etc.? Eventually a million or so (or more) of them are, one way or another, going to lose their jobs. Jobs which won't come back. The rest will see cuts in pay and benefits. People being replaced with machines (I used to write industrial automation software.)
What do we do with these people? The ones whose jobs are being replaced with machines, but who don't have the type of intelligence to get indoor/office jobs like the ones we all have? Half the population is, by definition, of below average intelligence (assuming intelligence is normally distributed). Do we put them all to work at Mall-Wart at minimum wage? Enlist them all in the Army and send them to Iran? Some sort of make-work jobs, paid for by those of us who can do the jobs available in the modern post-industrial economy?
The economy has been good at finding new jobs for people. I don't think you should underestimate peoples intelligence. We clawed our way to the top of the food chain and I don't see us falling back anytime soon.
Megan, I don't think wages are as sticky as they used to be. All of my friends in industry are taking pay cuts now. I've been hearing a lot of "We can give everyone a pay cut or we lay some of you off" and the employees have been opting for paycuts.
I'm not underestimation people's intelligence, I'm saying that half of all people have below average intelligence. This isn't Lake Woebegone.
"I'm more pessimistic than most commenters about the possibility that we will emerge from the mire to any great extent over the next two quarters."
Given how piss poor your track record is, I'm off to buy champagne now to open July.
wiredog,
Don't forget about the Flynn Effect - a 95IQ today is a lot higher than the 95IQ of 30 years ago.
Gee, who thinks we'll be fine in two quarters? If someone offered you a what's-behind-the-curtain that guaranteed we would be fine in three years or so, wouldn't you take it? I sure would.
I think he meant "underestimating" and "half of all people have intelligence below the mean".
Which suggests . . .
wiredog writes: "What do we do with these people? The ones whose jobs are being replaced with machines, but who don't have the type of intelligence to get indoor/office jobs like the ones we all have?"
Apparently we hire them to stand around in the freezing cold wearing sandwich boardss advertising Going-Out-Of-Business sales. If that's not a harbinger of "everything going to some serious [expletive deleted]", I don't know what is.
Sadly, I too write software that makes jobs expendable, but they're the "indoor/office jobs like the ones we all have". I don't see those folks wearing sandwich boards, so they may end up getting it worse in the end.
"Don't forget about the Flynn Effect - a 95IQ today is a lot higher than the 95IQ of 30 years ago."
Please take it back to gnxp guys...
Some people were saying 7-8%.
I wouldn't be surprised if we eke out some growth in Q1 or Q2. The worst is probably behind us.
This is one of the little ironies of a severe, deflationary recession: they actually increase the real income of most wage earners, because wages are sticky downwards.
This is something else I keep trying to explain to people: to those people who keep their jobs (generally the most productive people, at least in the competitive private sector), a recession can be beneficial due to the deflationary pressures.
As they say, tis an ill wind that blows no one any good. Recessions are a natural part of the business cycle.
TallDave writes: "This is something else I keep trying to explain to people: to those people who keep their jobs (generally the most productive people, at least in the competitive private sector), a recession can be beneficial due to the deflationary pressures."
That's true, but we're going to get to a point where we're not going to be able to fund entitlements by more borrowing. What happens then? We will reduce the entitlements? Not if we want to maintain our social order.
My guess is that we'll see Scandinavian-level tax rates in the not too-distant future. Atlas will collapse before he shrugs.
Please remember, this "economy" began shortly after January of 2007, when Ms. Pelosi and Mr. Reid took over control of Congress. If the Republicans had a brain in thier collective head, they would speak only of the economy in January of 2007 vs. what came after, the Pelosi/Reid recession/depression. The only failed policies of the past are the Carter era ones being implemented by Pelosi and Reid. Stagflation is coming. Are you ready?
By wiredog:
"What do we do with these people? The ones whose jobs are being replaced with machines, but who don't have the type of intelligence to get indoor/office jobs like the ones we all have? Half the population is, by definition, of below average intelligence (assuming intelligence is normally distributed). Do we put them all to work at Mall-Wart at minimum wage?"
Why do you assume it takes an avg IQ to have an office job? Or that if you are in the lower 49% than you must have a min. wage job? 15month and $6k buys you a associate degree in automation/robotics that you can use to maintain all those machines. Troubleshooting is no rocket science. For that matter, even ladder logic is not reserved for the intellectual elite.
On half the people being in the bottom half of the intelligence distribution: I frankly don't think this matters much.
I'm in a business which legitimately requires a pretty high cognitive skill level, and in which EVERYONE thinks they are of above average intelligence (with a generous sprinkling of people who think they always have to be the smartest person in the room). On average, I'd say the're actually pretty average. And I've definitely worked with some people to the left of the high point on the bell curve. Even they generally do well enough to get by.
To do the vast majority of jobs, you just don't need to have average intelligence. That includes most that currently advertise that they require a college degree. There are clearly more jobs that need highly intelligent people than there are such people, but for the vast (vast) majority, the issue is how many jobs are available not whether they can satisfy the IQ requirements of those jobs.
"Please remember, this "economy" began shortly after January of 2007, when Ms. Pelosi and Mr. Reid took over control of Congress."
Cute. Clearly as soon as the Senate became 51-49 in favor of the Democrats the economy started collapsing because of it. I highly recommend Republicans try that line of attack in 2010 so they can see exactly who voters think is responsible.
Re: wiredog @ January 30, 2009 10:33 AM: as a programmer myself, I'm amused that you imply that the higher intelligent folks are the ones with the indoor/office jobs. I've seen firsthand many people working in high tech jobs that seem dumb as a post (as they say).
Nothing is more boring than listening to the guys who learn the basic statistical fact that half of all people are below the mean, but never realize how the majority of people are clustered around the mean +/- a bit. Most of the "above average" crowd isn't that different from the "below average" crowd. Surprise, surprise! We are all mostly average.
The only failed policies of the past are the Carter era ones being implemented by Pelosi and Reid.
Every time I think I can no longer be surprised a blog comment, I'm proven wrong. Unreal.
I'm inclined to be more optimistic. It seems to me more likely than not that economic growth will resume toward the latter part of this year. This null hypothesis springs from my view that the US real economy is significantly more flexible and fluid (that is lacking in structural rigidities) than the other past economies that struggled through financial contagions.
Where really is the hurt in the real economy? Primarily in construction and finance, it seems to me. The finance gurus' skill sets are considerably more portable than commonly thought. Many will find temp work in restructuring (until the inevitable return of financial engineering). The fate of the blue collar workers is probably more gloomy, but they'll too find jobs quickly - many in health care and stimulus-stimulated infrastructure construction.
The pessimists need to explain their pessimism with explanations premised on sustained disequilibriums in the real economy. I've not so far seen a persuasive pessimistic piece so premised.
All the above is premised on the assumption that our government will not introduce new structural rigidities. The Obama Administration's rumored bank nationalizations might be one such government-induced rigidity (depending on the extent to which such nationalized banks continue as profit-maximizing agents). Perhaps also the bad bank plan, depending on its implementation, could similarly introduce additional rigidities. The expansion in government employment would almost certainly introduce additional rigidities. As would the sweeting of unemployment benefits.
If I were a journalist, I too would be very worried about my economic future.
It never ceases to amaze me, but it should. Left wing responders always make insulting responses but not substantive responses.
The Democrats are implementing the same economic policies as were implemeted in the 1970's. Do you think the result will be different? Stagflation was real and it was damaging to the country. We are seeing the implementation of "revenue sharing", massive debt, prop inflation monetary policy and trade restrictions. This is a receipe for disaster, as it always is when it is implemented.
But, of course, I am old enough to have lived through it and to had been educated in American history rather than "cultural studies". If you don't know history (or even know and appreciate what you don't know) then you substitute ideology.
Basil, you're confusing two different situations. The 1970s downturn was a more typical business-cycle deal compounded with the secular exhaustion of a round of industrialization. It was Keynesian overreach to think it could be solved with stimulus. The current situation is the collapse of a bubble economy that was widely recognized as such while it was happening, and in that regard it's more similar to the Great Depression, which was effectively if imperfectly addressed by Keynesian stimulus.
What do we do with these people? The ones whose jobs are being replaced with machines, but who don't have the type of intelligence to get indoor/office jobs like the ones we all have?
Well, one can debate what one is qualified, physically and intellectually, to work on in one's life, but that's not the point...
The question is: is it our responsibility to find something to "do" with people who lose their jobs in sectors that are most likely never to recover?
My answer is, in a macroeconomic sense, "no." Not that we couldn't try...but it just doesn't work. We are trying to do that now with the domestic car industry when we should have realized some 20 years ago that you can't prop up a sector of the market with policy strictly because a ton of people have to work there. Eventually the market will render its verdict (which it has).
We could have made the transition for many of the Rust Belt and Detroit manufacturing jobs 20 years ago, but policy (and the Unions) kept propping up these industries. Now were are in a financial situation that has put the clamps down on them, and we are left with a million-or-so line workers.
It's clear that leftists want to reorganize manufacturing unions into some sort of Green-job work force. This will create some short- and long-term, government funded, union jobs. It also will not work at creating a new, dynamic, growth-based sector of the economy. Ultimately, we will most likely be stuck bankrolling most of the unemployed manufacturing workers on the public payroll.
Ken, and others.
Sure, a line worker can retrain to maintain the robots. But not all of the line workers can. Or, even if they retrain, they won't get the jobs. If you replace 10 line workers with 10 machine maintainers you've gained nothing. But that's not how it works. One machine replaces 5 workers, and one worker can maintain 5 machines. So what do the other 24 workers do?
Any job that just requires doing the same thing the same way, over and over, can be automated. And, eventually, will be.
Right now, we're still in a deflationary environment, and things don't feel too bad to Americans who are still employed. What happens when we succeed in beating deflation though? This period may look like paradise.
wiredog: I've been asking the same question for a long time, and nobody has an answer other than the glib "They can build the robots!" or "They can mow lawns!" The answer is: we don't know, we just have to hope that we find ways for them to be productive.
"Please remember, this "economy" began shortly after January of 2007, when Ms. Pelosi and Mr. Reid took over control of Congress."
Partisan blame-assigning is as boring as it as unscientific.
Even assuming you coud ignore natural business cycles, which you can't, it's nearly impossible to tie specific proposals to overall economic outcomes given all the things going on at the same time.
At best, we can speak in vague generalities, such as "Free trade improves overall GDP."
I think the best you can do is compare large polities with substantially different policies that are otherwise similar, but even that's sketchy. Obviously we can saay S Korea's economic model works better than N Korea's, and probably America's works better than Europe's. Beyond that I don't think we can be much more specific.
Wiredog,
What do we do with these people?
For those that can, learn a skill. For the rest: sales and customer service, the last shrinking refuges of unskilled humanity.
Also, someone has to raise kids.
Rich, I was not addressing the "causes" I was merely commenting on the policies being adopted in "response. To pursue this further, the Keynesian response of Hoover and Roosevelt did not work to end the 1930 recession. The private sector work that was rebuilding Europe did that beginning in 1947.
I have no problem with government being the employer of last resort, but this thing that is being passed is the worst possible response and is worse than doing nothing.
P.S. btw, since the problem is mostly bank and housing related, why not just address the banking and housing issues and leave the rest out? The federal government could probably buy every house in forclosue with this type of money. Anyone have this number?
I'm glad that I got into sales before the rest of the underachievers joined up! First guy in wins!
"The pessimists need to explain their pessimism with explanations premised on sustained disequilibriums in the real economy."
Okay, I will. At the time the last depression began American was an expanding manufacturing and agricultural economy interrupted by financial crisis. Today we are contracting agricultural and manufacturing economy dependent on consumerism,credit and "financial engineering" for our GDP. Then the "engine" was cutback due to a shortage of financial "fuel", now there's little capacity for recovery. The "sustained disequilibrium" is the last twenty years of blooming and bursting bubbles where money begot money, and credit replaced production.
Today we are contracting agricultural and manufacturing economy
Considering that we are, as one commenter put it, the "Saudi Arabia of food," and that we produce 21% of the world's manufactured goods (China produces...12%--both statistics froma DOL report whose link is unfortunately broken), I wonder why I constantly see assertions like this. To be sure, employment in these sectors is shrinking due to automation, but that's not the same as saying that we don't have a sound agricultural, manufacturing, and extractive (i.e. "production") base for our GDP.
Wiredog said:
"One machine replaces 5 workers, and one worker can maintain 5 machines. So what do the other 24 workers do? "
What you are describing is a fear that existed since the beginning of the industrial revolution, when factories began replacing craftsman.
The overly simplified explanation is this. Since the factory now produces the same amount of widgets with one worked as it used to do with 25 ( per your example), the cost per widget drops accordingly. When the cost per widget drops, the public buys more widgets, and the factory has to expand production to keep up with demand, putting in more robots to make widgets, and hiring more people to maintain/program them. The distribution is actually more complicated than that, since some of the workers will go to make the actual robots, and some will go to sell the extra widgets.
Sometimes the public only needs so many widgets, so instead of making more widgets for cheap, we make much more complicated widgets for the same price. A good example of this is cars, where a modern car is considerably more than something made 20 years ago.
Rob writes: "Considering that we are, as one commenter put it, the "Saudi Arabia of food," and that we produce 21% of the world's manufactured goods (China produces...12%--both statistics froma DOL report whose link is unfortunately broken), I wonder why I constantly see assertions like this."
You can't use a single data point like this to dispute "we are contracting... manufacturing economy". What's the trend?
After WWII, the USA was responsible for over half of the World's GDP. I'd imagine manufacturing was a big part of that.
What's the trend?
The trend is 30 years or so of between 20-25% of the world's manufactured goods (again, broken link, sorry). The trend is also steadily decreasing manufacturing (and farm) employment, which is an issue, but a separate one from our allegedly disappearing production base.
Probably we were a greater percentage of world capacity after we bombed the crap out of their factories, but since Carter we've been holding pretty steady despite China's rise.
Staash... Of course after WWII the USA was responsible for over half of the World's GDP! We were also essentially the only industrialized nation in the world that hadn't been bombed non-stop for the previous 6 years.
Rob, I didn't believe you, but it turns out you're actually right about this.
http://www.ft.com/cms/s/0/2aa7a12e-6709-11dd-808f-0000779fd18c.html?nclick_check=1
"Last year the US was still easily in the top slot and accounted for a fifth of the total. China was second with 13.2 per cent."
Although the article reports that some expect China to overtake us soon:
"China is set to overtake the US next year as the world’s largest producer of manufactured goods, four years earlier than expected, as a result of the rapidly weakening US economy."
Not sure how much of their growth will come at our expense.
Tangentially, and I was very surprised by this:
"Manufacturing accounted for just 17.5 per cent of global gross domestic product in 2007, but much activity in the considerably larger area of services, for instance in retailing, distribution, transport and communications, depends on it."
That's a much lower number than I expected, but it matches up pretty well with the US data I could get my hands on. In 1988, manufacturing was ~21% of the US GDP. In 2005, it was 14.4%. Presumably the GDP growth is in other areas, and manufacturing is a relatively static component of it.
Rob,
Ken has the answer. You have trouble understanding it do to your anti-consumerist tendencies. You can't imagine a world in which the price of everything falls 90% resulting in everyone consuming 10x more.
For example, in a world where the price of stored energy and labor falls by 90% could you see yourself buying your own plane?
For example, in a world where the price of stored energy and labor falls by 90% could you see yourself buying your own plane?
Hell, yes. Although I might get my own submarine instead. Or possibly a submarine with a flat deck, to serve as an aircraft carrier for my airplane. Then maybe I'd strafe Somali pirates for the hell of it and quietly disappear before anybody figured out what I was doing.
It's not that I'm anti-consumerist, it's that I can't afford what I really want.
Rob,
Then you have your answer. The key is when the price of stored energy and labor falls by 90% we won't be able to buy the same things they exist now for 90% less, we will have a whole host of new even cooler things to buy.
With enough new technology the price of a Cessna or a 56' Hatteras might be $19,999. Or maybe some crazy cool sea plane/submarine/camper hybrid.
Off topic, I once heard that the ultimate engineering challenge would be to build a combination airplane/submarine.
The key is when the price of stored energy and labor falls by 90% we won't be able to buy the same things they exist now for 90% less, we will have a whole host of new even cooler things to buy.
Yes, but an aircraft-carrying submarine won't be one of them. More like an injectable iPod that plays music directly in your brain and allows the disembodied head of Steve Jobs to control your movements via satellite.
And I wouldn't want a combination plane/submarine. A suitably high "pointless difficulty" score is only achievable with arrested landings.
"Yes, but an aircraft-carrying submarine won't be one of them."
But you could imagine the price of a jet falling to the point that you could afford one, right?
You're an engineer, as I understand it carbon fiber is primarily expensive because it is difficult and labor intensive to manufacture. One could envision an automated assembly facility that could churn out airframes quite cheaply.... maybe... at some point in the future?
Perhaps the successful & very intelligent can employ them (or at least provide them w/ room & board) by using them to haul them around in their sedan chairs. That's at least two workers per brain-dead engineer, & of course if the engineer's employer provides enough kibble to spare, & there's still semi-potable, if not actually clean, water available in your area, more than two carriers can be "employed." (Status competition being important to motivate the extra-shallow.)
Funny you should mention it.
And I was just looking for shots of the Flying Sub from that ancient tee vee show.
Re: What happens when we succeed in beating deflation though? This period may look like paradise.
Huh? Deflation is not exactly normal, or paradisical. When we suceed in beating it, the economy will be on the mend.
Re: We were also essentially the only industrialized nation in the world that hadn't been bombed non-stop for the previous 6 years.
This is often stated and it happens not to be true. Britain suffered only mild damage in WWII. the Blitz was long over with in 1945. Sweden and Switzerland, neutral in the war, were wholly untouched. Ditto Canada and Australia.
Rob,
After a few drinks, I have a question for you as an engineer...if you have a moment.
If you could reduce the cost of energy and labor by 90% - including everything from Russian Titanium mines to Dominican Boxite smelters to increased CAD supplimented automated manufacturing... could you build a 5 passenger jet for $29,999.99.
Britain suffered only mild damage in WWII.
Britain's problems were due more to the collapse of its empire and its insistence on maintaining a wartime command economy long after the war ended.
Sweden and Switzerland
Sweden and Switzerland boomed like crazy after the war too, and Canada and Australia did well too. The reason those nations didn't comprise a larger percentage of world GDP is that they were (and are) small countries. The United States had six times the population of all four of them put together. In 1950, our share of world GDP was 27.3%, while theirs was 5.1%. Quite comparable in per capita terms.
Rob,
You also have to imagine a world in wich $29,999.99 jets are a reality. Could you imagine that upper middle class families like yours might not live in one 3,300 square foot home, but rather a 1,100 square foot condo near work, a 1,100 square foot cabin on a remote lake in the Canadian wilderness (perfect for the summer) and an 1,100 sq/foot beach house on the Atlantic coast of Morroco?
Now, I know you may think this is crazy, but from a purely engineering perspective, it is possible with only a few advances in automation and energy production technology.
jmo--I'm not an engineer, I merely play one on the internet. In reality, I'm an adolescent Golden Retriever who spends his time blogging because he has no access to bitches.
I've always wanted to say that. My wife would be pleased, too, because now I can never be elected to anything.
Actually, I'm an IP lawyer with a physics background. So I can't answer your question. Try the Mouse, he's an actual engineer (although in come kind of infrastruture or power work, not aerospace). Or maybe I'll ask my dad, he's a retired Boeing CFA.
But if you do find a way to build a 5-passenger jet for $30k, I could help you get a patent. Also, I'll probably buy one, but keep in mind it needs to have primitive runway capability for hunting trips. Consider a VTOL option package.
jmo,
Maybe not that far off. Dr. Robert Bussard believed with 5 years and a couple hundred million he could build a prototype proton-boron-11 fusion reactor that was practically aneutronic, utilizing highly efficient direct conversion of alpha radiation. It might cost as little as a tenth of current grid prices. The Navy is currently running a follow-up to his work to better assess his Polywell design.
That is just great! Now the Lymans have The Bomb.
Rob,
Don't worry the computing power that would make cost effective carbon fiber fabrication possible would make VTOL a no cost option.
But, seriously, could you imagine/envision advances in carbon nanotube/buckypaper fabrication along with some quantum computer technology making billions of high paying jobs available?
Yeh... um.. Talldave... your 11:52 post made me cum a little bit.
Rob,
And per what TallDave said: If we could cut the cost of power by 90% with no CO2 emmisions, what would make sense up here in the north? Heated roads!
How many low tech, but high paying, jobs would that entail?
Everyone is talking about deflation. My concern is that deflation will be temporary and the extra borrowing by the government to try and fight it will cause long term excessive inflation.