The "green shoots" theory of economic recovery is starting to look a bit like the herbs in my back yard--the ones I forgot to tell Peter to water while I was in Omaha. Retail sales fell again, despite confident proclamations that consumers had rethought their overreaction last fall. And foreclosures hit another record, which was oddly described as a "levelling off" by a lot of papers. The March numbers showed a big spike, because legislative and corporate moratoriums expired. In that context, a 1% increase in April isn't a "levelling off"--it's extraordinarily worrying.
I don't want to push the Great Depression analogy too far, but what's surprising when you go back to primary sources from 1930 is the optimism. I don't mean to imply that everyone thinks things are just swell. But while you know that they are facing the worst economic decade of the twentieth century, they don't. They're expecting something more like the recession that followed World War I. People are cutting back, but they're still spending, particularly because companies are slashing prices to move inventory. It was the long grind of the years that followed, and the catastrophe of the second banking crisis, that scarred them permanently. And this shows up in the economics stats and the stock market, which did not, as we like to imagine, simply decline in a straight line.
That may not be our story--crises are sui generis, the Fed and the feds have certainly opened up the taps as wide as they can go, and we may have a quick recovery, or something more like Japan's twenty year "lost decade". But it does give the lie to the notion that any change in the second derivative necessarily marks the beginning of the bottom.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
One thing to keep in mind is that April's fall in retail sales was not broad-based. Consumer electronics accounted for the largest share of the drop, and to some extent that might reflect simple oversaturation - most people who want widescreen HDTV's probably have them already - plus, if I'm not mistaken, that tends to be a volataile sector under the best of circumstances.
I definitely spent more on gasoline last month than I did in March, and I drove no more miles. That has got to be good for economy.
This is consistent with the OECD composite leading indicators featured in those graphs on the front page of yesterday's FT: they showed upturns in March in China, France, and the UK, but a downturn (of 0.6%) in the U.S.
There are quite a few differences between then and now, so you have to be careful with the analogies. Friedman and Schwartz proved that the key driver of the Depression was tight money. Bernanke is a strong follower of this, which explains why (at least in part) the taps are wide open (as Megan says).
This is not, btw, what Friedman ever advocated. Friedman, time and time again, called for a steady tiller with a moderate growth target. I don't believe he would be mashing his foot to the floor like Bernanke is. As we've said here already, the Inflation Monster is warming up in the bullpen. You can't pump this much money into an economy that has no appetite for it...
Businesses learned a few things over the last 60 years as well, such as how to keep inventories low enough so that they don't have to slash prices. Price reductions and incentives? Sure. But businesses have learned to trim their production - and their workforces, unfortunately - rather than overly trim their unit-margins.
Things are different today, but that doesn't mean that we aren't facing the same long-term malaise. Japan is proof that this is a very real possibility. Obama seems to be using them as his Economic Poster Child, and that is very troubling.
You don't want Japan's economy. Believe me.
"You don't want Japan's economy. Believe me."
Isn't Japan's unemployment rate about half as high as ours? Also, for all the talk about Japan's lost decade (or two), there seems to be a disconnect between, say, the Nikkei, and life in Japan. Tokyo now laps New York in Michelin stars for its restaurants, for one small example. It just doesn't seem to be as grim in Japan as some economists claim, but maybe I'm missing something.
"Isn't Japan's unemployment rate about half as high as ours?"
Some random internat posting addressed this by noting (I am not endorsing the post, just passing it along):
In Japan, whoever works even 1h a week, whoever turns down a job, or is employed a week a month, is considered as employed. As a result, the Japanese have long boasted at their low unemployment rates, eventhough it isn't the case anymore (over 5% officially).
But one of the most important differences between Japan and most Western countries (esp. individualistic Northern Europe), is that many married Japanese women stay at home, and are not considered unmployed because they are not seeking employment. This, I believe, is the same everywhere, but the fact that more Japanese women voluntarily stay at home gives more vacant jobs to men, and forrcibly reduces unemplyment. If all those house wives suddenly started to imitate their European counterpart and work, even part-time, unemployment rates would surge well over anything seen in Europe (well half of Western European countries already have lower unemployment rates than Japan, but big ones like Germany, Spain, France and Italy have rates around 10%).
Let's now calculate Japan's real unemployment. Japan's active population (that is between age 15 and 64) is 85 million or 66,9% of the total population.
The Ministry of Home Affairs' Statistical Handbook of Japan writes that in 2002, 109m Japanese were over 15, but only 66,9m were part of the labor force, among whom 63,3m were employed. That left the unemployment rate at 5,4%.
So why do we have 42,3m Japanese over 15 who are not part of the labor force ? Those are retired people, house wives, disabled people, etc.
To get a good approximate of the people who are voluntarily not working, I will exclude people over 64. It is true that some continue to work, but that will compensate for people between 15 and say 20, who do not feel like working, or do not need it because of their parent's support, or because they are too busy studying even for an "arubaito".
We get : 85m - 63,3m = 21,7 million people who are not working or 25,5% of the "active population" (those between 15 and 64 years old). This is our real unemployment rate. In other words 5,4% looking for work, and 20,1% not looking for work. Among them, 70% are females (housewives, students...); the remaining 30% of males being probably students who don't need to work or living/travelling abroad, homeless, or just self-employed people not declaring their income.
"Tokyo now laps New York in Michelin stars for its restaurants, for one small example."
I kind of like measuring the world that way! ;)
In Japan, whoever works even 1h a week, whoever turns down a job, or is employed a week a month, is considered as employed. As a result, the Japanese have long boasted at their low unemployment rates, eventhough it isn't the case anymore (over 5% officially).
All of these things would be considered employed under the reported U3 number. Unemployed also doesn't count people who want a job, but have stopped looking because they think there is no future. The self-employed that are no longer making any money are considered employed as well (think mortgage brokers, real estate agents etc.)
If you want to look at a number that counts everyone who wants to work, and everyone working part time that wants to work full time take a look at the U6 unemployment number. It's currently sitting at a seasonally adjusted 15.8% for April 2009.
Great analysis. I think the main take-away is that Japan measures employment differently than we do. They also have significant cultural differences in how they view work, etc.
My bigger concern is GDP growth. Japan's GDP has stalled for what feels like forever. Even though the government has poured cash into the economy, nationalized all kinds of things (at the expense of personal liberty), the economy is just stalled.
My largest concern is Japan's position. Japan's national debt is so high, per capita, that their economy is extremely exposed to adverse changes in the exchange rate, interest rates, or inflation - all of which are very likely now that there are so many other countries who will be vying for treasury-credit, or (ugh) monetizing debt.
I think the main take-away is that Japan measures employment differently than we do. They also have significant cultural differences in how they view work, etc.
The don't measure employment that differently than we do, that was my point. The unemployment number that's reported by the media (U3 unemployment), seems to be fairly similar to the Japanese method of calculation. Go here for the numbers and explanations between the different ways unemployment is calculated in the US, not just the reported U3 number. What Spartee calculated for Japan is much more similar to the U6 unemployment which the media rarely reports on. That currently sits at 15.8%
http://www.bls.gov/news.release/empsit.t12.htm
Unemployment is a tricky measurement to use regarding recession in Japan. The Japanese birth rate has been cratering for decades - a Japanese friend I correspond with regularly says in normal conditions you can't find people for certain jobs at any wage. That's why they have to world's craziest vending machines - there's nobody to sell the product to you. People are retiring out of the job market with nobody coming in to replace them.
So it's not surprising unemployment is low. Before Japan gets to the point where people can't find jobs it has a large buffer of pent up demand to work through. As far as I can see we don't have that in the US.
How long until stuff wears out? Seriously. I don't know many people who are expanding their lifestyles at the moment, except for those with new babies who are getting the equipment for that. Most people are doing what graduate students do -- using their clothes, cars, and what have you until they are all used up, and then replacing them.
Some of this change may be permanent. Most people used to live that way. It's only recently that you started to see people buy new appliances just because they wanted a different color. The results of that behavior are not encouraging.
The economy is tooled for expanding lifestyles, but we aren't going to get that with just more-of-same. I imagine there will be new products in the future, and people will add them to their lifestyles over time as people have done with dishwashers, computers, and so on. But we aren't going to get a new boom out of mature, established technologies that everyone already has.
So, how long until stuff wears out? And what's the next big thing?
"So, how long until stuff wears out?"
Good question for those interested long term investing or inflation.
Canned food: 2 years
Dry food(pasta, wheat, corn, sugar): 15-30 years
Automobile: 10 years or 175,000 miles
Clothes: 5-15 years
Electronics: 1-5 years
Power tools: 5 - 40 years
Ammunition: 40 years under low humidity conditions
Tangible skills or education: lifetime
Character and reputation: lifetime
Opinions and soft science knowledge: 6-12 months
my concern on the recovery is this:
Business and investment is forward looking. These are the things that the Obama administration has "thrown out there" for business to consider when making invesment decisions:
1. Higher individual tax rates beginning in 2011.
2. Higher corporate tax rates on foreign operations.
3. Potential carbon tax via cap and trade.
4. Radical change in health care (roughly 17% of the economy)
5. Chrysler and GM secured lender "cram downs" by the administration
6. General populist "jawboning" that targets business as the problem
7. The "overhang" caused by future projected deficits-- what will be the effect: Inflation? Higher taxes? Massive dollar devaluation? All of the above?
One can argue the necessity or propriety of each of the above, but what is clear that all of these are adverse to business, or at a minimum, sow great uncertainty about what the "rules" are going to be in the future.
Its had the effect of throwing a giant wet blanket on business investment at a time when the economy needs it the most.
Hi, just joined. If some posters here think Megan is too gloomy go check out the blog The Market Ticker. This guy is not a nut as far as I can tell, and sounds very knowledgable, but is saying we are looking at economic collapse. The writing there gets techincal, and I would be interested if the folks here could refute what is being written over there. Just call it some cross pollination of ideas. Me, I am just a lowly veteran of two tours in Iraq and a military history and gun buff.
Love the blog.
Rifle308
I once looked up the newspapers for the days of the worst period in October 1929. What struck me was what Megan says, that they were still optimistic. They'd report a huge drop in the stock market, but were cheered because there was a slight upturn at the end of the day.
By the way, I don't mean to be a pest, but in the comments for just about every column of Megan's is someone talking about the impending inflation we are in for. About that, I have a question, and maybe it's already been answered by someone else, so please excuse me for raising this again. But my background is more physics than economics, and in physics it is perfectly possible to have a huge force in existence which one doesn't notice because it is counteracted by an opposite force that is equal to it.
What if the inflation that we are supposed to have is counteracted by a huge deflationary force (like people saving rather than spending their money)? Wouldn't that mean no or very little inflation?
I think the difference in understanding physics and economics relates to an observer’s ability to draw inferences about the big from the small. In physics, by measuring the forces in a small system we can generally solve them for a large system. In economics, observers who attempt to do the same run the risk of being called “prophets of doom.” This is because too many people in the U.S. believe that since we have the world’s largest economy, small rules don’t apply. The economics of the household don’t apply to the big picture, in other words. These include ordinary concepts such as printing lots of money will cause inflation and saving money is a good thing. Evidence of big thinking exceptionalism is all around us and most notable in recent disclosures of corporate executive compensation packages. I think attributing this to bubble mania is too limited, and I agree that some other incentive may be at work.
Nearly thirty years ago I challenged a friend and future MBA for an energy plan for the U.S. and he responded that we should have none: “We’ll suck the rest of the world dry of oil and grow our economy,” he said, “then when the oil runs out it won’t matter, because we will rule the world.” At the time, people were more concerned that we were colonizing the world with our language. It is good to ponder the extent to which we have done this with our currency in the intervening years, when the discussion involves dollars and inflation. We have exported a lot of dollars. In 2009, around the world people would not think it out of the ordinary to accept dollars as payment as well as their own currencies, but we would think it odd if someone offered to pay us in yen, for example. As shown in a cigarette economy (Radford, R. A., 1945), Gresham’s Law applied in that the cheapest cigarettes prevailed as a currency in the prison camp while more expensive cigarettes were saved. I’m thinking that in debasing the dollar now, the effect may be that people outside the country will save their own more valuable currencies and use dollars even more. This could buffer the inflationary impact of federal deficits here at home, effectively taxing foreigners to pay for our recovery. Green shoots indeed. Too many that I have observed in government think this way.
I don’t suppose anyone can know the sum global effect of inflationary policies in the world’s largest economy. It would not be just to find our recovery to the detriment of others or kick the can farther down the road than others are able. This exceptionalism has already hurt too many. The ordinary and prudent policies that families use in hard times need to scale up to the corporate, state, and federal levels in my thinking.
"You don't want Japan's economy. Believe me."
Depends on the alternative. It's unlikely that the alternative is the economy we had before. It's much more likely that we'll resemble Zimbabwe or Japan. If those are the options, I'll take Japan.
Forgot to add....
This "green shoots" thing reminds me of the Nikkei all through the '90's. Some stimulus would pass or an economic number was bad, but better than expected and that would send the Nikkei climbing 40% over a period of months. Then, it would just sink again.
Sound familiar?
shiller is quoted in today's globeandmail.com about how the stories we craft/tell about our reality have effects on our expectations (behavioural economics, etc.) and this ties in somewhat to the "happy happy happy happy talk!" of the early30's too - politicians esp will not be keen on folks being realistic if that means pessimistic
Megan,
I'd like to see a post that looked back at what people were saying at the height of the 81/82 recession. From what I understand - things were looking very grim indeed.