Worse Than Expected on the Economy
Keep your eyes on the gap between what the economy could produce at full employment and the paltry level of aggregate demand (consumers plus businesses plus exports). That's why the stimulus is too small -- and why my bet is the President will be back for more stimulus. The Commerce Department reported today that the economy contracted in the 4th quarter of 2008 more sharply than initially estimated. Consumers cut spending the most in over 28 years. Businesses cut way back as well. Exports were dead in the water.
All told, according to the new data, the nation's economy shrank at an annual rate of 6.2 percent. Last month, the government's preliminary estimate of the drop in fourth-quarter GDP was only 3.8 percent. Roughly half the Commerce Department's revision was due to a sharper drop in business spending than had been anticipated. As a result, business inventories -- the amount of stuff they they have on hand to sell -- have dropped. That's good news because eventually businesses will have to replace their inventories, in anticipation of at least some consumer buying, and such replacement spending will spur the economy. But here's the bad news: Inventories still aren't dropping as fast as sales are dropping, suggesting even less business spending and investing coming up.
There's no reason to suppose the 1st quarter of 2009 will be any better, and lots of reason to think it will be worse. Government is spender of last resort. We're at the last resort now. $787 billion over two years, and only two-thirds of it real spending, is way below what will be needed to get the economy moving back toward full capacity. Do Republicans know this? Is this why they're continuing to bet that the economy won't be recovering by November, 2010, and why they're going to continue to say no?
All told, according to the new data, the nation's economy shrank at an annual rate of 6.2 percent. Last month, the government's preliminary estimate of the drop in fourth-quarter GDP was only 3.8 percent. Roughly half the Commerce Department's revision was due to a sharper drop in business spending than had been anticipated. As a result, business inventories -- the amount of stuff they they have on hand to sell -- have dropped. That's good news because eventually businesses will have to replace their inventories, in anticipation of at least some consumer buying, and such replacement spending will spur the economy. But here's the bad news: Inventories still aren't dropping as fast as sales are dropping, suggesting even less business spending and investing coming up.
There's no reason to suppose the 1st quarter of 2009 will be any better, and lots of reason to think it will be worse. Government is spender of last resort. We're at the last resort now. $787 billion over two years, and only two-thirds of it real spending, is way below what will be needed to get the economy moving back toward full capacity. Do Republicans know this? Is this why they're continuing to bet that the economy won't be recovering by November, 2010, and why they're going to continue to say no?
Advertisement
You betcha. This tarbaby will be the sole property of the Democrats.
February 27, 2009 1:09 PM | Reply | Permalink
Yeah, shooter. You and your Republican friends pulled it off, didn't you!
You completely wrecked the economy as well as the banking system itself. And despite totally blowing the timing -- you know, having the crash begin in earnest last October, as opposed to, say, now -- you can STILL blame the whole thing on the Democrats.
It's a two-fer: you destroyed the government's ability to sustain the social programs you all despise, while blaming it all on your political enemies.
Way to freakin' go!!
-- ARG
February 27, 2009 1:46 PM | Reply | Permalink
So far, it looks as if repugs have Friedman free market concept running at full bore. Klein's Shock Doctrine gives a good outline what to expect. The repugs will be calling for the government to divest itself and giving business a free hand to take over social security, EPA, Transportation, Commerce, Customs and you name it. Bu$h was doing that in Iraq ... all that money - billions - being paid out to US civilian contractors to produce hospitals, water treatment plants, electricity grid that never materialized or were so poorly constructed they can't be used. I think it may be necessary to re-open FDR internment camps for card carrying repugs to protect the rest of us.
February 27, 2009 5:06 PM | Reply | Permalink
shooter,
just like the tar baby of Reaganism/Government is the problem, is stuck to Conservatives and this economic tsunami we're being subjected to?
February 27, 2009 2:47 PM | Reply | Permalink
It'll be a long long time before this "will be the sole property of the Democrats." Americans are overwhelmingly in favor of doing what's needed to turn things around, and everyone sees that the Republicans are preventing the administration from dong all it should. Failure should be easy to hang around the Republican's necks.
February 27, 2009 2:58 PM | Reply | Permalink
Actually, Republicans are irrelevant here. They don't have the votes to do anything in opposition. It's the Democrats with one-party rule today.
February 27, 2009 5:08 PM | Reply | Permalink
It's that kind of wishful thinking that got the GOP and the rest of us into this mess.
Continue to drink the remaining dregs of that kool-aid, by all means. It seems to work for you.
The rest of us are engaged in a conversation that moved on at least a year ago; but we're not all that mean or vindictive. When you're ready to clear your head, get sober about economics, realize you reside in the 21st century, then by all means feel free to contribute something meaningful to the conversation.
Meanwhile, there's probably a nice warm corner where you can huddle and tell yourself about how the world is screwing you and the GOP. Not sure it will improve your life, but if it makes you feel better, hey -- it's a free country.
February 27, 2009 5:18 PM | Reply | Permalink
I believed in 2006 that the conservative/Republican strategy was to dig a hole so deep that when the shift toward Democratic principles occurs, the hole would be so deep that necessary recovery measures be both difficult to swallow and be fully blamed on the Democrats.
Your scorched-earth strategy may result in restoring your crew to a position of power.
It's unfortunate that wielding power has so little to do with competent governance.
February 27, 2009 5:40 PM | Reply | Permalink
We are now in the perfect laboratory to see how well Democrat policies work. One party rule, and three Pub Senators grease the skids for nearly anything Dems want. I'd think you'd be happy about taking credit for whatever happens from here.
February 27, 2009 8:40 PM | Reply | Permalink
We all know we may be headed for the abyss.
The question is whether the politically constrained Keynesian spending programs will stop our fall or whether having failing to do so, they will leave us in the situation of having to spend more money later -- when, having spent it today, we no longer will have it to spend, tomorrow.
I say, "Take the recession, now!"
February 27, 2009 1:29 PM | Reply | Permalink
We already have the recession. There's simply no way the government can spend enough to stop things from sliding still further. The best they can do is limit the descent and hope to keep things from going into the abyss.
February 27, 2009 1:48 PM | Reply | Permalink
Well, you get your wish, Ellen, because we will surely take the recession now, regardless.
The question is (if I may paraphrase), Will half-assed solutions attempted now make the problem even worse in the longer run?
I worry about that, too, which is why I wondered how smart it was for Obama to dilute his stimulus plan so much in the name of bipartisanship, when the other side (shooter's friends) were just not interested in helping.
Might've been better to have a bill with more infrastructure spending and less in tax cuts. (But, then, you and I disagree on that point too, don't we?)
-- ARG
February 27, 2009 1:53 PM | Reply | Permalink
ARG,
Unless I'm mistaken, Obama and the Dems took Government purchase of thousands of fuel efficient cars out of the stimulus package.
If I'm right, that move was DUMB, DUMB, DUMB.
February 27, 2009 2:49 PM | Reply | Permalink
having spent it today, we no longer will have it to spend, tomorrow
Unlikely.
Kuttner comes on NPR--says we come out of WWII with debt to gdp of 125%.
Per contra, the most horrendous of numbers (I think the latest, today, is Five Trillion) to shore up the imputed losses, only brings us to maybe 65-80% debt to gdp.
No worries then love. Fancy a shag?
February 28, 2009 2:21 AM | Reply | Permalink
Thanks again, former Pres. Bush, you really outdid yourself with this one.
February 27, 2009 1:45 PM | Reply | Permalink
...and Phil Gramm, don't forget him, I lay a great deal of blame on him. Can you imagine if McCain had one and HE was our Sec. of Treasury? Frightening.
February 27, 2009 2:06 PM | Reply | Permalink
er, won. lolz.
February 27, 2009 2:06 PM | Reply | Permalink
$787 billion over two years, and only two-thirds of it real spending, is way below what will be needed to get the economy moving back toward full capacity
I keep hearing this, or a variation of it: that we need to get the economy back to 'full capacity'. I'm not an economist, but it seems to me that the 'full capacity' of the last several years was fictional, based on made-up assets and outright lies and swindling. So how are we supposed to get back to that with government spending? And why would we even want to? It seems to me like we are coming down to our real 'full capacity' after years of living above it.
February 27, 2009 2:01 PM | Reply | Permalink
THANK YOU - the economy's GDP has been flat for eight years, juiced up only by debt. The answer cannot be to restore the economy to the level of fakery we came to expect through both Clinton and Bush. The problem is, politicians are uncomfortable admitting that they are indeed powerless in this case. They should keep us from devolving into chaos, but otherwise, let the economy do what it must - bleed off the debt-fueled bubble.
February 27, 2009 2:10 PM | Reply | Permalink
Thanks for pointing out the economy was juiced up.
I'd love an answer to the issue posed in this part of the thread -- restated in my own terms, "Wasn't the Bu$h era inflated because of outsourcing, offshoring, bogus accounting, no-bid contracts, and a housing bubble to boot?"
If all those are true, then were is the so-called 'real economy', and how far are we from actually understanding what it is?
February 27, 2009 5:24 PM | Reply | Permalink
I agree, especially in regards to the stock market. I believe we'll be stepping our way down to 3900 by sometime this summer- just a hunch.
February 27, 2009 2:10 PM | Reply | Permalink
The problem with that "we're coming down to our full capacity" line is that we've still got the population and the workforce we did in those go-go years, and they're not going away. What recessions do is bring economies back in some kind of ostensible balance by vaporizing a bunch of (possible unjustified) wealth and throwing a bunch of people out of work, while leaving the rest employed.
If you're going to argue that the US was consuming too much during the past 8 years, the answer is not simply to hack out the consumption but to turn up the savings and investment.
February 27, 2009 3:35 PM | Reply | Permalink
I think we're headed for an a very angry summer. Exactly why I'm moving out of the urban and into the rural.
February 27, 2009 2:08 PM | Reply | Permalink
Your conclusion doesn't follow from your premise.
The rampaging, gun-toting, pitchfork-wielding hordes are more likely to be found in America's coves and hollows, not in its urban canyons ... and once you're there, without neighbors, who will protect you?
February 27, 2009 4:07 PM | Reply | Permalink
I would disagree. If their are protests it will be those that are out of work, and with the exception of company towns the rural areas of our economy have been more resistant to this crisis (SD, ND, ID, and so forth are the strongest states, for example, in employment at the moment). The urban areas are seeing massive unemployment and much more competition for the few jobs that have opened up. Thus, I think the anger will be coming from the urban and unemployed. Furthermore, protests and riots require large amounts of people that are gathered- requiring a city usually. A riot is a hard thing to form in a rural area. Unless you piss off the farmers you aren't going to see large protests in the country.
February 27, 2009 4:44 PM | Reply | Permalink
I don't know how to do the calculations but, the administration calculated for a two trillion dollar gap in commerce over the next two years they were trying to partially fill with the stimulus.
With the current downtrend, will it be much larger than two trillion or were they gracious enough with their estimates when putting together the stimulus package?
If they did over-estimate, then there would be no need for another stimulus. The intention was never to fill the two trillion dollar hole 100% anyways no?
February 27, 2009 2:09 PM | Reply | Permalink
3.5 million jobs is not nearly enough. 8 to 10 million just may have done it.
February 27, 2009 2:12 PM | Reply | Permalink
Trouble is, there is a limit to how much the government can spend. The money to cover deficits doesn't drop from heaven. It has to be borrowed, and now it has to be borrowed in a very tight credit market. I don't think that it's realistically possible for the government to run a big enough deficit to spend the kind of money it would take to "cure" the recession. The best we're going to get is to make it not as bad.
February 27, 2009 5:00 PM | Reply | Permalink
What the national leadership needs to do is break what is now an irrational cycle of fear and puritanical fanaticism. But one problem is that, having made fun of Bush for telling the country to go shopping after 9/11, it is very hard for Democrats now to tell Americans they should go shopping. But that's indeed what people need to do: go shopping.
Unfortunately, some Americans seem to think that it is their duty right now to punish themselves for being bad, bad, bad consumers by "sacrificing" everything from refrigerator to an extra cookie.
America: go shopping!
February 27, 2009 2:10 PM | Reply | Permalink
Um, we don't have jobs so we aren't going to buy a darn thing until we do. The rest are scared s---less that they're going to lose their job too (or have had bonuses cut, benefits cut, etc)- so they aren't going to go shopping either.
Maybe Congress should go shopping.
February 27, 2009 2:14 PM | Reply | Permalink
Gubmint, the consumer of last resort!
February 27, 2009 3:30 PM | Reply | Permalink
The stimulus is part of the strategy. The budget is also part of the strategy. There are large deficits in the budget that are also for stimulative spending. The difference is that the budget requires only 50 votes to pass (unless the republicans want to go through a filibuster). A new stimulus package requires 60 votes to pass because it waives the budget rules.
February 27, 2009 3:36 PM | Reply | Permalink
Thank you, good point.
Paul Krugman likes this budget.
February 27, 2009 4:09 PM | Reply | Permalink
"Do Republicans know this? Is this why they're continuing to bet that the economy won't be recovering by November, 2010, and why they're going to continue to say no?"
The republicans have not kept this plan a secret, Mr. Reich. They have stated publicly their hope that by *moving to the right* they will gain seats in 2010. *Moving to the right* is a eurphemism for *vote against everything the Democrats propose* and bide your time. The Great Recession will still be raging,the Dems will have failed to staunch the bleeding and the repubs will prevail once again.
February 27, 2009 3:53 PM | Reply | Permalink
Should have added, they have nothing to lose and everything to gain by taking this tack.
February 27, 2009 3:56 PM | Reply | Permalink
At the height of the Great Depression, Republicans had only 20 seats in the Senate. So they still do have more to lose, by taking the obstructionist road.
February 27, 2009 4:11 PM | Reply | Permalink
Remember that back in the 40s and 50s, YouTube, the Internet, and the kinds of 'comparative video' that have exposed so much GOP deceit and double-talk didn't exist.
The GOP is going to have to overcome Rove, Cheney, Abramoff, Iraq, Coulter, Abu Gharib, lost retirement and pension earnings, and the GhostOfOutingPlame before it can make a comeback.
I'd give it at least another generation.
Can you say, "Bu$h in a jumpsuit on an aircraft carrier under a 'Mission Accomplished' sign?"
Breath easy.
February 27, 2009 5:31 PM | Reply | Permalink
Yes, they can lose more seats, but they're gambling that they have more to gain than to lose. If they don't gain, whether they lose more seats or not, they will have to rebuild from the ground up and they know it.
February 27, 2009 4:23 PM | Reply | Permalink
This was meant int response to eatbees.
February 27, 2009 4:24 PM | Reply | Permalink
Sir, as much as I like your posts, I would sure like to get the benefit of your participation in the ensuing discussion...
February 27, 2009 4:25 PM | Reply | Permalink
If anyone can explain how or where they get their economic ideas, I'd really appreciate some insight!
It's like they're economics come from the era of the Model T, and they don't even seem to acknowledge the world of outsourcing and offshore accounts (!). Hence, they're really almost delusional in their remarks -- to say nothing of their speeches.
I can understand that they don't want anyone investigating their role in enacting legislation that led to offshore accounts and Enron-type accounting -- they don't want their guilt revealed.
I also suspect that they obsess on 'capital' because they want to believe that is the 'economic engine', which is was during the era of the railroads --- although that is not the case today. (I'm reminded of a number of people who didn't invest in Microsoft stock because in their view, "that company doesn't MAKE anything".)
The GOP does not seem to understand that in the Information Age, **labor** and NOT capital is now a far more important instrument of economic innovation and activity.
If anyone can help me understand **why** the GOP can't get their heads around this very simple, basic concept, I'd sincerely appreciate it.
I'm honestly baffled by their ignorance at this point.
Do they still genuinely believe that 'capital' and 'investment' are more important than a well-educated brain?!
Consider me a complete dullard, but it sure looks to me as if entire economic sectors (education, software, medicine) are based on l-a-b-o-r, rather than capital.
How is it that the GOP can miss such an obvious fact...?
It's baffling to watch.
February 27, 2009 5:39 PM | Reply | Permalink
One might call it "illiteracy" but only if the goal were a healthy economy. I don't think that's the goal. I believe the goal is to cause such dire dislocation that the populace will *demand* direct and immediate authoritarian action.
These people are out for blood. To exemplify what I mean, here are two policity initiaves, one legislative and the other deregulatory: The Gramm-Leach-Bliley consolidation amendment of 1999 and further deregulation bank-like financial entities in 2003. Both of those initiatives were intended to limit financial sector stability by allowing further consolidation, increased leveraging and reduced capital reserve requirements. All without proper auditing or thoughtful risk management.
There is nothing baffling about it.
February 27, 2009 5:59 PM | Reply | Permalink
Obama is going in the right general direction on the budget and stimulus. Not big enough, but he's headed there. However, they cannot work without addressing two things: freezing US forclosures and admiting the FED and most US banks are bankrupt, and must be put into receivership. The derivative and related swindles must be written off entirely, while chartered banks are protected and the system returned to a Glass-Steagel arrangement.
February 27, 2009 5:43 PM | Reply | Permalink
Unmitigated Audacity, yours is the only plan that might work. I still don't know how we're going to avoid hyperinflation, though. This is what the Republicans believe is their ace in the hole. They may well be right. Obama is damned if he does spend, and damned if he doesn't. It's a good bet for the Republicans.
February 27, 2009 6:29 PM | Reply | Permalink
Hyperinflation is the inevitable result (at some point) of continuing along on our present course. Pouring trillions of dollars into the sinkhole of bad banks does nothing but push back (slightly) the day that they fail; but be assured they WILL fail. Geithner's course is little better than Bush/Paulson's absolute crime of looting the treasury to give hundreds of billions to the perps who created this mess. FDR-style receivership must happen sooner or later. The longer we wait, the worse the damage will be. I'd further submit that we follow on with a new Hamiltonian National Bank, that recapitalizes the chartered banks. Provided that we outlaw derivatives, CDOs and the like, and target new credit only to actual productive economic activities. Anything short of that will fail because we are so far into the hole that the present half measures, while seemingly more politically palpable, will surely fail. When they do, the repugs will hang their hats on the failure. Beter to be bold now, do what must be done while Obama still has the political capital to push it through.
February 27, 2009 7:46 PM | Reply | Permalink
"Government is spender of last resort."
Traditional, but is it always true?
February 28, 2009 5:41 AM | Reply | Permalink
The Obama team has to unlock the credit market ASAP. The Stress test on the banks is suppose to end at the end of April and then the Obama team is suppose to allow banks to raise revenue for 6 months before the government goes in. That is far too long to wait.
The Obama team has to get over its fear of temporarily nationalization of the banks and just do it after the stress tests determine which banks are insolvent at the end of April. There should not be a delay of another 6 months.
In terms of a 2nd stimulus package, now is the time to go to Congress and say, our economy is falling off a cliff and we need a 2nd stimulus package in the form of infrastructure spending. If Obama doesn't want to do that than just put the 2nd stimulus package in the budget by adding on $300 billion worth of infrastructure spending.
The reality is that healthcare and education spending may have to wait. Instead we need to spend money right now to save our economy.
February 28, 2009 6:42 AM | Reply | Permalink
Roughly half the Commerce Department's revision was due to a sharper drop in business spending than had been anticipated.
With the automated control and ordering systems installed to implement "just in time" inventory management, the time lag in pushing a decline in end-product sales back through the supply chain should have shortened considerably. Inventory buildup should not occur to any great extent during a business downturn.
This should also allow a quicker resumption of demand once sales begin to recover.
The net effect is to synchronize the slump so that all supply sectors of the manufacturing economy are affected at once.
However, how eager will employers be to rehire in the services sectors, once they have figured out how to get along with fewer employees. When will Google rehire all those recruiters that they laid off from Human Resources?
February 28, 2009 1:58 PM | Reply | Permalink
JIT is a lot like CDS and other derivatives, of course in a different domain. Pipelining has its good and bad sides, esp. when large shifts occur. Businesses in the pipeline make plans too and have invested capital in infrastructure. As long as the slowdown stays in "linear" territory there's probably not a problem, similar to how if Lehman didn't default, the extended web of financial pipelines might have adapted differently.
JIT is a kind of leveraging technology too. I hope it wasn't too highly leveraged.
February 28, 2009 8:30 PM | Reply | Permalink
Wow. Talk about retro!
-6.2% Q-to-Q real GDP is positively Reaganesque!
We haven’t seen anything that ugly in 27 years, not since The Gipper pulled the wool over everyone’s eyes with his smooth delivery and ‘the-hell-with-deficits’ voodoo economics.
Private consumption expenditure at -1.55% year-on-year is the worst performance in a single quarter since . . . 1951. Yep, over 57 years since we’ve seen consumers so scared.
= = = = =
ReaderOfTeaLeaves,
Outsourcing doesn’t “juice up” the economy. Rather, it reduces the cost to business by hiring cheaper and / or more productive workers to do work previously done in-house.
The rest of your rant, however, rings true.
= = = = =
paulW,
What recessions do is to reduce standards of living to more sustainable levels. If productivity doesn’t keep up with wages, and wages don’t keep up with spending, the imbalance of people living beyond their means is going to cause a lot of problems.
Recessions (unemployment => reduced consumption) are the solution, not the problem.
.
(Oh, and to “turn up the savings and investment” the absolute necessity is “to hack out the consumption.” No other way, sir.)
March 1, 2009 8:09 PM | Reply | Permalink