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The Economy's Not Looking Well

by Drew J Jones Tue Jan 17th, 2006 at 10:27:57 PM EST

Ben Bernanke will be taking over the Federal Reserve at what is clearly a time of uncertainty.  You need only read any newspaper or magazine to know this -- from the bullish Bushies at The Wall Street Journal and CNBC to the more reasonable elements at The Economist and in the Comments & Analysis section of the Financial Times.  For all the talk of the Dow hitting 11,000 again, nobody seems to notice that it's back down to below 10,900, and has, literally, been flat for a year:

John Authers of the FT rightly notes, on the market passing the 11,000 mark, that we've seen this all before.  This is not a performance worthy of tremendous praise from anyone except Larry Kudlow and the WSJ editorial board.  And, as it relates to jobs, it may not get any better for a while.  Combined with oil prices, again on the rise, and an apparently-deflating bubble in the housing market, Bernanke may be in for a rough freshman year.  What can we expect as the year progresses?


Now, despite the bullish assessment from The Wall Street Journal's talking heads, on television and among the editorial board members, the paper reported today that economists are downgrading their estimates to a rate of less than 3%:

Largely because consumer spending slowed to a near halt in the fourth quarter last year, overall economic growth fell below a 3% annual rate, economists estimate, after 10 quarters averaging about 4%. Many attribute the fourth-quarter slowdown to temporary factors, and the consensus estimate for growth this year is a still-solid 3.4%, according to the publication Blue Chip Economic Indicators.

The Fed is reportedly keen to see economic growth fall to its historic rate of just over 3%.  (Why?  Just control inflation, you schmucks.)  That's all well and good, but Ed Hyman, chief economist of ISI Group, tells the Journal that he expects growth to be around 2.5% for 2006.  Job growth will actually slow, if you can believe that (just shocking), to about 100,000 per month -- meaning the unemployment rate will rise from today's 4.9% to 5.5%.  But despite ISI's view that this would fit the "midcycle slowdown" that characterized 1984 and 1994, today's economy is, in no way, that of 1994.

For one thing, today's economy does not have the ability to fall back on a feverish boom, as was the case in 1994.  Growth slowed even more, to 1%, but would rise to around 4% per year for a stunning period of time.  Even after taking away the Dot-Com Bubble, growth was incredibly strong.  Nor is the economy recovering from the severely depressed state of 1983.  There hasn't been any stagflation.  No Volcker Contraction.

A slowing economy, a fast-dampening housing market, and a stagnant Wall Street -- especially combined with increasingly-high interest rates -- do not make for favorable conditions in the market.  Bernanke will be left to clean up Greenspan's asset inflation mess.  And a recovery that has been week on job growth from the beginning, still with millions unemployed but uncounted due to statistical games, will leave an even larger number of Americans out of work.

What will the Bushie excuse be then?

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That would be the US economy then?
by Colman (colman at eurotrib.com) on Wed Jan 18th, 2006 at 02:38:38 AM EST
A war economy would do nicely.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Wed Jan 18th, 2006 at 06:03:52 AM EST
[ Parent ]
It seems so.
by Quentin on Wed Jan 18th, 2006 at 06:14:39 AM EST
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At least The Economist's cover story of this week means that the consensus is not that it will be Bernanke's fault if it all goes pear-shaped during his first couple of years at the helm. That's good for him and should free his hand to take some bold measures if that's what he thinks he needs to do.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Wed Jan 18th, 2006 at 06:03:38 AM EST
I did not quote the bits of the Economist on Bernanke, but their message was basically that Greenspan seemed at least aware of the mess he is leaving to Bernanke (he has indeed been dropping hints for a while, even if, shamefully, he has not acted on them), but that Bernanke considers all these worries to be bunk and prefers the very instruments that will worsen things.

It's not a reassuring read.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jan 18th, 2006 at 08:40:14 AM EST
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Bernanke's sole purpose seems to be preventing deflation.  Most of his well known work is based on the subject.  If the US were not running up so much debt right now, it would have the option of raising rates and using fiscal policy.  Alas, we're in Bush World, where stupidity is a given and the only crime is sex.

I'm not sure how he'll handle it.  Hopefully he won't jump up to raise rates too high.  But, then again, he does need to get the housing bubble under control.  Can we re-vote or something and have Gordon Brown and the BoE instead of the Republicans and Greenspan, and start again from 2000?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jan 18th, 2006 at 08:46:36 AM EST
[ Parent ]
I'll stipulate that the BoE seems to have managed the housing bubble better so far, but I am not optimistic there either. Personal debt levels are also at record levels in the UK, and stagflation is still very much a possibility.

As we discussed in another thread a while ago, it is very much possible that, in a symetrical twist to today's conundrum, long term rates will go up when short term rates are brought down again, triggering a deep vicious circle of slower growth.

Form my perspective in the banking market, I can tell you that banks are beginning to do really stupid stuff. Any downturn will have massive consequences on many companies, and on the health of the financial sector, leading to retreat, investment collapse, and tight spending by all, accompanied for the weakest by bankruptcies.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jan 18th, 2006 at 08:58:44 AM EST
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Talking about banks doing stupid stuff... My American bank (who still hasn't figured out I don't have any US income any more, nor live there) just doubled the limit on my credit card... I think they're trying to see it I'll bite... Not a chance: I'm about 1 month away from being debt-free ;-)

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Wed Jan 18th, 2006 at 09:10:03 AM EST
[ Parent ]
I was kidding, though I do think the UK has handled the situation far better than America.  Your points are all well taken.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jan 18th, 2006 at 11:37:59 AM EST
[ Parent ]
I'm counting on (read: hoping for) Bernanke to get tough about asset inflation and bring new ideas to the table.  He's a good economist and knows what he's talking about.  But it will also be his job to tell Congress and the White House that the party's over, and that it's time to get serious about the budget -- which, for one thing, means getting serious about a war that is going to cost the US over $1 trillion, according to Joseph Stiglitz.

Those are less relevant to the current situation, but Bernanke will be a necessary voice.  As far as what to do about the current situation, I don't know.  It may be true that this is simply a "midcycle slowdown," but I have trouble buying into that.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jan 18th, 2006 at 08:41:12 AM EST
[ Parent ]
The Dow Jones has esentially been stagnant for 6 years now, not just for one year. This is a clear sign that despite all the cheerleading of the administration, there is some awareness in the markets that the prospects for companies, despite their capturing a record share of GDP in profits, are not so great - and that's because, in the medium term, that depends on consumption, and consumption in the US is going nowhere, with stagnant wages, record levels of debt, and the coming disappearance of house equity withdrawals.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jan 18th, 2006 at 08:43:03 AM EST
The six-year picture worries me less than the one-year picture.  Recessions happen.  But a stagnant market only three years into an expansion?  Not good.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jan 18th, 2006 at 08:49:35 AM EST
[ Parent ]
This "expansion" was driven by the FED's loose monetary policy.  Any fool can make money when in a negative interest rate environment - and thus the 'increase' in GDP.

Looking at the microeconomic situation I see a continued deterioration of the US economic position.  The automobile industries, the aeronautical industries, computer industries, and pharmaceutical/bio-tech industries are all experiencing a declining financial position as illustrated by downgrades of their bond ratings.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Jan 18th, 2006 at 10:04:15 AM EST
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The American auto industry has been doomed since the '70s.  Twice now they've been caught by high gas prices and received a pounding from consumers.  Once the Japanese entered the market with infinitely-better cars, it was all over.  They can't innovate, and they're losing money.  A lot of people over at Daily Kos believe we should, once again, engage in the "Buy American" campaign.  I have no sympathy for that, as someone who (knowing gas prices would be higher in the future) bought a Honda Civic when I was sixteen.

The management is incompetent, and the union leaders allowed it to happen when they should've demanded that GM and Ford (but especially GM) engage the hybrid side of automobiles.  Everyone in the American car industry is a fuck-up, as far as I'm concerned.  Anyone could've predicted this, knowing that competition for oil would pick up as China and India (among others) continued to rise, and that, consequently, the price would rise.

As far as technology is concerned, I see America losing a bit of its edge in biotech, but generally maintaining strength in computers.  Two companies control over 95% of the operating systems market (Apple with about 5-6%, and Microsoft with about 90%).  There's very little room to fight there, and it's going to be a century before any company can even think of ripping away Microsoft's near-monopoly.  Now, on the actual boxes (Dell, HP, Sony, etc.), other countries will be able to compete.

I'd like to think we can find a better industry leader than Dell, but I'm a partisan. ;)

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jan 18th, 2006 at 12:01:38 PM EST
[ Parent ]
Two companies control over 95% of the operating systems market (Apple with about 5-6%, and Microsoft with about 90%).
If you're talking about desktops for home computing... okay. But a larger fraction than 4% of web servers and of computers in academic and research environments, as well as entire governments, use some flavour of Unix or other. Hell, even Apple's Mac OS X is a flavour of BSD! Then there's the embedded (cell-phones, pdas, etc) market.

As far as business model goes, Apple M$ and Sun think they can make money by selling you the operating system for more than it's worth and providing free support. The Open Source community believes they can give you the OS for free and make money on customization and support. We'll see who's right.

Given the time scales involved (Moore's law), it takes much less than a century to take down a monopoly in the computing industry.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Wed Jan 18th, 2006 at 12:24:57 PM EST
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