Showing posts with label Great Recession. Show all posts
Showing posts with label Great Recession. Show all posts

Monday, April 15, 2019

15/4/19: One order of "Bull & Sh*t" for the U.S. Labor Market, please


The 'strongest economy, ever'...


Despite a decade-long experiment with record-low interest rates, despite trillions of dollars in deficit financing, and despite headline unemployment numbers staying at/near record lows, the U.S. economy is not in a rude health. In fact, by two key metrics of the labor force conditions, it is not even in a decent health.

As the chart above clearly shows, both in terms of period averages and in terms of current level readings, Employment to Population Ratio (for civilian population) has remained at abysmally low levels, comparable only to the readings attained back in 1986. Meanwhile, labor force participation rate is trending at the levels consistent with those observed in 1978.

Dire stuff.

Update: Here is a chart showing how the current recovery compares to past recoveries (hint: poorly):


Tuesday, July 31, 2018

31/7/18: 65 years of profligacy and few more yet to come: U.S. Government Deficits


The history and the future of the U.S. Federal Government deficits in one chart:


Which shows, amongst other things, that

  1. The post-2000 regime of deficits has shifted to a completely new trend of massively accelerating excessive spending relative to receipts;
  2. The legacy of the Global Financial Crisis and the Great Recession far exceeds traditional cyclical increases in deficits;
  3. The more recent vintage of the Obama Administration deficits has been more moderate compared to the peak crises years;
  4. The ongoing trend in the Trump Administration deficits is dynamically exactly matching the worst years of Obama Administration deficits, despite the fact that the underlying economic conditions today are much more benign than they were during the peak crises period under the Obama Administration; and
  5. Based on the most current projections, by the end of the year 2023, the U.S. is on track to increase cumulated deficit from USD 12.227 trillion at the end of 2016 to USD 20.466 trillion.  This would imply an average annual uplift of USD 1.177 trillion, which is significantly higher than the average annual increase in deficits of USD 838.3 billion recorded over the 2009-2016 period.
The good news is, fiscally responsible,  financially conservative, taxpayer interests-focused Republican Party has given full support to the Trump Administration on what in fact amounts to a restoration of the peak crises period trends in deficits accumulation.

Sunday, July 15, 2018

14/7/18: Elephants. China Shop, Enters a Mouse: Global Debt Bubble


Bank for International Settlements Annual Report for 2018 has a very interesting set of charts covering the growing global debt bubble, one of the key risks to the global economy highlighted in the report.

First, levels:

  • Global debt rose from 179% of GDP at the end of 2007 to 217% at the end of 2017 - adding 38 percentage points to the overall leverage carried by the global economy.
  • The rise has been more dramatic for the Emerging Economies, with debt levels rising from 113% of GDP to 176% between the end of 2007 and the end of 2017, a net addition of 63 percentage points.
  • Advanced economies faired somewhat better, posting an increase from 233% of GDP to 269%, a net rise of 36 percentage points.
  • As it stood at the end of 2017, Global Debt was well in excess of x3 the Global GDP - a degree of leverage not seen in the modern history.


As noted by BIS: “...financial markets are overstretched, as noted above, and we have seen a continuous rise in the global stock of debt, private plus public, in relation to GDP. This has extended a trend that goes back to well before the crisis and that has coincided with a long-term decline in interest rates".


Next, impacts of monetary policy normalization:

As the Central Banks embark on gradual, well-flagged in advance and 'orderly' overall rates and asset purchases 'normalization', the global economy is likely to bifurcate, based on individual countries debt exposures. As the chart above shows, impact from a modest, 100bps hike in rates, will be relatively significant for all economies, with greater impact on highly indebted countries.

Per BIS: "Since the mid-1980s, unsustainable economic expansions appear to have manifested themselves mainly in the shape of unsustainable increases in debt and asset prices. Thus, even in the absence of any near-term market disruptions, keeping interest rates too low for too long could raise financial and macroeconomic risks further down the road. In particular, there are reasons to believe that the downward trend in real rates and the upward trend in debt over the past two decades are related and even mutually reinforcing. True, lower equilibrium interest rates may have increased the sustainable level of debt. But, by reducing the cost of credit, they also actively encourage debt accumulation. In turn, high debt levels make it harder to raise interest rates, as asset markets and the economy become more interest rate-sensitive – a kind of “debt trap”."

Thus, the impetus for rates and monetary policies normalisation is the threat of continued debt bubble inflation, but the cost of such normalisation is the deflation of the debt bubble already present. In other words, there's an elephant and here's the china shop.

"A further complication in calibrating normalisation relates to the need to build policy buffers for the next downturn. Indeed, the room for policy manoeuvre is much narrower than it was before the crisis: policy rates are substantially lower and balance sheets much larger". And here's the mouse: cyclically, we are nearing the turning point in the current expansion. And despite all the PR releases about the 'robust recovery' current up-cycle in the global economy has been associated with lower growth rates, lower productivity growth, lower real investment (as opposed to financial flows), and more debt than equity (see http://trueeconomics.blogspot.com/2018/07/14718-second-longest-recovery.html).

In other words, things are risky, but also fragile. Elephants in a china shop. Enters a mouse...

Tuesday, May 15, 2018

15/518: Four macro charts that explain Trumpvolution


The current growth cycle has been the second longest on record:

Source: FactSet

But it has been much shallower than the previous cycles: "real GDP growth in the current expansion lags the other three expansions—by a lot. As of the first quarter of 2018, real GDP has expanded by 21% since the beginning of the current expansion; this is far lower than the 36% compound growth we saw at this point in the 1991‑2001 expansion. The chart also shows that the growth path for the longest expansions has continued to shift lower over time; the 1961‑1969 expansion saw real GDP grow by 52% by the end of its ninth year, while the economy had grown by just 38% by the end of year eight of the 1982‑1990 expansion."

Source: FactSet

And here's a summary of why loading risks of recession onto households is not such a great idea: "Real consumption has grown by 23% since the summer of 2009, compared to growth rates of 41% and 50% at the same point in the expansions of 1991‑2001 and 1961‑1969, respectively. The reluctance of consumers to spend in this expansion is not surprising when you consider how much of the brunt of the last recession was borne by this group."

Households' net worth collapse in the GFC has been more dramatic and the recovery from the crisis has been less pronounced than in the previous cycles:

Source: FactSet

Hey, you hear some say, but the recovery this time around has been 'historic' in terms of jobs creation. Right? Well, it has been historic... as in historically low:
Source: FactSet

So, despite the length of the recovery cycle, current state of the economy hardly warrants elevated levels of optimism. The recovery from the Global Financial Crisis and the Great Recession has been unimpressively sluggish, and the burden of the crises has been carried on the shoulders of ordinary households. Any wonder we have so many 'deplorables' ready to vote populist? As we noted in our recent paper (see: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3033949), the rise of populism has been a logical corollary to (1) the general trends toward secular stagnation in the economy since the mid-1990s, and (2) the impact of the twin 2008-2010 crises on households.

Tuesday, August 15, 2017

15/8/17: A Great Recovery or a Great Stagnation?


Value-added is one measure of economic activity that links the production side to consumption/ demand side (using inputs of say $X value to produce a good that sells for $Y generates $Y-$X in Gross Value Added). Adjusted for inflation, this returns Real Gross Value Added (RGVA) in the economy. Taken across two key sectors that comprise the private sector economy: households & institutions serving the households, and private businesses (including or excluding farming sector), these provide a measure of the economic activity in the private economy (i.e. excluding Government).

Since the end of WW2, negative q/q growth rates in the private sectors RGVA have pretty accurately tracked evolution of economic growth (as measured, usually, by growth rates in GDP). Only in the mid-1950s did the private sector RGVA growth turn negative without triggering associated official recession on two occasions, and even then the negative growth rates signalled upcoming late-1950s recession.

Which brings us to the current period of Great Recovery.

Consider the chart below, computed based on the data from the Fred database:


The first thing that jumps out in the above data is that since the end of the Great Recession, the period of the Great Recovery has been associated with two episodes of sub-zero growth in the private sector RGVA. This is unprecedented for any period of recovery post-recession, except for the period between two closely-spaced 1950s recessions: July 1953-April 1954 and August 1957-March 1958.

The second thing that stands out in the data is the average growth rate in RGVA during the current recovery. At 0.579% q/q, this rate is the lowest on the record for any recovery period since the end of WW2. Worse, it is not statistically within 95% confidence interval bands for average growth rate in post-recovery periods for the entire history of the U.S. economy between January 1948 and October 2007. In other words, the Great Recovery is, statistically, not a recovery at all.

The third matter worth noting is that current non-recovery Great Recovery period is the third consecutive period of post-recession growth with declining average growth rates.

The fourth point that becomes apparent when looking at the data is that the current Great Recovery produced only two quarters with RGVA growth statistically above the average rate of growth for a 'normal' or average recovery. This is another historical record low (on per-annum-of-recovery basis) when compared across all other periods of economic recoveries.

All of the above observations combine to define one really dire aftermath of the Great Recession: despite all the talk about the Great Recovery sloshing around, the U.S. economy has never recovered from the crisis of 2007-2009. Omitting the years of the official recession from the data, the chart below shows two trends in the RGVA for the private sector economy in the U.S.


Based on quadratic trends for January 1948-June 2007 (pre-crisis trend) and for July 2009 - present (post-crisis trend), current recovery period growth is not sufficient to return the U.S. to its pre-crisis long term trend path. This is yet another historical first produced by the data. And worse, looking at the slopes of the two trend lines, the current recovery is failing to catch up with pre-crisis trend not because of the sharp decline in real economic activity during the peak recession years, but because the rate of growth post-Great Recession has been so anaemic. In other words, the current trend is drawing real value added in the U.S. economy further away from the pre-crisis trend.

The Great Recovery, folks, is really a Great (near) Stagnation.

Friday, August 4, 2017

3/8/17: New research: the Great Recession is still with us


Here is the most important chart I have seen in some months now. The chart shows the 'new normal' post-2007 crisis in terms of per capita real GDP for the U.S.

Source: http://rooseveltinstitute.org/wp-content/uploads/2017/07/Monetary-Policy-Report-070617-2.pdf

The key matters highlighted by this chart are:

  1. The Great Recession was unprecedented in terms of severity of its impact and duration of that impact for any period since 1947.
  2. The Great Recession is the only period in the U.S. modern history when the long term (trend) path of real GDP per capita shifted permanently below historical trend/
  3. The Great Recession is the only period in the U.S. modern history when the long term trend growth in GDP per capita substantially and permanently fell below historical trend.
As the result, as the Roosevelt Institute research note states, " output remains a full 15 percent below the pre-2007 trend line, a gap that is getting wider, not narrower, over time".

The dramatic nature of the current output trend (post-2007) departure from the past historical trend is highlighted by the fact that pre-crisis models for forecasting growth have produced massive misses compared to actual outrun and that over time, as new trend establishes more firmly in the data, the models are slowly catching up with the reality:

Source: ibid

Finally, confirming the thesis of secular stagnation (supply side), the research note presents evidence on structural decline in labor productivity growth, alongside the evidence that this decline is inconsistent with pre-2007 trends:

On the net, the effects of the Great Recession in terms of potential output, actual output growth trends, labor productivity and wages appear to be permanent in nature. In other words, the New Normal of post-2007 'recovery' implies permanently lower output and income. 

Friday, July 28, 2017

28/7/17: Long term U.S. growth trend is still weak: 2Q 2017 Update


U.S. GDP growth estimate for 2Q 2017 came in at 2.6%, matching the post-1948 trend for expansionary periods almost to the notch. The problem, however, is that the trend is ... declining over time.

Here's the kickers to today's cheerful media reports on U.S. growth:

  1. Current expansion period average growth remains the shallowest amongst all post-recession recoveries since the end of WW2. That's right: the miracle of this Great Recovery is how weak it has been, despite all the Fed efforts.
  2. Current 4 quarters average for growth is 2.4%, which is only 0.2 percentage points above the overall recovery period average. Or, put differently, even before the revisions to 2Q 2017 numbers, last four quarters of growth have been un-inspiring. 
  3. The trend for historical growth during expansion periods has been sloping down since around the end of the 1980s. And we are, currently, still on that trend. In other words, recoveries are continuing to trend more anaemic over time.
So keep telling yourself that everything is coming out 'on expectations'. Just don't think about the pesky fact that expectations are trending lower.

Monday, January 2, 2017

2/1/17: U.S. Unemployment Duration is Still Record-Busting


Throughout recent years, the recovery meme, played across the mainstream media in the U.S. has provided endless support to President Obama’s approval ratings. During POTUS 2016 election, the said meme was used by Hillary Clinton to challenge the ‘things aren’t so great in America’ views of Bernie Sanders and, subsequently, the echoes of the same from Donald Trump. Since the election, the recovery story has been billed as the ‘strong economy’ legacy that President Obama will be leaving for his predecessor to mess with - the basis for setting up the incoming Trump Administration for any potential fall, should economic fortunes of the recovery were to falter.

The central point of the U.S. recovery story - absent any appreciable growth in productivity, capital investment, and sectoral value added - was the only bright spot on the U.S. economic horizon: the labour markets. In fact, the U.S. headline unemployment figures have shown very strong gains, and jobs creation has been robust, with more recent data showing improvements (at long last) in households’ incomes. All of these indicators can and have been robustly challenged in terms of the extent to which they show true nature of improvements. However, they have been taken, predominantly, as read. Improvements are improvements, and gains are gains.

And as the readers of my blog and media articles would have known, the story is never complete, if one looks only at headline figures. Reality is always more complex.

So to show you this complexity at work, let’s look at one official indicator of the health of the labour markets in the U.S. - duration of unemployment. If the U.S. economy is really awash with jobs, and if the true unemployment rate is really sitting at 4.9 percent, the duration of unemployment should not only be declining on average, but it should be closer to ‘normal’ non-recessionary reading. Right?

Take a look at the following chart based on data from the St Louis Federal Reserve database, Fred:


Yes, duration of unemployment peaked in January 2011 at 40.7 weeks and since then fallen to 26.3 weeks (as of November 2016), but 26.3 weeks for average unemployment benefits duration is still above any previous recession since 1948 on.

Now, as er return to normalcy. During 1990-1991 and 2001 recessions, recovery failed to completely reduce average duration of unemployment back to pre-recessionary norms. In simple terms, after the end of recession, in 1990-1991 and 2001 downturns, on average, unemployed people remained in unemployment longer than before recessions. These were the first two recession on record that resulted in this change in structural unemployment duration.

Now, consider 2008 recession. Chart below illustrates what happened to the ‘new normal’ duration of unemployment spells. Specifically, chart below plots the difference between average duration of unemployment during recession and recovery and the average duration of unemployment in 12 months prior to the onset of each recession. Returning to normal here would mean getting duration gap closer to zero.


Again, current (since 2008) recovery is clearly the worst for all post-recessionary episodes on record. Currently, duration of unemployment is 9.5 weeks, on average, longer than it was during the last 12 months of pre-2008 recession. Which is bad enough to be worse than the peak deviation for any recession in modern history.

What is happening here? The fabled U.S. jobs creation recovery is really a combination of several factors. One of these is genuine increases in jobs being created, which drives unemployment down. Another is demographic: U.S. labour force is expanding, and as it does, employment creation get swallowed by new entrants into labour force, while many existent unemployed are either exiting the labour force, or remaining on unemployment benefits longer. Of course, putting younger workers to work is a good thing. But squeezing older unemployed out of workforce is not.

There are serious problems with highly elevated (to-date) duration of U.S. unemployment that few politicians are willing to talk about. For one, longer duration of unemployment implies lower probability of transition into employment. Secondly, it also implies higher probability of future unemployment in future recessions. Thirdly, it implies more severe losses in skills, human capital, health, social well-being, etc. In other words, costs of unemployment rise faster for longer duration of unemployment.

Which makes you pause and think: is the legacy of the Obama administration on jobs is that impressive? Really? Well, stay tuned for more...

Tuesday, April 12, 2016

12/4/16: Look, Ma... It's [not] Working: IMF & the R-word


A handy chart from the IMF highlighting changes over the last 12 months in forecast probability of recession 12mo forward across the global economy



Yes, things are getting boomier... as every major region, save Asia and ROW are experiencing higher probability of recession today than in both October 2015 and April 2015, and as probability of a recession in 2016 is now above 30 percent for the Euro area and above 40 percent for Japan.

In that 'repaired' world of Central Banks' activism (described here: http://trueeconomics.blogspot.com/2016/04/12416-imf-rip-growth-update-risks.html) we can only dream of more assets purchases and more government debt monetizing, and more public investment on things we all can't live without...

Because, look, it's working:

Thursday, September 17, 2015

17/9/15: That 'Lost Decade' Meme... U.S. Median Incomes

The common memes in the media today are:

  1. U.S. economic recovery from the crisis is complete and is well ahead of that of the euro area; and
  2. The most recent economic crisis is a standalone event (a recession, rather than a continuation of a period of longer-term stagnation) and, thus, we can talk about the so-called 'lost decade' when it comes to the crisis-induced disruption.

Three really powerful articles on the topic of median incomes in the U.S. over the last 30 years that clearly dispute these points.


  • First, Quartz.com piece, using US Census Bureau data, showing that inflation-adjusted median household income in 2014 stood at USD53,657 down 6.5% on 2007 levels and back to the levels compatible with 1989. Link to full article here.
  • Second, Mike Shedlock's piece covering same data from more involved angles, with more scar figures: "Real median household income for all races is where it was in 1996. Real median household income for white non-Hispanics is where it was in 1997. Real median household income for blacks is where it first was in 1995. Real median household income for Hispanics is where it first was in 1998. Real median household income for Asians is where it first was in 1995." Full article here. The key point in both is that the so-called 'lost decade' looks more like 'lost two decades' and counting.
  • Third, Yves Smith's piece on the same topic, taking adjustments to historical data into account, showing (chart below) that "Median household income for non-elderly households in 2014 ($60,462) was 9.2 percent, or $6,113, below its level in 2007. The disappointing trends of the Great Recession and its aftermath come on the heels of the weak labor market from 2000–2007, during which the median income of non-elderly households fell significantly from $68,941 to $66,575, the first time in the post-war period that incomes failed to grow over a business cycle. Altogether, from 2000–2014, the median income for non-elderly households fell from $68,941 to $60,462, a decline of $8,479, or 12.3 percent…" Full article here.



Do remember, we are talking here about the engine of global recovery, the home of hope for the real workers, the jobs creation machine, the U.S. economy that is, allegedly, in a ruder health than the rest of the advanced economies world... just don't forget to add that crucial 's' at the end of its 'lost decade' descriptor...

Saturday, September 5, 2015

5/9/15: Updating America's Scariest Chart


As you know I rarely post on the U.S. economy. But recently I was updating a presentation involving the state of financial flows for retail investors and savers around the world and had to check up on my old chart that I labeled America's Scariest Chart Redux (see previous update here).

Keep in mind the dominant media meme: the U.S. economy has been growing at a robust rate and the Great Recession has been officially over now for 74 months.

So where does the current unemployment duration (in terms of average duration in weeks) stand?


Err... average duration of unemployment in the U.S. is currently at 28.4 weeks.  Over 12 months period before the onset of the Great Recession, duration averaged 16.8 weeks. Which means that even today, a full 87 months after the start of the Great Recession, average duration of unemployment is 11.6 weeks longer than it was before the crisis. Current deviation from pre-crisis levels in average duration of unemployment is consistent with this measure of labour markets performance in months 17-18 of the crisis.

Worse, we are now (still) in a situation where people on unemployment benefits are staying in unemployment longer, on average, than in any other recession on record.

Now, let's revisit the 'official' former Scariest Chart - the index of employment also plotted by each recessionary period. This chart used to be published regularly, but since end of March 2014, U.S. employment index has finally reached pre-crisis levels of employment and everyone forgot the said chart. Too bad. Here it is, updated to the latest data:


And guess what? The chart above clearly shows that the current period of 'recovery' is still the worst in terms of employment performance than any previous recovery on record.

Just thought you would like an update...

Friday, August 29, 2014

29/8/2014: Stability... of Negative Growth: Euro Area in Historical Perspective


Washington Post has a nifty chart plotting the demise of Europe... http://www.washingtonpost.com/blogs/wonkblog/wp/2014/08/20/worse-than-the-1930s-europes-recession-is-really-a-depression/

Here it is:
That's not just 'periphery' up there in black. It's the entire euro area, with the stellar performer Germany, solid Austria and exports-rich Belgium and the Netherlands, competitiveness-leading world superstar Finland, the best-educated country in the solar system Ireland, and on... and on...

It has been 6.5 years since euro GDP been below pre-crisis levels. And things are getting worse, not better as we speak.

Remember, this is supposedly the European Century, per comfortably overpaid outgoing EU Commission. This is the Age of Europe, per majority of the comfortably overpaid incoming EU Commission. This is the state of delusion. 

Tuesday, June 24, 2014

24/6/2014: US Productivity Slowdown: It's Structural & Nasty


"Productivity and Potential Output Before, During, and After the Great Recession" a new paper by John Fernald (NBER Working Paper No. 20248, June 2014) looks at the U.S. labor and total-factor productivity growth slowdown prior to the Great Recession in the context of the slowdown "located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains". In a sense, the paper reinforces the point of view that I postulated in my TEDx talk last year dealing with the 'end' of the Age of Tech (here: http://trueeconomics.blogspot.ie/2013/11/14112013-human-capital-age-of-change.html).

Fernald opens the paper with a set of two quotes. One brilliantly describes the core question we face:
"When we look back at the 1990s, from the perspective of say 2010,…[w]e may conceivably conclude…that, at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation….Alternatively, that 2010 retrospective might well conclude that a good deal of what we are currently experiencing was just one of the many euphoric speculative bubbles that have dotted human history." Federal Reserve Chairman Alan Greenspan (2000)

Fernald argues that "The past two decades have seen the rise and fall of exceptional U.S. productivity growth. This paper argues that labor and total-factor-productivity (TFP) growth slowed prior to the Great Recession. It marked a retreat from the exceptional, but temporary, information-technology (IT)-fueled pace from the mid-1990s to the early 2000s. This retreat implies slower output growth going forward as well as a narrower output gap than recently estimated by the Congressional Budget Office (CBO, 2014a)."

Figure 1 from the paper illustrates how the mid-1990s surge in productivity growth indeed ended prior to the Great Recession. The rise in labor-productivity growth, shown by the height of the bars, came after several decades of slower growth. But, notes Fernald, "in the decade ending in 2013:Q4, growth has returned close to its 1973-95 pace. The figure shows that the slower pace of growth in both labor productivity and TFP was similar in the four years prior to the onset of the Great Recession as in the six years since."



And things have been bad since. Labour productivity growth (slope of liner trend below) is now on par with what we have been witnessing in 1973-1995, and shallower than in 1995-2003. But the trend is still close to actual performance, which signals little potential for any appreciable acceleration:


Beyond labour productivity, things are even messier. Charts below plot the Great Recession against other recessions in terms of productivity, output and labour utilisation:







Notes: For each plot, quarter 0 is the NBER business-cycle peak which, for the Great Recession,
corresponds to 2007:Q4. The shaded regions show the range of previous recessions since 1953. Local
means are removed from all growth rates prior to cumulating, using a biweight kernel with bandwidth of 48 quarters. Source is Fernald (2014).

All of the above show the cyclical disaster that is the current Great Recession, but crucially, they show poor recent performance in Labour Productivity, exceptionally poor performance in Hours of Labour used, disastrous performance in Total Factor Productivity… in other words - historically problematic trends relating to productivity, labour utilisation and tech-related productivity in the current recession compared to all previous recessions.

But more worrying is that, as Fernald notes: "That the slowdown predated the Great Recession rules out causal stories from the recession itself. …The evidence here complements Kahn and Rich’s (2013) finding in a regime-switching model that, by early 2005—i.e., well before the Great Recession—the probability reached nearly unity that the economy was in a low-growth regime."

So what's behind all of this slowing productivity growth? "A natural hypothesis is that the slowdown was the flip side of the mid-1990s speedup. Considerable evidence… links the TFP speedup to the exceptional contribution of IT—computers, communications equipment, software, and the Internet. IT has had a broad-based and pervasive effect through its role as a general purpose technology (GPT) that fosters complementary innovations, such as business reorganization. Industry TFP data provide evidence in favor of the IT hypothesis versus alternatives. Notably, the euphoric, “bubble” sectors of housing, finance, and natural resources do not explain the slowdown. Rather, the slowdown is in the remaining ¾ of the economy, and is concentrated in industries that produce IT or that use IT intensively. IT users saw a sizeable bulge in TFP growth in the early 2000s, even as IT spending itself slowed. That pattern is consistent with the view that benefiting from IT takes substantial intangible organizational investments that, with a lag, raise measured productivity. By the mid-2000s, the low-hanging fruit of IT had been plucked."

This a hugely far-reaching paper with two related implied conclusions:

  1. Prepare for structurally slower growth period in the US (and global) economy as the last catalyst for growth - tech - appears to have been exhausted; and
  2. The Age of Tech is now in the part of the cycle where returns to innovation and technology are falling, while returns to financial assets overlaying tech sector are still going strong. The classic bubble scenario is being formed once again, as always on foot of disconnection between the real economic returns to the assets and asset valuations. This bubble will have to deflate.

Friday, June 20, 2014

20/6/2014: Household Disposable Income: Great Recession 2007-2011


Excellently spotted by @stephenkinsella - a chart from The Economist blog mapping changes in disposable incomes across a set of advanced economies over 2007-2011 period:


Link to the post: http://www.economist.com/blogs/graphicdetail/2014/06/daily-chart-13?fsrc=rss

As I mentioned on Twitter, good news "Ireland is not Greece"... kind of...

Saturday, January 11, 2014

11/1/2014: Don't mention the 'D' word in the Eurozone, yet...


Bloomberg this week published a note analysing the GDP performance of the euro area countries during the Great Depression and the Great Recession: http://www.bloomberg.com/news/2014-01-06/europe-s-prospects-looked-better-in-1930s.html. The unpleasant assessment largely draws on the voxeu. org note here: http://www.voxeu.org/article/eurozone-if-only-it-were-1930s.

Perhaps the most important (forward-looking) statement is that in the current environment "complying with the EU's debt-sustainability rules will entail severe and indefinite budget stringency, clouding the prospects for growth still further". This references the EU Fiscal Compact and 2+6 Packs legislation.

And on a related note, something I am covering in the forthcoming Sunday Times column tomorrow (italics in the text are mine and bold emphasis added):

"What are the fiscal lessons? First, avoid deflation ... at all costs. ... Beyond that, the options in theory would seem to be financial repression, debt forgiveness, debt restructuring and outright default. Financial repression, the time-honored remedy, would seem to be out of bounds... and EU governments aren't yet ready to contemplate the alternatives [debt forgiveness, restructuring and defaults]. At some point, they will have to. In the 1930s, the situation didn't look so hopeless."

But why would the default word creep into the above equation?



Update: and another economist calling for debt restructuring/default denouement: http://www.voxeu.org/article/why-fiscal-sustainability-matters#.UtJWBR7i-nh.gmail
I know, I know - everything has been fixed now, so no need to panic...

11/1/2014: US Jobs Losses & Some Bad Omens for Europe...

Via @calculatedrisk blog, we have an updated chart comparing jobs destruction in the US for the Great Recession against the previous downturns (post-WWII):


I noted before that in addition to highlighting the severity of the Great Recession, this chart also shows that since 1981, downturns in the US have been marked by ever-extending duration of periods of jobs losses recovery.

Another worthy note is to point out that the US economy is now in 71st month of jobs levels below pre-crisis peak, which means that the US has already clocked almost 6 years of jobs losses. On current trend, it will be around 8-9 more months before the US fully recovers to the pre-crisis jobs levels. Given labour force and demographic changes during the crisis, and given pre-crisis long-term trends in jobs creation now foregone due to the crisis, the US is unlikely to regain the pre-crisis trend levels of employment any time in the next 5 years if not longer. That's the so-called 'lost decade' extending to more like 12 years or beyond.

And the US is in a much better shape than Europe... which is on aggregate is in much better shape than the 'peripherals'... 

Sunday, September 22, 2013

22/9/2013: Two articles on the Great Recession

Two recent posts on the Great Recession in the US worth reading:
http://www.oftwominds.com/blogaug13/recession-never-ended8-13.html
and
http://www.zerohedge.com/news/2013-08-26/guest-post-detroitification-it%E2%80%99s-government-stupid

The former argues pretty cogently that "The reality is that the recession never ended for 95% of U.S. households, and by many metrics the recession has deepened."

The latter has a handy guide to its core arguments as per drivers for the Great Recession:

"The reason why the economy is not recovering and will not recover can be explained in five simple points:

  1. Wealth and standard of living increases can only be achieved by producing more, not less.
  2. Capital increases are required to produce more. Wage gains are directly tied to productivity gains and more capital enables productivity to rise. 
  3. The private sector uses and expands capital. 
  4. Government destroys capital. It confiscates it from the private sector and uses it for consumption, effectively reducing the supply. Jobs, income and growth that otherwise would have developed do not. The rare exception is if government “invests” in capital projects like roads, infrastructure or meaningful education. If properly chosen, this government spending can assist in the production of capital.
  5. The proportion of assets and capital confiscated has increased greatly over the last century. At some point, the capital and wealth left behind in the private sector is inadequate to reproduce itself. That is when economic growth turns negative and standards of living decline. Long before that point growth rates diminish."

At a very general level, the above 5 points are fine. More fine detail would add the role of credit/leverage, as I argued here: http://trueeconomics.blogspot.ie/2013/08/2282013-why-this-time-things-might-be.html

And a nice chart to sum it all up:


Tuesday, August 13, 2013

8/13/2013: Sunday Times, August 11: Wither Middle Ireland


This is an unedited version of my Sunday Times article from August 11, 2013.


Recent data from Irish retailers, aggregate services indices as well as household surveys paints a picture of an economy divided in misery and fortunes. Following an already unprecedented five years of straight declines, domestic demand, stripping out one-off effects, such as weather, continues to shrink. This is the paralysed core of our economy. At the opposite side of the spectrum, pockets of strength remain within some demographic groups – namely the young and mobile professionals and debt-free older households. These form a de facto sub-economy only marginally attached to Ireland’s long-term future. With personal consumption still accounting for over half of the total annual GDP, a society torn between these two divergent drivers of domestic demand, savings and investment, is an economy at risk.


On the surface, CSO data through H1 2013 shows that Irish retail sales (excluding cars) grew modestly in June 2013 when compared to the same period a year ago. Much of this growth was due to weather effects and these are likely to strengthen even further in the third quarter. However, removing food, fuel and bars sales, core retail sales were down 1.7 percent in value and were up 0.8% percent in volume in April-June 2013, year-on-year. In other words, core sales are still being driven primarily by price declines rather than by organic growth in demand.

Meanwhile, aggregate data released this week, covering services (as opposed to sales of goods alone) showed annual declines in June 2013 in accommodation, and food and beverage services activities.

The bad news is that five years into the process of reducing household expenditures, Irish consumers are still tightening their belts. Not only discretionary spending is dropping, but demand for staples is contracting as well. At the end of H1 2013, retail sales were down on 2007 levels for both durable and non-durable household consumption items, as well as food.

This data is largely consistent with the analysis of the household budget surveys released earlier this month.  These surveys showed that compared to 2009, Irish households have cut deeper into their bills in twelve months through Q3 2012. Demand for groceries, clothing and footware, recreation, health Insurance and education saw continued cutbacks. For example, in the 24 months prior to June 2011, 56 percent of Irish households cut down on food purchases. Further 51 percent cut spending in the 12 months through September 2012. Despite these already severe cutbacks, industry surveys show that Irish households are still concerned with high cost of basic consumables.

Households’ propensity to cut costs has risen in the twelve months through September 2012 compared to the 24 months period to June 2011 as those still holding onto their jobs are now shifting into deeper cost savings mode. This busts the myth that the only people forced to severely cut their spending are the unemployed and the poor. The largest proportion of severe cuts in the earlier part of the recession fell onto the shoulders of the households where at least one person was jobless, followed by students. Back then households in employment were the category second least impacted by household budgets cuts. Last year, households still in employment were the second most likely to reduce spending. Significantly - households with some members on home duties, retired or not at work due to illness or disability posted the shallowest average cuts of all demographic groups.

The above explains why the data from multiples retailers in Ireland has been showing a V-shaped pattern of changes in consumer demand, with higher demand witnessed in lower-priced categories of own-brand goods supplied by discount retailers, such as Aldi and Lidl, and the premium own-brands of traditional multiples, such as Tesco. Demand for mid-range priced goods usually purchased by the middle class continued to fall.

Ditto for the luxury end of the market, with exception of Dublin, as sales of food and drink in specialist stores have fallen almost 20 percent on pre-crisis peak. Exactly the same pattern of shift away from the middle of price range sales emerged in the demand for electrical goods.


The drivers for the above trends are crystal clear. Middle Ireland is under severe pressures financially, while Happily-Retired and Yappy Irelands are having a relatively easy recession or living through the good times. The main force working through the Irish domestic demand is that of polarization of households not along the lines of employed v unemployed, but along the more complex and fragmented demographic lines.

The average number of spending cutbacks in 12 months through September 2012 for households with no person at work stood at 2.6 categories of spending. The same numbers for households with one and two persons working were 3.3 and 3.2 categories, respectively.

This pattern of cutbacks and income distribution changes across the households is also strengthening over time. In effect, due to Government policies, Ireland is becoming a country with severely polarised distribution of financial well-being. This polarisation is contrary to the one witnessed in normal economies and is different from the one that majority of out policymakers and analysts have been decrying to-date.

The Great Recession has finally exhausted ordinary savings of both working and unemployed households, while lack of income growth has meant that even those in employment are now sinking under the weight of debt and tax and cost inflation driven by the State budgetary policies to-date.

Last week, CSO reported distribution of the households by their ability to manage bills and debts over 12 months prior to July-September 2012. Of households with at least one adult aged 65 and over, up to 28 percent were experiencing difficulties in managing their debts and bills. For households with all adults under the age of 65 the corresponding number was up to 46 percent. Up to 69 percent of the families with children were in the same boat. The older the respondent was, the less pressure on paying their bills their reported.

In normal economies it is the older families that face tighter budget constraints. In today's Ireland it is the younger and the middle-age families with children that are being pressured the hardest by the crisis. This bedrock of financial health in the normal times has been pulled from underneath the economy by the Great Recession.

At the same time, the crisis has generated a new class of the relatively well-off. Based on employment levels and quality, earnings, as well as regular and irregular bonuses data, three sectors in the Irish economy stand out as the winners during the crisis: the ICT services, specialist exports-focused services and international financial services. All three sectors are dominated by younger workers with high percentage of employees coming from abroad and working on a temporary assignment basis here. The demographic they represent is primarily from mid-20s through mid-30s, with smaller size families. These groups of employees are also heavily concentrated geographically, with exporting services sectors workers primarily living in Dublin, followed by a handful of other core urban areas.

Even as early as 2006-2007, market research has shown that these types of households favour premium consumption of convenience food, spend more of their income on going out and travel abroad, and less on purchases of durable goods, household goods, education and health insurance. They do not invest in this economy and hold off-shore most of their long-term savings. Their financial investments are also held and managed abroad and often include mostly shares and options in their own employers. Their children are not going to continue growing up in Ireland and will not be a part of our future workforce. The skills they accumulate while working here are transitory to the overall stock of Irish human capital. On a social level, their demand for entertainment is currently best exemplified by the booming restaurants and bars across the D2-D4-D6 areas of Dublin and stands in stark contrast to Middle Ireland’s hollowed out town centres and neighborhoods with empty storefronts and vacant building sites.


Today’s Ireland is a society where the middle class and large swaths of the upper-middle class have been dragged under water by the combination of the unprecedented crisis, compounded by rampant state-sanctioned cost inflation and legacy debt.

The data on domestic demand suggests that we might be entering a classic ‘Bull trap’. Here, tight rental markets in the leafy South Dublin neighborhoods fuels sales of rentable properties to service the needs of the Yappy Ireland. These pockets of activity are at a risk of generating inflated expectations of incoming prosperity. Don’t be fooled by this – the risks to the real Irish economy are still there, in plain view, in the streets of real Ireland.

Recognising this reality requires the Government to reconsider the tax increases that are impacting adversely the middle and the upper-middle classes. It also means that the State must reform, rapidly and thoroughly the semi-state sector to reduce the cost drag exerted by the Irish utilities, transportation, health and education services providers on Middle Ireland families’ balancesheets.  Lastly, prudent risk management requires for us to manage very carefully the process of mortgages arrears restructuring and debt work-outs. While many economy have survived sovereign and banking sectors busts, no economy can emerge from a crisis having destroyed its middle classes.



Box-out:

In Ptolemaic cosmology, astronomers believed that the Earth was the centre of the Universe. To balance this Universe, Ptolemists used to draw complex sets of larger and smaller circles - known as epicycles - to describes their orbits around the Earth. The problem with epicycles spelled the demise of the Ptolemaic cosmology in the end: as the known number of planets and stars increased, the system of superficial orbits rapidly collapsed under its own complexity. The Ptolemaic absurdity, however, is still alive today in Irish economic policies. A year ago, the Government had a clear choice of policy options: a site-value tax (SVT) that can be levied on all forms of properties, including land, or a residential property tax that can be levied only on structures. In a study covering all known forms of policy mechanisms used to fund public infrastructure around the world,  submitted to the Department of Environment, I have argued that one of the major advantage of the SVT over a property tax was that it would have incentivised more efficient use land, reducing land hoarding and speculation. There were multiple other advantages of SVT over the property tax as well. Alas, the Government opted for a property tax favouring under-use of land over all other properties. This tax suits the major lobbies influencing the State: farmers and well-off rural landed families. Fast-forward eight months from last December: this week, Dublin City Council called for a levy on unused vacant sites. Hundreds of sites lay vacant across the city - blotching the cityscape and posing a threat to personal safety to many workers, as well as an unpleasant reminder of the property bust and economy's dysfunctionality to the would-be foreign investors. Dublin City has been trying to force this land back into development since 2009, although no one in the city has a slightest idea where the demand for such development might come from. Thus, our Ptolemaic system of economic policies is about to draw yet another contrived, complex and inefficient balancing circle on the map of our tax policies to compensate for the Government's rejection of the site value tax. After all, managing the superficial complexity of a political economy that attempts to appease the landed classes, while satisfying the needs and demands of foreign investors and urban authorities is an arduous task

13/8/2013: UK Great Recession

An interesting chart comparing the historical recessions in the UK to the current one:


The longest it took before the current recession for the output to return to pre-crisis peak was 47 months (1930-34 recession and 1979-1983 recession). In the current one, the UK is at 62 months and counting. I don't need to remind you that the UK has both fiscal and monetary policy at its disposal and was aggressive in deploying both during the current crisis. Ireland has neither fiscal nor monetary policy at its disposal. 

We can (and should) reference Government failures in dealing with the crisis, but we have to keep the simple fact in perspective: by joining the euro area, we have removed virtually all and any power from the hands of our politicians to even attempt to manage the economy. Instead of Dublin, Irish Great Recession can be almost solely blamed on Frankfurt & Brussels (Strasbourg et al can be included too, for completeness). Its causes are rooted in the systemic mispricing of economic and investment risks facilitated, incentivised and even directly driven by the euro and the underlying monetary policy of the ECB. Its regulatory and institutional frameworks were shaped and influenced and informed by the European (Brussels) ethos which put political considerations over political economy, and political economy over economy. Its inability to deal effectively and economically efficiently with the crisis is due to the lack of monetary policy tools, while its fiscal collapse is 50% driven by the social partnership model of the European social democracy, and 50% driven by the severe mismanagement of the banking crisis resolution by the EU/ECB/IMF. This is not to say that Irish society and Governments were not culpable in creating the conditions for the crisis or in failures of managing the crisis. Instead, it is to point to the joint liability that befalls not only us, but also the European systems and leadership.

This should be a reminder to European politicians, especially those claiming to have learned something from the crisis (e.g. http://trueeconomics.blogspot.it/2013/08/982013-political-waffle-passing-for.html)

Friday, July 5, 2013

5/7/2012: Epically scary chart

Via Calculated Risk:


Basically, since 1981 recession, duration of the subsequent jobs losses has been longer and longer and longer. The duration spread has risen from 3 months between  1981 and 1990 recessions, to 14 months between 1990 and 2001 episodes to now 19 months and still counting. At current run rate, we are looking at 77-78 months duration and this will bring the spread to ca 33 months.

Thus spreads: 3-->14-->33.