Monday, August 1, 2011

America’s ‘Great Recession’ even greater than thought

WASHINGTON — The “Great Recession” was even greater than previously thought, and the U.S. economy has skated uncomfortably close to a new one this year.

New data on Friday showed the 2007-2009 U.S. recession was much more severe than prior measures had found, with economic output declining a cumulative of 5.1% instead of 4.1%.

The report also showed the current slowdown began earlier and has been deeper than previously thought, with growth in the first quarter advancing at only a 0.4% annual pace.

The data indicated the economy began slowing in the fourth quarter of last year before high gasoline prices and supply chain disruptions from Japan’s earthquake had hit, suggesting the weakness is more fundamental and less temporary than economists had believed.

The annual revisions of U.S. GDP data from the Commerce Department showed economic growth contracted at an annual average rate of 0.3% between 2007 and 2010. Output over that stretch had previously been estimated to have been flat.

At the depth of the recession in the fourth quarter of 2008, output plummeted at an annual rate of 8.9% — the steepest quarterly decline since 1958, and 2.1 percentage points more than previously reported.

The recession was already the deepest since the Great Depression and, while it still pales in comparison, the data help explain why it is taking so long to shake off its legacy.

“The general picture of the recession remains pretty much the same, it was a record decline before and now it is a even bigger decline,” Steven Landefeld, the director of the department’s Bureau of Economic Analysis, told reporters.

The economy was weaker in both 2008 and 2009 than had been thought. Gross domestic product contracted 0.3% in 2008; the department had previously reported it was flat. In 2009, it shrank 3.5% instead of 2.6%.

In the first quarter of 2009, the economy shrank at a 6.7% pace, 1.8 percentage points more than had been thought.

When growth finally resumed in the second half of 2009 after four straight quarters of contraction, it was less vigorous than thought. Growth in the fourth quarter of 2009 was cut to a 3.8% pace from a previously reported 5.0% rate.

The revisions also showed weaker income growth. Disposable income adjusted for inflation grew at an average annual rate of 0.6% between 2007 and 2010, rather than 1.2%.

At the same time, households saved less in 2009 and 2010. Perhaps surprisingly, corporate taxes were stronger than had been thought in 2009 and 2010.

TROUBLING 2010-2011 SLOWDOWN

The data was released Friday along with the government’s first estimate of second quarter GDP, which advanced at a meager and weaker-than-expected 1.3% rate.

Not only did the economy skirt perilously close to a contraction in the first quarter, growth in the fourth quarter of last year was at a tepid 2.3% annual rate, not the solid 3.1% pace that had been believed.

The downward revision to the first quarter was even sharper. Previous figures had shown the economy advanced at a 1.9% rate.

A combination of bad weather, high gasoline prices and disruptions to manufacturing after the March earthquake in Japan had been blamed for this year’s slowdown.

But the surprisingly weak tone in the data so far this year and the downward revisions to growth in the fourth quarter before those headwinds hit suggest those transitory factors bear less of the blame than thought.

Reuters

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Gerald Celente on US debt insanity

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“The Debt Ceiling is the Least of Our Worries”

“The debt ceiling is the least of our worries.”

That is how Barry Ritholtz, CEO of FusionIQ and author of The Big Picture, concluded his Washington Post article from this past weekend.

In a piece entitled Debt ceiling: 10 lessons beyond that crisis, Ritholtz argued that many financial and economic issues in the U.S. more important than the debt ceiling unfortunately remain unresolved.

“We have created an intensely concentrated financial industry, where a handful of banks control the majority of assets,” he wrote. ”Competition is less than it was before the crisis, and bank fees are creeping upwards. While risk-taking remains rather subdued, history informs us it is likely to return as the crisis fades in the collective memory. The bailouts left us with a legacy of poor balance sheets and moral hazard. None of 10 factors discussed above have been, in any meaningful way, resolved.”

To his credit, Ritholtz was one of the few market pundits waving the red flag over the housing and credit bubbles in 2006 and 2007, prior to the financial crisis.

His ten unresolved issues consisted of ultra-low interest rates by the Federal Reserve, the flawed rating agencies model, radical deregulation of derivatives, subprime loans, leverage rules, mortgage underwriting standards, automated underwriting, the repeal of Glass Steagall, state banking regulations, and the GSE’s (Fannie Mae and Freddie Mac).

In light of these items, Ritholtz noted that “We’ve got some major and prolonged challenges: ongoing debt issues, structural unemployment, a housing overhang and continued economic frailty.”

While he did not discuss the investment implications of these matters in the article, the significant uncertainty stemming from these issues is likely to provide a favorable environment for gold and other safe haven asset classes.

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America is merely wounded, Europe risks death

Needless to say, these are not normal times. The US and EU debt crises are feeding on each other in a dangerous synergy, with fears of a fiscal “sudden stop” in Washington causing global risk aversion and aggravating tremors in the Spanish and Italian bond markets. It is a pre-taste of the “catastrophe” predicted by the Fed’s Ben Bernanke if politicians fail to control their passions.

And yet, data from the St Louis Fed show that America’s M2 money supply grew at a 6.4pc annual rate in the second quarter, accelerating to 12.2pc in June. The compound annual rate of change has exceeded 40pc over recent weeks.

The broader M3 indicator (including large savings deposits) is growing at the optimal rate of around 5pc. It has been an uncannily accurate lead indicator at each twist and turn of our economic drama over the past five years, and is telling us now that the Fed’s kindling wood has at last begun to ignite the damp coals of the US financial system. There is no longer a 1930s liquidity trap. We can infer that the housing market may be nearing the end of its deep slump.

The economy is curing itself in time-honoured fashion. Whether this monetary cure will be allowed to run its course depends on politicians in Washington, Berlin, Rome and Madrid.

My recurring nightmare ever since the Western debt edifice began to crumble four years ago is that the denouement would track the events of mid-1931, when leaders failed to reform a destructive fixed exchange system (Gold Standard) and the fuse finally detonated on Europe’s banking system. It was when political blunders turned recession into the Great Depression, and ideology intruded with a vengeance.

The narrative of 1931 is already well-known to readers. France sabotaged a rescue of Vienna’s Credit Anstalt because of strategic disputes with Germany. This set off a financial chain reaction. Frightened markets tested the weak links of the Gold Standard. They withdrew funds from Britain after naval ratings “mutinied” over pay cuts. Contagion spread back to New York. By October 1931 the international system had collapsed, though the full horror did not become evident until the next year. A string of countries retreated into variants of autarky, or fascism, or both. Communists and Nazis together won more than half the seats in the Reichstag election of July 1932.

It is far from clear that the international order is more secure today than it was in the seemingly calm days of May 1931, so one cannot lightly forgive the reckless brinkmanship on Capitol Hill over recent days.

I write before knowing the outcome of weekend talks but we can rule out any form of US default. President Barack Obama can invoke the 14th Amendment in extremis, or issue a Bush-style “Catastrophic Emergency” directive.

The more plausible risk is that the debt ceiling is not raised, forcing a ferocious fiscal squeeze to avoid default. Washington would have to slash spending at an annual rate equal to 11pc of GDP, and do so in a disorderly fashion that would shatter confidence.

There are historical cases of respectable growth following fiscal contractions, not least in Britain after 1932 and 1993, but the scale of cuts needed to close America’s double-digit deficit at a stroke is of an entirely different order. You do not have to be Keynesian to see the dangers of such a violent shock in an over-leveraged economy.

If cuts continued into September without either side blinking, the knock-on effects might rapidly set off serial defaults by states and an implosion of the $2.5 trillion municipal bond market. The bankruptcy saga of Jefferson County, Alabama, is a foretaste.

Maryland, Virginia, South Carolina, New Mexico and Tennessee have all been put on negative watch. California has had to raise an emergency $5bn loan. Nevada is spending half its tax-take on debt service costs, and Michigan 40pc. These states are hanging on by their fingernails.

Yet if disaster is an outside risk in America, it is an odds-on likelihood in Europe. It is already clear that the latest EU summit deal is too little to stop a spiralling crisis in confidence, let alone acknowledge that North and South have diverged too far to share a currency union. Spanish and Italian yields are back to pre-summit danger levels, and might fly out of control at any moment unless a lender-of-last resort steps in to guarantee the market.