Depression Year 6: The Shoe Finally Drops

 

By Alexander (Sandy) Prisant

(Reuters) - U.S. consumer sentiment ebbed in August and residential construction rose less than expected last month, potentially dimming (US economic) hopes…” (8/16/13)

The beginning was 5 1/2 years ago. It was January 2008. And it was Chicken Little's Moment.  The sky was actually falling. 

One morning on the radio, they indifferently reported that in the middle of the night, the Federal Reserve, in conjunction with Europe had cut interest rates a whopping two (2) percent "to stabilize global markets".  Two Percent. In the middle of the night.

My wife Susan and I were in South Florida, seeking a home for retirement.  We looked at each other across coffee in bed, with wide eyes.  We're just writers and teachers and like good interior design.  We're not economists.

"This sounds like a Depression, " I said. Susan nodded. We talked about ramifications. The first would be the huge real estate bubble in the middle of which we were sitting. It would collapse just as we were buying.

 We drove to our agents, Coldwell Banker. Susan went in and sat down with the manager. She explained In basic terms about the Fed and what was about to happen and that real estate prices would go first.   The agent rejected every word of it. "South Florida prices" she declared,"  are very strong and will not drop."  We never talked to Coldwell Banker again.

One university defines a Depression as: "a severe and prolonged downturn in economic activity... a depression is commonly defined as an extreme recession that lasts two or more years...(it) is characterized by factors such substantial increases in uemployment, a drop in available credit, diminishing output, bankruptcies, sovereign debt defaults and reduced trade and commerce..."

 Does this sound like the country you're living in?

 A noted economist confirms: "A depression is a sustained and severe recession. Where a recession is a normal part of the business cycle, lasting for a period of months, a depression is an extreme fall in economic activity lasting for a number of years...some economists believe a depression encompasses only the period plagued by declining economic activity. Other economists, however, argue that the depression continues up until the point that most economic activity has returned to normal."

 Bottom Line: We are year #6 of a Depression.

·         A smaller percentage of the population  is working today than in the frightening days of 2009 (59% to 64%)

 •       At current growth rates, employment will not come back to "normal" until between 2020 and 2025.

•       In the July 2013 jobs reports, over 60% of jobs created were in those positions classified as "the lowest paying jobs"

•          The UN Industrial Development Organization reports "a sharp fall in production in North American in this period."

 

And yet only now is the White House grasping this is NOT another cyclical,short recession, but an upheaval requiring structural change to rebuild the economy. Reports are they are thinking about this only now. In Year  #6 of this Depression.

David Brooks of The New York Times, notes  " We have politicians talking about very small fixes to enormous problems that are structural."

No one is being more honest than Mr Brooks.  He is talking about the need to create new economic engines. About transforming the workforce and the way we work--not just one or two retraining courses.

He suggests:

"Part of the problem has to do with structural changes in the economy.  Sectors like manufacturing, agriculture and energy have been getting more productive, but they have not been generating more jobs. Instead, companies are using machines or foreign workers.

 "This is a big problem. It can’t be addressed through the sort of short-term Keynesian stimulus some on the left are still fantasizing about. It can’t be solved by simply reducing the size of government, as some on the right imagine. “

 You won't hear a single politician talk like this. Or about this. The White House, only now, is beginning to THINK about this. But this, dear reader, is the huge challenge we are facing for years to come.

 Beginning in Year #6 of this Depression.

The American Way?

Ed- American capitalism is working more efficiently than ever. What does that mean for the future of our country?

Corporate Profits Were the Highest on Record Last Quarter

By CATHERINE RAMPELL

Published: November 23, 2010

The nation’s workers may be struggling, but American companies just had their best quarter ever.

American businesses earned profits at an annual rate of $1.66 trillion in the third quarter, according to a Commerce Department report released Tuesday. That is the highest figure recorded since the government began keeping track over 60 years ago, at least in nominal or non-inflation-adjusted terms.

Corporate profits have been going gangbusters for a while. Since their cyclical low in the fourth quarter of 2008, profits have grown for seven consecutive quarters, at some of the fastest rates in history.

This breakneck pace can be partly attributed to strong productivity growth — which means companies have been able to make more with less — as well as the fact that some of the profits of American companies come from abroad. Economic conditions in the United States may still be sluggish, but many emerging markets like India and China are expanding rapidly.

Tuesday’s Commerce Department report also showed that the nation’s output grew at a slightly faster pace than originally estimated last quarter. Its growth rate, of 2.5 percent a year in inflation-adjusted terms, is higher than the initial estimate of 2 percent. The economy grew at 1.7 percent annual rate in the second quarter.

Still, most economists say the current growth rate is far too slow to recover the considerable ground lost during the recession.

“The economy is not growing fast enough to reduce significantly the unemployment rate or to prevent a slide into deflation,” Paul Dales, a United States economist for Capital Economics, wrote in a note to clients. “This is unlikely to change in 2011 or 2012.”

The increase in output in the third quarter was driven primarily by stronger consumer spending. Wages and salaries also rose in the third quarter, which might help bolster holiday spending in the final months of 2010.

Private inventory investment, nonresidential fixed investment, exports and federal government also contributed to higher output. These sources of growth were partially offset by a rise in imports, which are subtracted from the total output numbers the government calculates, and a decline in housing and other residential fixed investments.

Finally: People Are Using the "D" Word

By Sandy Prisant

While there are a few facts about the number of bank failures and percentage of US unemployed that are less grim this time, the greatest difference between the The Great Depression and The Great Recession is the choice of one word.

As we roll through Year 3 of this, house prices are again falling,  consumer confidence and stock markets are again dropping.  At the current rate of job creation it will take more than 10 years to replace all the jobs we've lost--which is a tactful way of saying we will NOT be able to replace all the jobs we've lost. Ever.

At the moment we are locked in a profound debate about the choice between balanced budgets and throwing lifelines.  But the US economy seems to snicker at all this chatter and continues to wend its way down hill.

In the last couple of years we've had a surfeit of wild estimates about this decline lasting 6 months. Or a year. Or a couple of years.  We've had "jobless recoveries" before and our gut tells us this isn't one of them. The fact is The Great Depression lasted 10 full years and it took Adolf Hitler to get us out of it. 

To date no one has presented any compelling case for our current malaise lasting less than a decade--as Depressions can. But there are some experts detailing what most US sources are unwilling to say. 

The following article from Sunday's Telegraph (London) comes from a senior economics analyst:

With the US trapped in depression, this really is starting to feel like 1932

The US workforce shrank by 652,000 in June, one of the sharpest contractions ever. The rate of hourly earnings fell 0.1pc. Wages are flirting with deflation.

People queue for a job fair in New York. The share of the US working-age population with jobs in June fell from 58.7pc to 58.5pc. The ratio was 63pc three years ago. Photo: EPA


By Ambrose Evans-Pritchard

Published: 9:33PM BST 04 Jul 2010


"The economy is still in the gravitational pull of the Great Recession," said Robert Reich, former US labour secretary. "All the booster rockets for getting us beyond it are failing."


"Home sales are down. Retail sales are down. Factory orders in May suffered their biggest tumble since March of last year. So what are we doing about it? Less than nothing," he said.


California is tightening faster than Greece. State workers have seen a 14pc fall in earnings this year due to forced furloughs. Governor Arnold Schwarzenegger is cutting pay for 200,000 state workers to the minimum wage of $7.25 an hour to cover his $19bn (£15bn) deficit.

Can Illinois be far behind? The state has a deficit of $12bn and is $5bn in arrears to schools, nursing homes, child care centres, and prisons. "It is getting worse every single day," said state comptroller Daniel Hynes. "We are not paying bills for absolutely essential services. That is obscene."

Roughly a million Americans have dropped out of the jobs market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high.


Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP.

The share of the US working-age population with jobs in June actually fell from 58.7pc to 58.5pc. This is the real stress indicator. The ratio was 63pc three years ago. Eight million jobs have been lost.

The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weninger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s.

"Legions of individuals have been left with stale skills, and little prospect of finding meaningful work, and benefits that are being exhausted. By our math the crop of people who are unemployed but not receiving a check amounts to 9.2m."

Republicans on Capitol Hill are filibustering a bill to extend the dole for up to 1.2m jobless facing an imminent cut-off. Dean Heller from Vermont called them "hobos". This really is starting to feel like 1932.

Washington's fiscal stimulus is draining away. It peaked in the first quarter, yet even then the economy eked out a growth rate of just 2.7pc. This compares with 5.1pc, 9.3pc, 8.1pc and 8.5pc in the four quarters coming off recession in the early 1980s.

The housing market is already crumbling as government props are pulled away. The expiry of homebuyers' tax credit led to a 30pc fall in the number of buyers signing contracts in May. "It is cataclysmic," said David Bloom from HSBC.

Federal tax rises are automatically baked into the pie. The Congressional Budget Office said fiscal policy will swing from a net +2pc of GDP to -2pc by late 2011. The states and counties may have to cut as much as $180bn.


Investors are starting to chew over the awful possibility that America's recovery will stall just as Asia hits the buffers. China's manufacturing index has been falling since January, with a downward lurch in June to 50.4, just above the break-even line of 50. Momentum seems to be flagging everywhere, whether in Australian building permits, Turkish exports, or Japanese industrial output.

On Friday, Jacques Cailloux from RBS put out a "double-dip alert" for Europe. "The risk is rising fast. Absent an effective policy intervention to tackle the debt crisis on the periphery over coming months, the European economy will double dip in 2011," he said.

It is obvious what that policy should be for Europe, America, and Japan. If budgets are to shrink in an orderly fashion over several years – as they must, to avoid sovereign debt spirals – then central banks will have to cushion the blow keeping monetary policy ultra-loose for as long it takes.

The Fed is already eyeing the printing press again. "It's appropriate to think about what we would do under a deflationary scenario," said Dennis Lockhart for the Atlanta Fed. His colleague Kevin Warsh said the pros and cons of purchasing more bonds should be subject to "strict scrutiny", a comment I took as confirmation that the Fed Board is arguing internally about QE2.

Perhaps naively, I still think central banks have the tools to head off disaster. The question is whether they will do so fast enough, or even whether they wish to resist the chorus of 1930s liquidation taking charge of the debate. Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us