3Q09 GDP Revised Lower

The Commerce Department has revised its original estimate for GDP growth downwards from 3.5 percent to 2.8 percent. From the New York Times:

The nation's gross domestic product -- the total value of goods and services in the economy -- rose at an annual rate of 2.8 percent from July through September, the Commerce Department said, falling short of the 3.5 percent originally reported last month. The revised number, based on more complete data, was in line with analyst expectations.

But even though growth was slower, the third quarter still marked the end of the longest economic contraction since World War II, with the economy expanding for the first time in a year.

Much of the growth can be attributed to the billions of dollars the federal government has pumped into the economy as it seeks to mitigate the effects of a deep recession.

Popular government-financed initiatives, like a credit for first-time home buyers and the cash-for-clunkers program, have helped prop up spending in crucial sectors. But the nation is still grappling with the highest unemployment rate in 26 years, hampering efforts to persuade consumers to open their wallets again.

The Commerce Department said Tuesday that consumer spending in the third quarter increased 2.9 percent, falling short of the 3.4 percent it reported last month. That number worried some economists, who said it was below healthy margins and lower than the levels seen in 1983, when unemployment was equally high. Consumer spending makes up about 70 percent of the economy.

At the risk of sounding repetitive, the initial fiscal stimulus was insufficient, the labor markets remain weak and though the rate of bleed has slowed the economy continues to shed jobs. Moreover, the average length of unemployment is at a record high. Thirty-eight percent of the unemployed have been unemployed for 27 weeks or longer.


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Roubini: The Job Loss is Permanent

In an op-ed in the New York Daily News economist Nouriel Roubini, known as Dr. Doom for his dire yet accurate predication for the global economy, warns the US labor market remains weak and should continue to shed jobs through the end of 2010 at the earliest. He adds that "the jobs just are not coming back."

As for a response, he advocates a second round of fiscal stimulus.

There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

The long-term picture for workers and families is even worse than current job loss numbers alone would suggest. Now as a way of sharing the pain, many firms are telling their workers to cut hours, take furloughs and accept lower wages. Specifically, that fall in hours worked is equivalent to another 3 million full time jobs lost on top of the 7.5 million jobs formally lost.

This is very bad news but we must face facts. Many of the lost jobs are gone forever, including construction jobs, finance jobs and manufacturing jobs. Recent studies suggest that a quarter of U.S. jobs are fully out-sourceable over time to other countries.

Other measures tell the same ugly story: The average length of unemployment is at an all time high; the ratio of job applicants to vacancies is 6 to 1; initial claims are down but continued claims are very high and now millions of unemployed are resorting to the exceptional extended unemployment benefits programs and are staying in them longer.

Based on my best judgment, it is most likely that the unemployment rate will peak close to 11% and will remain at a very high level for two years or more.

While the U3, the nation's official unemployment rate is 10.2 percent, the broader U6 rate, which measures underemployment, is a stunning 17.5 percent. The U6 tops the 20 percent mark in Michigan, Rhode Island, Nevada, California and South Carolina reflecting a widespread coast-to-coast malaise.  

I think it is time to for the nation's first urban President since Teddy Roosevelt to think about rebuilding urban America that has seen a deterioration in its infrastructure. It's time to rescue Detroit and offer a vision for greener, smaller, sustainable Detroit. It's time to look at Portland's success as a urban model. An extensive light rail project has been integral to Portland's success. Rebuilding our urban transportation infrastructure, that we foolishly abandoned in the 1940s and 1950s, is the sort of national project that can provide jobs in the short-term while addressing our long-term energy needs.

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A Jobs Summit

Before leaving for a week-long trip to Asia, the President today announced that the White House will convene a jobs summit early next month. Frankly with an economy that has shed 3.49 million jobs since President Obama took office and 8.2 million jobs overall since the recession began in December 2007, this is long overdue. It is also a recognition by the Administration's economic team that their initial assumptions on the size of fiscal stimulus were insufficient to spark sustainable job creation. The story in the New York Times:

President Obama announced on Thursday that he will convene a jobs summit at the White House next month, saying "the economic growth that we've seen has not yet led to the job growth that we desperately need."

"Millions of Americans, our friends, our neighbors, our family members are desperately searching for jobs," Mr. Obama said. "This is one of the great challenges that remains in our economy, a challenge that my administration is absolutely determined to meet."

Mr. Obama made his remarks in the Diplomatic Reception Room at the White House, shortly before leaving Washington for a weeklong trip to Asia. He spoke after a report was released Thursday showing that fewer people had submitted applications last week for unemployment benefits than in recent weeks.

"Hiring often takes time to catch up to economic growth," Mr. Obama said. "Given the magnitude of the economic turmoil we've experienced, employers are reluctant to hire."

With health care and Afghanistan dominating the debate in Washington, many Democrats have grown concerned that the administration has not focused extensively enough on the economy and the unemployment rate that has inched up to 10.2 percent.

The jobs forum in December will include business leaders, small business owners, labor union leaders and others. It marks a pivot for Democrats as they head into next year's midterm elections, where the party's control of Congress is at stake.

While Mr. Obama is not on the ballot next year, his economic policies will be, as Democratic members of Congress and governors face an angry and worried electorate. Party strategists have been urging the White House to take more steps to respond to the economic concerns. Or, at least, show that the administration is focused on jobs.

"We all know there are limits to what government can and should do, even during such difficult times," Mr. Obama said, "but we have an obligation to consider every additional and responsible step that we can to encourage and accelerate job creation in this country."

The President also met with his Economic Recovery Advisory Board last week to discuss job creation options including making another round of investments in infrastructure. There is no short-term panacea, other than to extend unemployment benefits, but on the table should be the formulation of a national industrial policy based on a public-private partnership. Not since the 1984 presidential election, when Walter Mondale proposed a comprehensive industrial policy, has the issue sparked much discussion in either major US political party. It is time again to have this debate.

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Welcome to Relative Backwardness

After the release of the October unemployment data that reported a steeper than expected rise to 10.2%, I decided to revisit an old college text, The Zero Sum Society: Distribution and the Possibility for Change, the seminal work of MIT economist Lester Thurow. Written in 1979 and published in 1980, Thurow's work interprets macroeconomics as a zero-sum game and examines the American political environment to find explanations for the decline of the American economy. I thought it might offer some insights into our current predicament.

Just three pages and a mere seven paragraphs into the book, I came across this sentence:

And how do you evaluate vast expenditures, such as those we make on health care, where we are spending more than the rest of the world but getting less if you look at life expectancy (U.S. males are now sixteenth in the world)?

Twenty-nine years later, we are still grappling with the same question only now in terms of life expectancy US males now rank twentieth-fourth in the world. Clearly, we are not exactly making strides which only makes the eight paragraph of Thurow's classic all the more prescient and troubling.

But whatever our precise ranking at the moment, the rest of the world is catching up, and if they have not already surpassed us, they soon will. From many perspectives, this catching-up process is desirable. Most rich people find it more comfortable to live in a neighborhood with other rich people. The tension are less and life is more enjoyable. What is not so comfortable is the prospect that our rich neighbors will continue to grow so rapidly that we slip into relative backwardness.

Well, welcome to relative backwardness! We are not just being surpassed by European countries and East Asian tigers, on some metrics we are being surpassed by Latin American countries. The World Health Organization ranks the healthcare systems of Colombia, Brazil and Costa Rica as better than ours. If in 1980 we were worried about falling behind in relative terms, we should now be worried about falling behind in absolute terms. It is not just that other countries are leapfrogging us, it is the fact our living standards are being eroded. But our economic problem is really one of our politics. Where once success of the American economy was measured in terms of gains in living standards and the growth of the middle class, today only lip-service is paid to these. That the GOP long out sold the middle class should be obvious. This is, after all, a party that subscribes to an ideology where the individual trumps society and where inequality is a public good, not just an unfortunate consequence. But even much of the Democratic Party has long abandoned its New Deal principles with its Clintonian embrace of haute finance as the engine for growth. Everything else but perhaps for the pesky service sector, it seems, we outsource.

There is little doubt that macroeconomic shocks beginning in the early 1970s played a role in the erosion of American living standards. But the more fundamental factor since then has been the collapse of a political consensus that favors inclusive growth based on a broad-based prosperity. Instead our political economy, even today in the Age of Obama, favors a narrow elite. We can quibble about that size of that elite but when Representative Anna Eshoo, a liberal Democrat who represents Silicon Valley, has enough sway to insert an amendment into the healthcare bill that extends the patent protected income streams for biotech firms that produce a class of drugs called biologics from five to twelve years we should have no illusions about whom she actually represents. The interests she serves are that of her largest campaign contributor, the Biotechnology Industry Organization, the lobbying arm for the biotech industry. It is a mockery to suggest that Anna Eshoo has the interests of the American people in mind when she serves a corporate master.

The growth of the lobbyist trade is astounding and as their power rises, our living standards have fallen. Here's a quick historical overview:

After World War II, and particularly starting in the 1970s, lobbying in Washington expanded to a degree unimagined in previous generations. As the nation grew larger it also became more pluralistic. Interest groups multiplied and often were in conflict. Traditional isolationism or general indifference to foreign affairs was replaced by heightened awareness of the global involvement and reach of the United States. The dissident political movements of the 1960s demonstrated the possibilities of group political activities and prompted the rise of new groups that felt government was not being responsive to their needs and interests. The rapid evolution of efficient and cheap mass communication promoted grassroots advocacy far beyond previous levels.

Perhaps the most important change was the quiet revolution in the fundamental nature and rules of the legislative process in Washington: the fragmentation of the power of the political parties and party leaderships; the promotion of individual candidates with special agendas at odds with party preferences and priorities; and the restructuring of election campaign spending in ways that allowed groups to support particular candidates. Changes in Congress in the early 1970s, which some have described as a revolt of a new generation of younger politicians against old-guard traditional leaders, resulted in a reorganization of power within Congress, including a reduction in the power of party leaders and committee heads and an increase in the role of subcommittee heads and individual members. Instead of several dozen committees guided by the party leaderships, there were more than 200 subcommittees, often run by individual congressmen free of leadership control. Congressional staffs grew from 2,500 in 1947 to 18,000 in 2000.

These changes opened the door for interest groups, lobbyists, public relations experts, and political consultants of all kinds. The number of interest groups expanded steadily, growing by one measure from 10,300 in 1968 to 20,600 in 1988. The number of registered lobbyists in Washington grew from around 500 during World War II to more than 15,000 by the early 1990s. The number of political action committees (PACs) that financed many of the more powerful interest groups increased from a handful in 1970 to more than 4,000 in less than twenty years.

By 2005, the number of registered lobbyists had topped 35,000 (the number of lobbyists who actually do the lobbying is less - about 13,400 up 30 percent since 1998; the balance is support & research staff). The lobbying boom was caused by three factors: rapid growth in government, a pro-business Republican Party that controled both the White House and Congress, and wide acceptance among corporations that they need to hire professional lobbyists to secure their share of Federal benefits. In dollars terms according to the Center for Responsive Politics, the amount spent on lobbying Congress between 1998 and 2008 has grown from $1.44 billion to $3.3 billion. That's a CAGR of 8.65 percent. Meanwhile over that time frame, US GDP had a CAGR of just 5.07 percent.

It needs to be noted that lobbyists don't always work to get legislation passed. They more often work to get legislation killed. And to do so, they engage in delay tactics. To delay is effectively to kill. The result has been a paralysis of our politics. That this weekend the House was able to pass a measure that begins to tackle our healthcare crisis is indeed historic but given that the overwhelming percentage of Americans have long desired a more equitable health insurance scheme, it is noteworthy that the measure passed with just two votes to spare. Even more astounding is that the passage of healthcare bill is by no means assured in the United States Senate. The underlying causes of our political paralysis could not be more evident.

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A Recovery, But For Whom and For How Long?

Last Thursday, the Bureau of Economic Analysis at Department of Commerce released preliminary Third Quarter GDP figures. Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.5 percent in the third quarter of 2009, the first sequential growth in four quarters. The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment.

The figures released also mark the strongest growth rate in two years and a pause in the economy's dark slide. Over the past 12 months, the US economy  had contracted 2.3 percent. In 2008, the American economy grew a scant 1.1 percent shedding 2.6 million jobs, a number equal to the number of jobs found in states such as Wisconsin, Missouri or Maryland. And throughout 2009, the US economy has continued to shed jobs. Since the start of the recession in December 2007, the number of unemployed has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent. The job losses have been particularly brutal in a number of sectors. Employment in manufacturing has contracted by 2.1 million since the onset of the recession while the construction industry has lost another 1.5 million jobs. So in looking at this recovery, one must ask for whom.

Nearly 63 percent, or 2.2 percent, of the 3.5 percent increase in GDP was due to temporary government tax credits to consumers that have either expired or are set to expire before the end of the year. For example, durable goods spending surged 22.3 percent boosted by the Federal government's "cash-for-clunkers" program. Federal spending outlays added another 0.6 percent to growth. But for the fiscal stimulus, we would be looking at an essentially flat-lined third quarter.

Furthermore though corporate profits - 81 percent of the S&P 500 topped expectations - rebounded, most of the increase in profit, however, came from cost cutting rather than from robust sales, which should raise concerns about the sustainability of the nascent economic recovery. And corporate cost cutting was achieved largely by depressing wages and cutting employees' hours. The Obama recovery, such as it is, is little more than another vast redistribution of wealth from the bottom to the top. Wall Street gains mask Main Street pain. The players may be different, but this is still a neo-liberal game being played.

On Meet the Press, Secretary Geithner described the growth in the economy as "broad based." He must have a rather narrow definition of "broad based." This is a recovery that is leaving millions of Americans further behind and eroding living standards. While corporate profits rise, real average weekly earnings continue to fall. Average weekly earnings in the manufacturing sector rose by only 0.7 percent in September, as the average number of weekly hours worked fell to a record low of 33 hours. That's the lowest annualized weekly earnings growth since such data began to be tracked in 1964. Overall, the BLS reports that average weekly earnings have fallen by 1.9 percent since the beginning of the year with disposable income decreasing 3.4 percent in the quarter. It is simply incumbent upon the Administration to do more for the average American worker. The budget was a start but the Administration needs to address the structural unemployment problem and fully commit to broad redistributive policies that will create truly broad-based prosperity and not just one for investment bankers.

The economy has still has some major hurdles to confront. In February I began harping on the coming crash in commercial real estate. US commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. Thankfully, this is beginning to get some press as billionaire investors Wilbur Ross and George Soros "freak out."

There continue to be deflationary pressures in a wide range of asset classes: housing and rents being the most noticeable. But there are also inflationary pressures in the commodities markets. Since the start of the year, oil prices have more than doubled, copper is up more than 120 percent and gold has gained more than 10 percent. Zinc prices despite a 5 percent decline in demand are up over 75 percent. And while food inflation has so far remained in check, there are warning signs of creeping food prices.

It is to the Administration's credit that we have averted a systemic crash. However, as the Federal Reserve and the Treasury Department begin to wind down the extraordinary programs implemented over the past year, the likelihood of further financial turmoil is not just extant but high. And for too many Americans, the financial turmoil never ceased to begin with.

Below the fold, the thoughts of Joseph Stiglitz on the recovery.

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