The US economy

[sandid]

It’s a pity there appears to be no record on the net of Soros’s Singapore talk, just a lot of quotes. He doesn’t seem to base his view on anything that isn’t already generally known; it’s just that, given his resources, you have to take his interpretation seriously.

Again, the yield curve situation is just one of the ‘known knowns’. Since the Fed has a joint objective of price stability and minimising unemployment they must be trying to minimise the risks to both. The Republicans won’t want a recession in late 2006 or 2007. That just leaves external forces.

One impression I have is that Asian countries are determined not to go down with the ship if the US does have a recession.

[Ironman]

sandid,

I think you may be discounting the actions of the Fed too much. While they are mandated to minimize unemployment, I believe the Fed interprets that as being the "natural rate" of unemployment, which is always in flux and thereby gives them a lot of room to maneuver. The Fed gives higher priority to controlling inflation. With Ben Bernanke coming in as Fed chair, I think we can expect to see a stronger emphasis on inflation targeting, given his past work.

In other words, excluding major external shocks, I believe a late 2006-early 2007 U.S. recession will be a made-in-the-USA affair, driven by the Fed's modern habit of overtightening when inflation rears its ugly head (as most of them tend to be.)

Whether Asian countries adopt a "don't go down with the ship" approach to such a recession, that will depend upon what's going on in their economies at the time, as well as how deep and how long a U.S. recession might be.

As for Soros, I don't put much stock into the words of billionaires. They can afford to be often wrong....

[ikitov]

Snow trusts in the US.
http://today.reuters.com/news/newsArtic ... ived=False

Except inflation he is right. No reason for a recession.

[sandid]

Snow trusts in the US.

But ‘in the dollar we trust’? My pension fund and I are not so sure.

It is John Snow’s job to be bullish. He probably only got the job because his predecessor, Paul O’Neill, wasn’t bullish enough.

But I agree with most of the things he said. My pension fund and I are bullish – for now. 2005 was a good year and I hope the wheels will stay on this bull run for another quarter at least. If the US is heading for trouble, please let it be after Dow 12000.

2007 U.S. recession will be a made-in-the-USA affair, driven by the Fed's modern habit of overtightening when inflation rears its ugly head (as most of them tend to be.)

As for 2007, there’s the Marc Faber view that the US will print money and inflate away its debts as in the past. And there’s the Soros view that the Fed won’t know what ‘too far’ is until it’s gone there. There doesn’t seem to be much room in between for a soft landing.

I agree with Ironman that Bernanke will act on inflation even if it results in politically difficult unemployment levels. That’s the reason for setting an inflation target in advance – to make it politically possible to take unpopular decisions.

Some might say this crazy Bush administration will put pressure on the FOMC or fiddle the CPI numbers. We’ll see when we get there.

There is another view of the future, as put forward by Anatole Kaletsky in ‘Our Brave New World’. This is a golden age view of the US as the home of ‘platform companies’. We’ll see when we get there too. In the meantime, let's just keep an eye on the data.

[sandid]

What a letdown; everyone and his dog was waiting to see the US GDP figures for Q4 –
http://www.bea.gov/bea/newsrel/gdpnewsrelease.htm

- and when they appeared, showing an annualised growth rate of only 1.1%, everyone and his dog rubbished the numbers.

John Snow even issued a press release to rubbish them:

STATEMENT BY TREASURY SECRETARY JOHN SNOW ON THE RELEASE OF PRELIMINARY ESTIMATES OF FOURTH QUARTER 2005 GDP
http://www.treas.gov/press/releases/js3088.htm

The preliminary estimate of fourth quarter 2005 GDP released this morning is inconsistent with the underlying strength of the U.S. economy.

I would not read too much into today's numbers. They are somewhat anomalous, reflecting some special factors. They are not consistent with other data on the U.S. economy which paint a picture of good growth…

There are two more attempts to get the numbers right over the next two months. I bet the ONS is laughing.

[David Smith]

Yes, even the bears on the US economy here in Davos did not expect a number quite so bad as that, and it is true that the figures seem to include several distortions. Had things genuinely been as weak as the figures suggested, Alan Greenspan's crowning glory - getting US interest rates back to something close to neutral (4.5%) on Tuesday might have been thwarted.

[Ironman]

The US GDP figures will almost certainly be revised from the reported real GDP growth rate of 1.12% upward to 2.62% if the Skeptical Optimist's alternative GDP forecasting method is any indication. Still quite a dip from the previous quarter, but nowhere near a bad as the early data would seem to indicate.

[ikitov]

My experience with the US data shows that the BEA consistently decreases the first published figures several years after. In July 2005, they downed annual figures for 2002-2004 by 0.5%. So, I would expect GDP growth rate for 2005 to be revised down to 2.8% (current value 3.3%) in 2008. But nobody cares about old data. For example, most of the people interested in the US economy stiil refer to the 2001 recession in spite there was nothing like recession.

[sandid]

This graph isn’t very exciting but it shows how US GDP has grown to 12.75 trillion dollars (using quarterly data up to 2005 Q4, seasonally adjusted at annual rates, downloaded from www.bea.gov ).

I think I do have the revised figures, Ivan, but this shows the general picture. The top line is total production/spending. The other four lines are the main components that add to the total.

A few highlights: Government spending (light blue) and private investment (brown) are almost the same percentage of GDP today as in 1990, approx. 18% each. Personal consumption has grown by roughly 5% to 70% of GDP and the trade deficit has grown by roughly -5% to -6% of GDP, both since 1990.

If you consider the 1990/1991 recession and the 2001 slowdown, it was private investment spending that actually fell in both cases. Consumer spending didn’t fall.

So, short of a depression, the whole argument about whether to expect a recession, expressed as negative GDP growth, seems to depend on the behaviour of the two relatively small items that can have negative growth – private investment and the trade deficit.

(OK, slower consumer and government growth contribute in the total, but only investment growth and trade can be negative numbers).

Look at the trade deficit. Suppose the current trend continued and the deficit increased to 9% of GDP without provoking a crisis. The extra negative 3% would probably send the total growth below zero – a recession. But so what? If there isn’t a crisis – as in the current situation – whose worse off? Employment may actually increase.

The point I’m making is to question GDP growth as a means of keeping score. Surely wealth, health and employment are better measures of “growth” in an economy.

Now consider private investment. It’s made up of one-third “residential” fixed investment (housing) and two-thirds non-residential, i.e. business spending.

These two behaved completely differently in the two ‘recessions’. In 1990 residential spending dropped by 20% but business spending hardly dropped at all. In 2001 business spending dropped by 10% but residential spending didn’t drop.

Now wouldn’t you think that a drop in business investment is worse than a drop in house building? But 2001 is considered a mild (or non-existent) recession compared to 1990/91.

So fine, let’s measure GDP growth, but shouldn’t we pay more attention to employment, net wealth and wealth distribution?

[ikitov]

Sandid,

You have opened an endless discussion on the causes of recession.
Prescott and Kydland, the 2004 Nobel Prize laureates, got the prize for a model explaining business cycles as driven by some exogenous shocks of unpredictable nature. This means that no one can predict future recessions. So, their position is clear. You can not predict but can explain if you have an economic model in hands. The model is very sophisticated and includes many parameters calibrated to a given situation.
Half of economists (theoreticians and practicing) do not consider that explanation as a reasonable and provide approaches similar that you have written in your post. This is a streamline of economic thought. Their problem, however, that they can not catch the principal parameter driving all this mess (like business spending, government spending (Keyence), FDI or something else). Nothing works well. Actually, Prescott and Kydland got their prize because this second group fails every time.
Some physicists (statistical physics, theory of chaos, quantum physics etc.) develop models of statistical prediction based on some aggregate parameters. They actually can predict all the past recessions. The problem is that it is still hard to predict future recessions and also they predict in past more recessions than really happened - false alarms.
I have developed my own economic model that uses only one parameter (the number of 9-year-olds in the USA) and predicts dynamic and cumulative behavior of GDP per capita (and GDP). GDP is a good thing to predict exactly because of varying amplitudes of its ingredients. Whatever happens to the parts, the whole thing does not care.
GDP per capita is a better parameter, however, for description of economic performance. Various countries have different population growth rates and thus GDP measurements are usually strongly biased (in the USA +1.5%). By the way, the USA had a recession in 2001 if to use GDP per capita.
Currently, I am in a process of publishing, but you can find the model at my web-site. Obviously, I can not reproduce about 50 figures here.

[sandid]

Well, I’m glad there is some scepticism about GDP growth as an indicator. It doesn’t seem to indicate what ordinary people call “growth”.

Also, that’s a good point, Ivan, about GDP per capita being a better measure. It’s especially interesting as the US population is approaching the round number of 300 million this year.
http://abcnews.go.com/US/story?id=1503435

Dividing 12.75 trillion dollars by 300 million people gives them $42,500 of spending power each. That seems a little high, but does it really mean what it seems to say?

Just on the housing construction issue again – George Soros blames his suggestion of a recession in 2007 on a slowdown in the housing market. But that seems very unlikely to cause a recession by itself. Residential fixed investment is 6% of GDP. Even if that started to decline at the rate of 20% per year the reduction is only just over 1% of GDP. There would be other negative effects (jobs and re-sales) – but then the current spending on property may well go elsewhere.

Northern Trust has some good graphs and info. about new US home sales here (second half of the report):
http://web-xp2a-pws.ntrs.com/content/me ... 012706.pdf
.

[ikitov]

I have a bit different view, Sandid. I prefer to work with GDP rather than "living standards" because the former is a number. One can always check uncertainty of a measured value. So, when I say that GDP is determined with an accuracy of 1% I understand how this value is obtained and what one can do to measure it better. When you ask - What does GDP mean for ordinary people? I do not have any answer I can prove.
So, I better stay with the numerical definition of GDP, for which I have a definite relationship to predict its value for the next nine years. My point is that the numerical value of GDP does not depend on actual or physical content of goods and services produced in the US economy. What these people will produce is unpredictable in size and content, but the price they will pay for all those things is very well known and predefined. Houses are just a normal good like cars or education. Numerically, it does not matter what will happen to this market. Emotionally, this market is more important than that for cars or education. At the same time, if GDP grows steadily, one can expect a more of less healthy housing market as was observed before. So, if I predict a normal growth in the next two to five years, one can assume that the housing market will also be fine.
I am trying to incert couple figures with the prediction

[sandid]

Various pieces of the puzzle released recently – Dec. construction pointing to 2005 Q4 GDP being revised higher. Manufacturing, retail sales and employment all look good in Jan. – implying a good first quarter.

On the other hand, lower productivity and unemployment that’s below 5% and falling could lead to higher interest rates to slow things down.

I see you’re predicting rising GDP at the start of 2006, Ivan. ECRI’s US GDP leading indicator has also risen, pointing to faster growth ahead.
Gauge of U.S. economy rises in latest week
( http://www.businesscycle.com/ )

It looks like so far, so good on the economic front.

[David Smith]

The keenly awaited January payrolls, a bit weaker than expected:

'Nonfarm payroll employment increased by 193,000 in January, and the unemployment rate fell to 4.7 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job gains occurred in several industries, including construction, mining, food services and drinking places, health care, and financial activities.'

[ikitov]

I trust in numbers. But if one looks carefully in the methodology of the CPS
http://www.census.gov/prod/2002pubs/tp63rv.pdf
he finds that the payroll employment has an accuracy of +-150000.
That means that with a 90% probability the number is between 43000 and 343000.
I do not trust this particular number and monthly unemployment readings as well.