The recession is over, isn’t it ?
Posted on 31. Okt, 2009 by Geert in Uncategorized
The news is now all around: the recession is over. It seems that the media are so hungy for good news, that they forget to give a fair picture of the current state of the US, European and world economy.
US GDP grew by 3,5% in the third quarter. Or to be more precise, a government statistician made an estimate of such growth, taking into account an increasing qualitative judgment on the data. Of this 3,5% , roughly half was because of government stimulus. The cash for clunkers program contributed by some 1,5%. Government expenditures added also a bit.
But anyway. After a terrible stretch of negative growth, there was a quarter of growth in the US economy. To be true, there might even come a new quarter of positive growth and a third. But that doesn’t mean the recession is over. A recession is not only measured by GDP. It is a combination of a broad number of economic elements, employment, investments, consumption etc.
But more importantly, we should acknowledge that the current economy is on life support, adrenaline in the form of zero interest rates and ballooning public deficits. This has to be paid back somewhere down the road.
This evening, I met a CEO of an important financial institution. He told me that several companies are in critical danger. Breaches of convenants for instance. A relapse of orders after an inventory-led rebound. Layoffs that are just starting. And delinquencies all around. The picture on top of the post, shows the “seriously delinquent loans” as a % of total (FNM). No explanation needed I guess ? This kind of evolution is bound to have second round effects. Rising unemployment will eventually translate into cuts in consumer expenditures, and probably more delinquencies.
There is one thing we should acknowledge on the positive side: a lot of companies (non-financials) are showing unexpected big profits. To what extent this is currency related (in the US: import of non-USD revenues) or how much is government related is unclear. It is sure however, that companies have been very proactive in cutting costs, and cutting deep.
Corporate profits are at this stage, a support for the markets. The question is also, whether corporate profitability will eventually translate into new investments and employment. In an environment of global excess capacity, I have difficulties in being an optimist on that part of the rosy scenario.
Frank
31. Okt, 2009
The recession is over. The depression can begin. I’m still in the deflation camp. My God, I’ve never been deeper in the deflation camp till now.
The world economy has been ballooning on cheap credit for many years. When too much credit popped it, governments and central banks pumped it up with even more and bigger cheap credit. Detoxing the drug addict with more dope will kill the patient. The recovery is a mirage. It’s the last “hoera” based on free money, public deficits, adding more debt to the books, shuffling debt instruments around and valuing debt at 100% instead of market value.
The system is overloaded with debt. Debt that is currently marked at 100% on the books of banks, bussinesses, …. Soon the market will find out what the true value is of the massive amount of debt that can not possibly be paid back. Debt is about to engage in a massive deflation which will break many promises to pay back. Many economists still believe central banks are in control of the situation and of inflation. They are going to try, that’s for sure, but they are fighting a debt tsunami with a rubber boat and a water gun.
For years central banks and governments have been fostering the growth of debt. The debt puppy has been growing ever since. Now the puppy has become a monster it needs more and more food to stay happy. The monster is out of control and if it does not get what it wants, it’s going to bite with a vengeance.
Emeline
31. Okt, 2009
@Frank
I enjoy your accurate comment, written with a bright view.
FV
31. Okt, 2009
@frank : day by day higher (income, property, …-)taxes, higher food- & energyprices, … vs more unemployment, Joe6pack throwing the towel, … : doesn’t that sound more like stagflation !?
carl
31. Okt, 2009
American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order
Theo
31. Okt, 2009
@ Geert
Given current economic realities and the tools of corporate finances/management… isn’t it better to talk about non-financial corporations trying to stay solvent, rather than corporate profits in the strict sense?
Isn’t this an important distinction, which gives us an indication of why industrial investment is still down? and in turn why this is very far from it being an economic recovery?
Selling off your built up, overpriced inventory and cutting off as much overhead as you can afford is not exactly an indication of economic recovery.
Peter Meuris
31. Okt, 2009
Deflation and huge debts gives lots of defaults, no ?
Theo
31. Okt, 2009
@ Peter Meuris
Not necessary.
Look at all the reported “profits” last quarter.
Furthermore “default” is a financial term, not accounting.
What’s at play here is not the amount of debt (leverage), rather the type of covenants as per contract with the debt holder (usually some sort of financial institution).
This little detail is important here in the story about the CEO and his clients.
Depending on the type of covenants, the corporations have different options available. Again, this is important in determining how long a corporation has before insolvency and who ends up with the assets on their books.
koen2
31. Okt, 2009
Deflation in the US? Sure (the deflating economy), but no way (the inflating government).
http://krugman.blogs.nytimes.com/
Still, we’ve gotten the big boost, and it’s clearly far short of what we really need.
And yes, we can afford more.
koen2
31. Okt, 2009
GDP inflated by government’s cash for clunker programme
hmm: general motors had it’s own cash for clunker programme, a couple of years ago (zero interest financing), now it’s on life support
http://www.businessinsider.com/chart-of-the-day-motor-vehicle-output-2009-10
According to the Bureau of Economic Analysis (BEA), motor vehicle output spiked a seasonally-adjusted 157.6% quarter on quarter. This is completely unprecedented. Vehicle output is clearly going off a cliff next quarter. The question will be how low can the blue line below go.
Next quarter, we won’t just be returning to business as usual for auto output. Don’t forget that Cash for Clunkers pulled future auto demand, ie. some of Q4 demand, into Q3. Thus Q4 is likely to be very weak since many people who planned to buy a car in Q4 probably took advantage of Clunkers and bought in Q3.
To put this into GDP terms, according to the BEA the spike you see below added 1.66% to the U.S. GDP growth figure reported. Thus without it, GDP growth would have been only 1.89% (3.5% – 1.66%) in Q3.
Now imagine if next quarter the blue line below goes down into negative territory as it did just two quarters ago. Next quarter, not only are we unlikely to get Q3’s boost, but motor vehicle output data could subtract from GDP as well. So watch out for the cliff…
koen2
31. Okt, 2009
economagic has a new chart:)
it should be looked at in combination with bank credits and M2: you can lead a horse to a well, but you can’t make it drink, or, you can’t push a string
(click on ‘SA’, then on ‘gif chart’ and then change the settings to 1970)
http://www.economagic.com/em-cgi/data.exe/frbH3/day-t04s01
Frank
31. Okt, 2009
@Emeline
Thanks. Much appreciated!
@FV
Taxes are up. They will always be. Taxes are set by the government not by the market. As to food and energy, prices are down. Remeber all these economists a few months ago who said that deflation was only temporarely and based on the collapse of oil prices last year. Guess what: prices are still plunging. It’s just beginning. High prices of the past where not real, they merely reflected the ballooning credit bubble.
Ann Somers
01. Nov, 2009
Philip Gijssels (Fortis) deelt uw scepticisme Geert. Lees de Tijd website.
carl
01. Nov, 2009
The massive debt is already there.The leverage is still in the system.
The day comes when the next treasury auction goes without bidders on some portion.
China has shifted its maturity to extremely short-term .
They shorten maturity,so that if the birds take flight they can move to dump at the first sign of trouble.
carl
02. Nov, 2009
I have difficulties in being an optimist on that part of the rosy scenario:
Geert,Isn’t it a paradox for you also that the main obstacle to turning this so sais recovery into a durable expansion is the stimulus programs of the Obama Administration that were meant to ensure recovery.
Every busineesman can see a huge tax increase coming right at them because of the 1,4 trillion deficit in 2009 and nine trillion more prerdicted for the next ten years.
Consumers (the personal consumption share of GDP rose to a high of 71 % in the 3rd Q of 2009.
The jobless rate is officially 9,8 %.
Consumers can’t carry this expansion for long if the job market doesn’t recover.
When will the animal spirits revive?