Yesterday, Macroeconomic Advisors cut their 2Q GDP forecast, which caused Professor Brad Delong to say "IT'S TIME TO PANIC !!", which in turned caused Professor Paul Krugman to reiterate his "Third Depression Watch," which in turn has caused Doomers everywhere to cream themselves in barely concealed delight.
So I was all set to do an "I told you so," citing my January 11 forecast of "good growth" in the first quarter, followed by:
... in March or April, a debt ceiling increase will have to be passed. This Congress gives every indication of preparing for first class brinksmanship and idiocy on that score - meaning that either a government shutdown and/or default will actually occur, or dimwitted austerity measures will pass. So much for the second quarter.And I've been noting since at least March 25 in my Weekly Indicators column that "it appears that the Oil choke collar is indeed beginning to constrict the economy."
....
... Oil at 4% of GDP - given general inflation and GDP growth, is probably now more like $94 a barrel. But continuing expansion in Q1 should push us there. As with 2010, the effect of the price of Oil depends on how far and for how long it overshoots that mark. At this point I do not anticipate much of an overshoot, but combined with Congressional idiocy, this should be enough to restart fears of a double-dip in the April-July window ....
But here's the thing: GDP for the first quarter was just revised from 1.8% to .... 1.8%. And Macroeconomic Advisors' downgrade of forecasted 2Q GDP was from 3.2% to 2.8%!
In other words, the blogospheric Doomgasm has been prompted by fears that the economy will grow 1% more this quarter than last quarter!
Ummmmmmm, ok.
For the record, I still see a slowdown or stall this quarter and/or next. And this is still going to be a long, hard slog of a recovery, and yes it would be nice if somebody in Versailles actually gave a damn.
Bonddad here:
I just wanted to add that I've also noted the same issues (a slowing economy) here and here. In other words, readers of this blog -- data driven and wonky that it is (with pretty graphs to portray numerical data over a time) -- knew what was happening. And neither NDD nor I are saying the world is coming to an end, or that we're in a depression or that the pits of hell will open up and swallow us whole.
I do want to give NDD a big hat tip for catching the issue far earlier than I did. Thankfully, I've given up betting him on his economic predictions!
6 comments:
You seem to imply that 1.8% growth is somehow satisfactory.
To quote one of my favorite bloggers (http://www.fundmymutualfund.com/):
"It remains scary to think what the economy looks like without 18 IVs attached pumping steroids into every vein. We're now nearly 2 years into the 'recovery' and it's almost entirely China and US deficit spending driven. The economy continues to be "meh", but corporate profits continue to be solid as the labor force is squeezed. Which to come full circle, is part of the reason we have so many government programs running to substitute for the catalysts that should be occurring in an organically healthy economy where labor and capital are far more in balance."
Wsm:
For my part, I certainly do not think 1.8% growth is satisfactory. Presumably, neither do either of the good professors.
But they didn't write "head for the hills!!!" articles a month ago when the 1.8% 1Q GDP was announced. So why is the forecasted 2.8% 2Q GDP suddenly cause for predicting Armageddon?
Because the 2.8% downwardly revised forecast after a 1.8% nonrevision isn't going to be enough to pull employment back up at all. And the longer unemployment stays elevated, the more likely it is to maybe start up a demand-destruction spiral again, or at least keep demand low and loop us back around to reinforcing the stagnant/low growth.
I have mixed feelings about where we're at, but I have had mixed feelings through the whole downturn and recovery, to be fair -- everything is mixed signals. I think we'll have slow and insufficient growth with high unemployment for a while, but whether that leads down the road to finally finding some footing, or whether it starts to become a huge downward pull of it's own, I can't really guess.
I think that's the point of the alarm sounds, though -- this isn't enough to pull employment at all, and there have been many signs of a real demand-driven downward pull through this whole economic event. Unemployment as an indicator lags, but probably only until it eats some unknowable huge amount of demand, and then it leads into a spiral. I think that's a reasonable worry and a reasonable cause for new action of some kind, though I do also think the OMG IT'S HAPPENING MAD MAX!!!11!!!! stuff is completely mockworthy.
"So why is the forecasted 2.8% 2Q GDP suddenly cause for predicting Armageddon?"
I definitely don't think the Q1 (or Q2, or any 2011 data) are cause for Armageddon. I get it that the original post was aimed at dispelling the two reactions that you linked to at the beginning of the post.
My point is that the economy has been in disastrous shape for several years now. Quantitative Guessing (1, 1.5, or 2) did not change that (it actually made it worse). The bottom line is that the 2 most important drivers of the domestic economy, housing and employment, are both still in horrendous shape.
First time unemployment claims are now over 400K for the sixth straight week in a row. This is very alarming and next week's jobs report will probably be very weak.
Economists Lawrence Christiano and Terry Fritzgerald find that the comovement correlation of the petroleum industry with with the total economy is .16. What this number means is that the oil industry is highly countercyclical. A zero correlation means the variable is perfectly countercyclical and a 1.0 correlation means the variable is perfectly pro-cyclical. A .5 reading means the variable is acyclical. Thus, high oil prices are a real concern. What's good for Exxon is bad for America.
Just for comparison, the goods producing sector has a comovement correlation of .99 and financial services a correlation of .48. This means manufacturing is highly procyclical while finance is surprisingly not correlated to the business cycle. Another finding is that we almost always have a recession when petroleum expenditures reach 4% or more of GDP.
Does this mean that we will soon have another recession? Not necessarily, we did not have a recession in 2003, even though oil prices spiked up that year. One explanation is that the oil shock was short and occurred when the economy was in the early phase of a recovery. Thus, its no time to panic, but on the other hand, the economy is getting close to recession territority.
BondDad, I'm pretty sure that the two good professors are emphasizing the bleak prospects for the economy because they consider the ~2% quarterly growth rates to be Depression level performance for Main Street. That level of GDP growth pegs job growth at just enough to maintain the UE rate at its current level, unless one starts to see major increases in job market participation. Further, they very well might believe the official GDP deflator is underestimating the inflation rate by even a relatively small amount. If the deflator were to be increased by a mere 1%, the GDP growth rates fall into the 1% range. At that point, we're not officially in recession, but those negatively impacted by all of the horrendous financial, fiscal and now political decisions of the last ten years will be living Great Depression-style lives. The only difference is that we now have more guns in the society than we did in the 1930s.
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