Economic forcast: Gloomy?

But isn't the economy improving? Yes, some economic indicators are, but other indicators are showing something else:



A new recession seems inevitable

[...] ECRI is one of the more widely respected firms on economic recessions, as it has never been wrong when forecasting that a recession would start, or failed to predict a recession well before it was widely accepted.

Achuthan predicts the recession will happen even without a new shock to the economy, such as a spike in oil and gas prices or a Greek sovereign debt default sparking a financial meltdown. If those things occur, he says they will simply make an inevitable recession more painful.

In fact, Achuthan said data gathered since his September forecast only confirms his view that economic growth has slowed to such a degree that a downturn is now unavoidable, likely by late summer.

"Now that we have several months of definitive hard data, this is not a forecast," he said, pointing to key measures that don't receive as much attention from the public or many economists.

Specifically, he identifies annual growth in industrial production, real personal income and spending, as well as the year-over-year change in gross domestic product, a broad measure of the nation's economic activity. That GDP reading has been stuck between 1.5% and 1.6% growth for the last three quarters, far less encouraging that the rising quarterly GDP, which is more widely reported.

"Basically, growth has flatlined," he said.

Some might think that a new downturn would be a so-called double-dip recession, in that it comes before the economy has fully recovered from the jobs lost during the Great Recession. But Achuthan said if the economy falls into recession at this point, it would be a new recession, not a double dip, given the time that has passed since the formal end of the recession in 2009 and the economic growth since then.

He said improved consumer confidence and economists' stronger outlook are due to gains in jobs and stocks over the last six months.

The unemployment rate has fallen for five straight months, dropping to 8.3% in January compared to 9.1% in August. Filings for new jobless benefits have fallen to a nearly four-year low. And the Standard & Poor's 500 (SPX) index has gained 27% since an October low to reach the highest level since June 2008.

Even ECRI's own leading indicators have been showing steady improvement since October. But Achuthan said those readings are still recessionary.

He said the time it takes employers to increase staff means that job growth is a so-called lagging indicator, which reflects economic conditions in the past rather than pointing to future growth.

"Job growth always follows consumer spending growth, not the other way around," Achuthan said.

That doesn't necessarily mean the economy will start losing jobs again by this summer, when he expects the recession to start. He said hiring can continue in the early months of a downturn, but there will definitely be job losses ahead. [...]

Read the whole thing to see why. The worst part is, the obvious signs of a new recession may not start to manifest until after the November elections.
     

Advice for America from a Mexican Tycoon

Carlos Slim Fixes the Economy

Mexican telecom tycoon Carlos Slim Helú—whose family fortune of about $74 billion makes him the world’s richest human (well ahead of Bill Gates and Warren Buffett on the Forbes list of billionaires—plays against type.

[...]

How do we fix this recession?

“With the same things that were done in 2000 and 2001, when it was temporarily solved with big expenditures and very aggressive monetary and fiscal policy,” he tells me. “Aside from lowering taxes, we should be directing more money to the real economy, not to the financial economy. The volatility of the markets is so great that more is won or lost in a single day than in five years of accumulated interest. And that’s not a good thing.”

I ask if he agrees with President Obama’s so-called Buffett rule, which would mandate that rich people like Warren Buffett—who benefits from a 15 percent tax rate because his money comes from capital gains—pay at least the same rate as their secretaries.

“I don’t know what Warren Buffett pays,” Slim says, “but I think that the fiscal policy should be fair. You don’t need to raise taxes on rich people, because they create capitalization and investment. But you need to tax speculation—meaning capital gains. Why should it be just 15 percent? Salaried people pay 35 percent. Why shouldn’t that be paid on capital gains?”

Anything else?

“The welfare policies that you are following—you and Europe—are unsustainable,” Slim argues. “You cannot have people retiring at 60 years old, and you cannot provide universal health care the way you do. That’s crazy. The focus should be the support of small- and middle-size business. That is where the employment is. And there should be investment in the real economy. Infrastructure is an example. And the best way to do that is with the private sector. It’s more efficient.”

I ask what should be done about the terrible violence surrounding the illegal Mexican drug trade, with grisly murders in the tens of thousands.

“It’s a problem coming from the United States,” Slim says.

Because of the demand?

“Because of everything. You stay with the money and the drugs. We stay with the weapons and the violence. And you’re selling the weapons to the consumers in Mexico. And the retail price [of the drugs] is, I don’t know how much bigger, let’s say 10 times in the U.S. what it is in Mexico. And that means the demand is here and the money is here. It’s like what used to happen during Prohibition in Chicago. You had a lot of violence there.”

What’s the solution?

“Follow the money.”

Would it help to legalize the drugs and, as with Prohibition, eliminate the incentive for crime?

“It doesn’t ‘help,’ ” Slim says. “It finishes.” [...]

Interesting. The article has a photo.
     

The Bond Market won't wait much longer

A Race Against Time To Balance the Budget

[...] Even as Greece, Spain and Ireland raise the specter of sovereign debt crises, even as France and Britain take bold action to bring their excessive spending under control (at the price of major street violence in their capital cities) American politicians focus on the general unacceptability of a proposal that includes anything that doesn't quite fit their ideological predilections. If they can't have it exactly their way, then they don't want it at all. They are prepared to just coast forward at multi-trillion dollar yearly deficits, leaving only a string of condemnatory press releases in their wake.

But there are Cassandras out there warning against such delays. This spring, Fed Chairman Bernanke warned Congress that the United States could soon face a debt crisis like the one in Greece.

"It's not something that is 10 years away. It affects the markets currently," he told the House Financial Services Committee. "It is possible that bond markets will become worried about the sustainability (of yearly deficits over $1 trillion), and we may find ourselves facing higher interest rates even today."

Just last weekend, the former Fed Chairman Alan Greenspan spoke on NBC's "Meet the Press," saying he believed "something equivalent to what Bowles and Simpson put out is going to be approved by Congress. But the only question is whether it is before or after a crisis in the bond market."

He said the risk is that the deficit, which hit $1.3 trillion this year, could spook the bond market. That would result in long-term interest rates moving up rapidly and could lead to a double-dip recession.

The Fed chairs are not alone. According to Bloomberg News, earlier this year, New York University professor Nouriel Roubini, who predicted that last crash, said that "the U.S. may fall victim to bond "vigilantes" targeting indebted nations from the U.K. to Japan in a potential second stage of the financial crisis."

"The chances are, they are going to wake up in the United States in the next three years and say, 'this is unsustainable.'"

Roubini suggested that "the public debt burden incurred after the 2008 bank panic may now cause the financial crisis to metamorphose.

"There is now a massive re-leveraging of the public sector, with budget deficits on the order of 10 percent" of gross domestic product "in a number of countries," Roubini said. "History would suggest that maybe this crisis is not really over. We just finished the first stage and there's a risk of ending up in the second stage of this financial crisis."

Of course, we may get lucky. But the sad thing is that we don't even have to fully implement a ten-year deficit reduction plan to vastly reduce the risk of a bond crisis. If we were to enact a serious, credible plan -- even if it didn't begin to bite for a few years, that would probably assure the bond market that we are taking care of the problem.

By immediate action, I mean that Congress and the president go into intense negotiations this coming January and keep at it until we have a plan that brings us back to fiscal probity and is reflected in a budget resolution and the early appropriation and authorization bills. It will take about six months of intense, good faith work. [...]

Clearly it can be done, but how much longer are we going to procrastinate? Timing matters. We must keep pressure on the GOP to hold the course on fiscal responsibility, and to do what is necessary. Too little, too late, could have extremely dire consequences. It's fixable, but we have to act NOW.


Also see:

Has US Currency already "collapsed"?

The book "When Money Dies" is back in print

What happens when Tax Cuts Expire in 2011?

Our true national debt: $130,000,000,000,000.

Argentina's Example: Are we heading there?

     

The "Jobless" Recovery. A Second "Dip"?

Recession May Be Over, but Joblessness Remains

The United States economy has lost more jobs than it has added since the recovery began over a year ago.

Yes, you read that correctly.

The downturn officially ended, and the recovery officially began, in June 2009, according to an announcement Monday by the official arbiter of economic turning points. Since that point, total output — the amount of goods and services produced by the United States — has increased, as have many other measures of economic activity.

[...]

The declaration of the recession’s end confirms what many suspected: The 2007-9 recession was not only the longest post-World War II recession, but also the deepest, in terms of both job losses and at least one measure of output declines.

The announcement also implies that any contraction that might lie ahead would be a separate and distinct recession, and one that the Obama administration could not claim to have inherited. While economists generally say such a double-dip recession seems unlikely, new monthly estimates of gross domestic product, released by two committee members, show that output shrank in May and June, the most recent months for which data are available. Output and other factors would have to shrink for a longer period of time before another contraction might be declared.

Even without a full-blown double dip in the economy, the recovery thus far has been so anemic that the job picture seems likely to stagnate, and perhaps even get worse, in the near future.

Many forecasters estimate that output needs to grow over the long run by about 2.5 percent to keep the unemployment rate, now at 9.6 percent, constant. The economy grew at an annual rate of just 1.6 percent in the second quarter of this year, and private forecasts indicate growth will not be much better in the third quarter. (The Business Cycle Dating Committee itself does not engage in forecasting.)

“The amount of unemployment we’ve already got and the slowness of recovery lead to predictions that we could have 9-plus percent unemployment even through the next presidential election,” said Robert J. Gordon, an economics professor at Northwestern University and a committee member.

“What’s really unique about this recession is the amount of unemployment in combination with the slowness of the recovery,” he said. “That’s just not happened before. We had a sharp recession followed by a sharp recovery in the 1980s. And in ’91 and ’01 we had slow recoveries, but those recessions were shallow recessions, so the slowness didn’t matter much.” [...]

The rest of the article compares this recession and recovery with ones that have occurred previously, and looks for explanations to account for the differences. Some of their findings are interesting, but the real question they should be asking is: "Why aren't employers hiring?" There ARE reasons. See the links below:

Why the "Recovery" is stalling

What happens when Tax Cuts Expire in 2011?

Obama's Anti-Business Policies Are Our Economic Katrina
     

What happens when Tax Cuts Expire in 2011?

Tax rates will rise sharply. Businesses are already planning for it now, and it will affect the state of the economy and the recovery. But how much so? Here are two perspectives:

Tax Hikes and the 2011 Economic Collapse
Today's corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market.

[...] On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush's tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.

Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession. [...]

The article goes on to compare what is happening now, with what Ronald Reagan did in 1981, to pull us out of a recession. The current Administration is doing exactly the opposite, and the results will be exactly the opposite too. Many in this Administration have been claiming that "capitalism is dead"; and now it seems they are doing their best to make sure it happens.


Tax cuts actually increase tax revenue, because as businesses prosper, there are more businesses and employees paying taxes. The Democrat leadership knows this too, but it doesn't fit with their agenda of attacking the private sector and expanding government power and control. Many of them would even like to overburden and collapse our current system of government and economics, so they can then replace it with something else. And unfortunately, the Democrat's understanding of economics in general, tends to be very poor. We are seeing the proof of that now.

Even so, I don't want to be strictly partisan about this, I want to be realistic. Is the prediction of "economic collapse" in 2011 too grim? Or at least, too soon? Perhaps.

Will Higher Tax Rates in 2011 Cause an Economic Collapse?

[...] I am reluctant to endorse Art’s prediction that the “economy will collapse,” since even good economists are lousy forecasters. But we certainly will see a large degree of tax planning, which will lead to less revenue than expected next year. And the higher tax rates will inhibit growth, though it is impossible to predict whether this means 2.1 percent growth instead of 2.3 percent growth, for instance, or 0.5 percent growth instead of 0.6 percent growth. [...]

You don't need to be a rocket scientist to understand that if taxes rise sharply, businesses will make decisions based on that, and the cost of higher taxes will be passed on to the consumer in the form of higher prices.

In our own business, we are buying new equipment and making repairs and improvements this year, because we are anticipating the costs of these things to rise next year. Therefore, we won't be spending much next year. I would have to assume that other business people who are paying attention to what is happening are going to do the same.

Even if we elect a better congress in November, it will take time to reverse the many bad trends that have already been put into motion. I don't see a quick fix for any of this. We are going to have muddle through. If that is the best we can do, then we must do it. The situation is what it is, but it can be improved, even if it has to get worse for a time, before it can get better.


Also see:

Has US Currency already "collapsed"?

What would a U.S. currency collapse look like?

     

What happens if China stops buying US debt?

Some people who claim to know, are saying that time may be closer than we think:

China May `Crash' in Next 9 to 12 Months, Faber Says

Investor Marc Faber said China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst.

The Shanghai Composite Index has failed to regain its 2009 high while industrial commodities and shares of Australian resource exporters are acting “heavy,” Faber said. The opening of the World Expo in Shanghai last week is “not a particularly good omen,” he said, citing a property bust and depression that followed the 1873 World Exhibition in Vienna.

“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

[...]

Faber joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.

China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade. [...]

Read the whole thing for the details. It sounds like China is on an unsustainable path. So if China stops buying our debt, what could the response of the US government be? Neal Boortz speculated about this recently:

ARE YOU STARTING TO BELIEVE ME NOW?

[...] A story in this week's edition of Human Events details a request by the Obama Administration to the Departments of Labor and Treasury to provide information regarding the "annuitization" of private 401K plans through something the Obama crowd calls "lifetime income options." Yeah ... lifetime income options paid by and controlled by the government. The Republicans are prepared to fight .. but until next year they don't have the numbers.

The second scenario in which the government could seize our 401K or IRA plans isn't really getting all that much attention ... yet. Maybe I just dreamed it up. Here's the scenario: Obama and the Democrats, with no small amount of help from the Republicans, continue to spend America into bankruptcy. The deficit grows and our national debt grows even more hideously. Finally China, facing some economic problems of its own, decides it owns enough U.S. debt. Treasury tries to auction some more debt instruments, and China shows no interest. Suddenly the Imperial Federal Government is faced with a problem ... who is going to buy U.S. Treasuries? Just how much interest are we going to have to pay? Answer? Why, we'll make our own citizens buy them! The next thing you know the Democrats are rushing to pass legislation mandating that all outstanding funds in 401K and IRA plans be immediately used to purchase a special issue of Treasury Bills! If you want to maintain the tax advantages of these retirement instruments you'll have to invest the money in low-yield Treasuries and hold "your fair share" of American debt. Good bye to making your own investment decisions and good bye to any decent rate of return on your retirement savings. [...]

I've sometimes regretted not maintaining a 401k. Now I'm wondering if it's just as well that I didn't.
     

Interactive unemployment map, by county

The Decline: The Geography of a Recession

Follow the link. It's a time-lapse map of the USA by county, from Jan 2007 to Sept 2009. The dark colors represent growing unemployment. It's like watching the lights go out in America.

Here in Oregon, unemployment rises in the private sector, while Government jobs thrive and even increase:

It's no coincidence. Government jobs are union jobs, and their policies are often antagonistic to the private sector; job killers.
     

Japan: "Throw the Aso out of office"

Japan election: Opposition set for victory, PM quits as party head

TOKYO, Japan (CNN) -- Japanese Prime Minister Taro Aso announced his resignation as head of the party that has governed Japan for decades following its apparent landslide defeat in elections Sunday.

Japan's voters, fed up with the party that has governed the country for decades, gave the opposition an enormous landslide victory in parliamentary elections Sunday, exit polls suggest.

The polls indicate the Democratic Party of Japan (DJP) may have won a 3-to-1 victory over the Liberal Democratic Party (LDP). Aso congratulated the DPJ in a televised appearance as the country waited for official results.

Yukio Hatoyama, the DJP leader, was restrained in his first public comments since the vote.

"I hope this victory will be for the people of Japan," said the man who is poised to be Japan's next prime minister.

Hatoyama, who has been touting an Obama-style message of change, was mobbed at street rallies by supporters during the campaign -- the kind of support the opposition has never seen before.

He pledged to raise the minimum wage and discourage hiring through agencies or on temporary contracts.

That message is gaining traction in a country that is witnessing historic highs in unemployment and experiencing ramifications like homelessness for the first time.

Voters at polling stations told CNN they wanted change and wanted to give new leaders a chance, even if they were not sure what policies would replace the ones that have run the world's second-largest economy for more than a generation. [...]

I suspect that the outgoing "liberal democratic" party is the more conservative party, while the democratic party is the more socialist party. I can only wonder if their new "Obama style" leader will amass huge mega deficits too? We'll see.