Our forecast of official growth forecasts back in the fall turned out to be fairly accurate. My update of this assessment – for the new IMF numbers due out next week – is now online at NYT.com.
Many officials seem to have bought into some version of the “it’s a V!” take on the global recession. To me, this looks like wishful thinking. Whether or not you support the “V” view fully, officials should surely be spending more time preparing for worse scenarios.
Just in case – why not prepare properly for the cross-border resolution issues that would arise from the failure of a major global bank? Why did the G20 decline to take on this issue properly? Even the IMF’s baseline, I expect, will suggest potentially serious problems ahead.
The Baseline Scenario 
Too bad there’s no letter of the English language that looks like a downward-sloping lightning bolt.
I have been doing a little look at the near-monthly WSJ survey of economists and their forecasts of GDP for the last couple of years. This has been stimulated by Menzie Chinn’s regular update of the latest vs. last forecast at Econbrowser.
While I don’t yet have the stats all lined up to support this, it appears that on average every forecast of GDP (& similarly with other metrics) has several consistent characteristics: The trough is later and lower, and the recovery is longer and slower.
I can understand these economists not catching the turn to recession (to some extent), but why do they keep projecting a turnaround sooner, higher, and faster than has so far been the case? At this point, I’m tending to believe it’s driven by their employer, not the data, analysis, or models.
Even if the recovery began _tomorrow_, it would not be a V… it’s already the longest recession in post WWII history. We’d be immensely lucky to see a U.
Firms, even those with heavy cash cushions, are not treating this like a V. There is no demand source emerging to rescue the global economy, except _possibly_ the chinese state. Consumers are many times more than tapped out (and with historically record debt-earning ratios, every sane individual is wondering why Obama, his lieutenants, the banks, and occasionally even this website continually emphasize – with coordinated talking points – the need to get banks lending again, when there’s clearly plenty of liquidity, but limited opportunity).
The illusion of reflated asset values will only survive if it is met with real economic data suggesting actual stabilization and improvement. Meanwhile, the reservoirs of spending are slowly being exhausted and federal debt is piling up. The utter inaction and bumbling of the last 6 months inflicted tremendous damage… Each month of incompetence probably delayed recovery by 2 months, as many homeowners went under, businesses chopped more employees, small businesses gave up the ghost, and individuals exhausted precious savings.
Also, consumers will be paying down house and consumer debt for years (since they bought at inflated asset values, and the sellers/refinancers/equity-dippers spent on consumption). Banks, provided with a lifeline of cheap money, will soak up the high-payments, where the money will literally vanish to cover loan loss reserves.
Given this, we would be fortunate to see an L-recovery, supported by government spending that results in real long term infrastructure investments, which lasts for a few years while consumers slowly spend themselves out of debt (aided by modestly above average inflation achieved through coordinated global QE). Followed by an accelerating recovery in which China begins to assume a stronger global role, and we see an acceleration in infrastructure/energy/health investment.
ZZZZZZZZZZZZZZZ!
the scariest letter
statsguy.. man, I loved your summary of the situation and the road we’ll need to travel to get out of our current situation.. It was a clear and concise posting that provided clear and rational understanding. I have forwarded it to a few of my friends.
I think Soros is right. The recovery will be an upside down square root sign. Right now, the economy has overshot on the downside. This overshot will build up demand that will bring about a quick up swing. The deeper the the overshoot on the downside the stronger the upward rebound. The rebound will likely overshot on the up side. However, US consumers simply will not have the same easy credit as before. This in conjunction with the Fed tightening the money supply to prevent inflation means the economy will correct back down and find a lower level when compare to the economic level before the crisis.
Admittedly, I only have minimal data that the economy has overshot on the downside. For example, Larry Summer’s point about annual vehicle replacements rate is one excellent example. On the other hand, you’ll find a quick rebound for every US recession since ww2. What is different this time is that the economy will settle on a lower economic level than before the crisis.
I’ve been wondering about the economic data on prices, which suggest increases in health and education. Are prices rising because aid – free care, tuition assistance – is declining? Or does the increase in price suggest some underlying strength in the economy? Andrew
The big question is whether this downturn will behave like the other post WWII recessions, or like the great depression. So far, most predictions that it would behave “normally” (starting from a year ago) has been obliterated – although much of this is because the government response has been pathetically below expectations (until, perhaps, the last month).
Immediate history, therefore, may not be a good prediction. We can note some unique factors:
The average lifespan of autos, for instance, has increased, but up through 2006 we continued to exhibit sales growth outpacing population growth. This suggests excess ownership, which can be redistributed through second-hand sales (particularly as people lose jobs). In other words, leaving aside super-deals (and we’ve seen some of them), what is the natural resupply rate for the US auto market? I suspect that, under pressure, consumers could keep their clunkers going quite a while. As new data has come in, the US auto industry has continued to cut production and push back the anticipated date of its demand-rebound, and it may just settle down to a lower steady-state (not necessarily a bad thing). And this is not just a US problem. Sales of importers to the US have suffered almost as much.
We can ask the same question of cell-phones and computers. Prior to the meltdown, sales were kept up partially be replacement (upgrading monitors to flat screens) to newer models, and partly by purchases of second and third systems (discretionary). So where are the new systems that are crucial to have, and will people sustain discretionary purchases? (Is there another big leap in the next year, or are we running-out the product lifecycle?)
Likewise, homeownership has exceeded historical levels, and we still have an excess supply due to second-home ownership and investment ownership. Also, if we see a long term transition to smaller (but more efficient/comfortable) homes, there is no reason for larger and poorly constructed homes to reflate in value (leaving consumers chained to long-term debt payments).
Also, there’s the question remains just how much real and longlasting change has occurred to the consumerist American psyche. We won’t know that for a while, but many semi-discretionary purchases (clothing, accessories, electronics, travel) could continue to suffer as some people re-evaluate their entire lifestyle.
Remember, that in spite of the highly-criticized aggressive US Fed action, we just saw 0.4% year-on-year decline in prices. In the long run, there are sectors that need to grow – but something needs to keep demand stable/growing long enough for resources to transition into the new sectors (and those new sectors may require significant govt. support).
There is still concern that govt. is not doing enough… and that the periodic upward blips (with bear market rallies) will keep giving everyone hope that the economy will “heal” by itself in just a few months (without taking the aggressive steps necessary).
This one is easy – the increase in tuition is reflecting a decrease in willingness of universities to tap endowments to fund tuition (and compete for students).
At the cost level, universities have done more to contain costs this year than they have done in the past 25 years… Freezes on hiring, freezes on pay, cutting support staff…
And – I could hardly believe it – they are occasionally even requiring tenured staff to actually TEACH more than 1 or 2 courses a semester. (Tenured staff spend very little time a year teaching and on activities directly related to teaching.)
This is more deflationary than academia has been for years.
simon,
would you be expand on what you think are the main “cross-border resolution issues” and how they might be addressed?
alternatively, a link to anyone else’s discussion of the issue you’d recommend would be very welcome.
thanks.
As usual, all of your opinions are mere speculation. The TRUTH is that no one knows whats going to happen. And how could you? it’s in the future, and these times we live in are new. I can only hope that you FACE REALITY and begin to realize that institutional theft must end, and those whom profited from that, must be prosecuted before any “recovery” can happen. People are NOT going to trust their savings to a system that is corrupt until the issue of institutional corruption is addressed. Why would they do that? And in the final analysis, it is that plain fact, trust in “the system”, is the only thing that will begin any recovery. There are people who think that “big money investors” control the world. But, in fact, where does their money come from, really? US. The mass market of small investors, who have now lost faith. We have stopped “buying” things. And without “us”, they have nothing. Until “we, they buyers”, have faith again, “they”, the big investors….have nothing. In short, until “we, the people” decide it’s time to begin buying, and trading again, “they” have nothing. And with no faith in the system, with no trust, thats not going to happen.
Get rid of the corruption, until then, you have nothing.
Instead of engaging in quantitative analysis (watching for “green shoots”) to gage the severity of this recession and it’s future, maybe we should be taking on a qualitative approach – we must examine the structural architecture of our current global system and how it evolved.
The global framework of finance and trade has been influenced by factors outside of the classic supply and demand models. Central Banking, Governments’ interreactions via treaties, subsidies, etc… have distorted the evolution of global economies and we are now left with an unsustainable system.
It is a lopsided system, and it is now toppling. Too may nations overconsume, while others overproduce. Others overlend, while many overborrower. Malfeasance in the markets and self serving influence in governments by powerful institutions magnify the destruction and impede a solution.
What we are witnessing, this implosion, is not only a mere symptom of a lopsided global architectural framework, but also a correction, a cure for what should evolve – what should have evolved. Markets are indeed self correcting. Central Banking, particularly in the US, has distorted our economy by easing whenever a needed recession sought to clear out the economy’s exesses. Consumer goods inflation was really combatted by outsourcing production and labor – while maintaining asset inflation. In the meantime, a FIRE economy was nurtured into an unsustainable behemoth to replace the dying productive/manufacturing economy.
Thus, one nation deindustrializes and creates a paper economy – a service sector economy based on asset valuations and unrealistic asset growth models. Another economy relies on production for mainly consumption abroad – by nations that rely on the growth of false wealth. That false wealth took was fueled by ridiculous lending and irresponsibly “created” money. False wealth was exchanged for debt servitude. Both nations in that paradigm are suffering. Both nations are guilty of impeding the natural earned distribution of wealth to the many market participants/workers, and instead redirected the flow of wealth to the few. For instance, while China discourages union organizing, the US encourages the shipment of jobs/manufacturing abroad through trade treaties .
In my view there are two crises. One is the credit crisis, the other is the rapid assimilation of emerging nations into the global trade and finance architecture.
When we trade with nations that have a fraction of the regulations and freedoms we have, we ultimately import their poverty. This has been masked by the now collapsing FIRE economy. As the FIRE economy implodes, the poverty becomes unmasked.
As for the “credit crisis,” the current crisis is not a credit crisis. The crisis already occurred. It occurred when irresponsible lending replaced a productive economy. What we are now witnessing is the market’s “correction” of that irresponsible, unsustainable system.
As John Stuart Mill once said of panics:
“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”
Therefore, there will be no V or U or L shaped recovery. Why? because “recovery” implies a return to a point in the past with growth thereafter. That past will not be seen again.
Instead of wondering if a “V” or “U” or “L” will follow… maybe an entirley new letter is more appropiate? Maybe the greek letter Omega? Because that best represents an end to an era. One can only wonder what the new era will look like, and if it’s beginnings will be marked by global cooperation or conflict.