Posted on 01/26/2009 9:21:08 AM PST by BGHater
Recession:
A recession occurs when a nations living standards drop and prices increase. This downturn in economic activity is widely defined as a decline in a countrys gross domestic product for at least 2 quarters.
Depression:
An economic condition caused by a massive decrease in business activity, falling prices, reduced purchasing power, excess of supply over demand, rising unemployment, and other negative economic factors.
- Bloomberg financial definitions
Truth or Dare: Recession or Depression?
As unpopular as it may have been, I have been writing about the impending recession over the past several years. I am rather used to being called a "perma-bear" as it relates to the asset-based, over-leveraged mess we call our economy.
Truthfully, it's been no fun whatsoever to call 'em as I see 'em. An outlier view has been a necessary evil, however, and one that I've been proud to have had the guts to provide.
I will now turn to what, in my view, is the biggest risk of all: We're in a recession - and the economy can actually shrink. And shrink it has, is, and will likely continue to do. The question now: Are we going through a traditional recession, or a once-in-a-lifetime depression?
I actually hoped the unprecedented credit unwind would end up in a nasty recession; but I fear a depression is either upon us or will soon be upon us. To be truthful is essential in markets and life: To face head-on the bad news which isn't at all fun or exciting to face.
I hate to say this, as unpopular as it may be: Welcome to the depression. For my reasoning, please read on.
Putting the Recession Question to Bed
GDP estimates for 2008's fourth quarter are due to be released on Friday morning at 8:30 a.m., with estimates coming in the -5.5% range, which follows a -0.5% number in the prior quarter. Many believe the economy will turn around in the second half of the year, when the Obama administrations fiscal stimulus plan makes things all better.
I couldn't disagree more. We have seen these stimulus plans before: Dropping $500 checks into the mail has produced more savings and debt repayment - but not a flow of steady consumption by consumers. Seriously, with new claims for unemployment benefits now averaging over 500,000 per week, the economy losing 600,000 jobs per month, and leverage still piled up on top of leverage, I think the odds of the economy being in growth by the end of 2009 (and possibly the end of 2010) is nothing more than a pipe-dream.
GDP Quarterly Change Since 1994
Are We in a Economic Depression?
There are several criteria that an economy must meet to be in a depression:
I would like to address these factors one by one in an attempt to determine if we have actually landed in an economic depression - one that sadly may be global in nature.
The Chicago Purchasing Managers Index
The Chicago Purchasing Managers index has fallen off a cliff. The index is a monthly regional index of Midwestern manufacturing activity. An index reading below 50 (we are now at 35.1) means manufacturers are reporting deteriorating business conditions.
Richmond Federal Reserve Manufacturing Survey
Just in case you would like to believe that the Chicago manufacturing number is a fluke, get a load of the chart above, which covers states like Virginia and North Carolina.
Furthermore, if you thought manufacturing alone was under attack, you may wish to reconsider. As the US economy has become more of a service economy and less of a manufacturing economy, many have pointed to the ISM Non-Manufacturing Index for hope. Sadly, that index is plummeting as well.
Everywhere we turn, no matter the industry, no matter the country, the answer is the same: A massive economic slowdown so pervasive that nothing seems to be able to stem the tide.
ISM Non-Manufacturing Index since Inception (1997)
What about falling prices? No matter where we turn, the prices of everything -- from equities to commodities (with the notable exception of gold) to esoteric securities to real estate -- are falling. I could fill the next 5 pages with gory details, but anyone who opens their brokerage statements knows what I mean.
There used to be "inflation in the things that we need and deflation in the things we want," but that saying is no longer apropos. Everything is falling in price, which is, at best, deflationary; at worst, it signals the depression we may very well be in.
Rising Unemployment - the Really Big Problem
Reduced purchasing power is evident (thus the question of whether supply exceeds demand can be bracketed). The charts above are quite simply proof these issues exist.
The really big problem: unemployment. Like the old saying goes, "It's a recession when your neighbor loses his job; it's a depression when you lose yours." As I write this, Caterpillar (CAT), the international leader in heavy equipment, just posted an abysmal quarter; it's laying off 20,000 people.
Many would have you to believe this is a domestic issue. Nothing could be further from the truth. Since much of Caterpillar's business is conducted outside the US, it confirms my suspicions that the economic issue is indeed global; anyone hanging their hat on an economic recovery due to a 1933-style infrastructural improvement had better take a look at Caterpillar's news release.
Just to give you a flavor for how far-reaching the unemployment situation is, the following companies have recently announced job cuts and layoffs - all are global, best-of-breed and industry leaders: Caterpillar, Kimberly-Clark (KMB), Pfizer (PFE), Royal Bank of Scotland, ING (ING), Harley-Davidson (HOG), Philips International, Microsoft (MSFT), Deere (DE), Starbucks (SBUX), United Airlines (UAUA), Schlumberger (SLB), Xerox (XRX), Toyota (TM), Sony (SNE), Union Pacific (UP), Bentley, Reebok, Fiat and Clear Channel (CCO).
OK. Are you depressed yet? If you think that list is scary, consider this: All those layoffs have been announced since last Thursday.
To get a sense of just how bad things have become, I offer up these rather sobering charts:
US Initial Jobless Claims
The difference between this cycle and past cycles is the persistence of the high numbers of laid-off workers and the rather high absolute number.
Sadly, I don't expect this trend to change for quite some time, with a terminal unemployment rate between 12-20%. Once again, depression-like numbers.
US Continuing Jobless Claims
While the reported unemployment rate in the US creeps toward 7.5%, it's nowhere near the highs reported in the early 1980s, let alone the rates of prior depressions. The $64,000 question is whether or not we can trust the numbers being reported. As a cynic, I certainly do not. Whether it's the flawed "Birth/Death Rate Model," which arbitrarily adds jobs via "hedonic adjustments," or other manipulations of the unemployment rate, it's nearly always understated.
A recent study showed that, when we add in "discouraged workers" -- those who have given up looking for a new job and have run out of unemployment insurance -- then add part-time workers who want to work full-time, the US unemployment rate is closer to 13.5%.
And with economic activity dropping off a cliff, the 13.5% number seems much more logical to me than 7.2%.
Unemployment Rate, Courtesy of Shadow Government Statistics
According to the data from John Williams website, www.shadowstats.com, the rate stands at 13.5%.
The main point I would wish to deliver here: An economy built on so much leverage, deteriorating so quickly, is going to collapse, no matter what the stimulus (bailouts, buyouts, TARP, Stimulus packages, quantitative easing, mortgage market manipulation, etc).
The economic avalanche is upon us. And if you've ever witnessed an avalanche, there is no way to stop it.
In fact, with Ex-Fed Chairman Paul Volcker as President Obamas economic advisor, I would expect some tough times ahead. Mr. Volcker has a tough-guy reputation (recall he snuffed out double-digit inflation in the early 1980s - I was there to see it, and can tell you it wasnt fun) by raising short-term rates to near 20%, causing an ugly recession, double-digit unemployment, and pain for all asset classes. The tough decisions he made, however, paid off with a 26-year bull market for Treasuries, which I believe is now over. Finally, I believe Mr. Volcker will be the real force behind the Treasury Department's actions - not Tim Geithner.
In short, buckle your seatbelts. I continue to avoid credit, under-weight equities, and to batten down the hatches. Unfortunately, I believe the worst is yet to come.
LOL
He is talking about Pelosi stimulating the economy with abortions(funding) now !
You are correct.
There is more than enough blame to go around and it extends across the aisle.
Are you for real?
This has been a bi-partisan pooch screw of the highest order.
The conservatives who stuck to their principles as best as they could have the least amount of blood on their hands
Are you for real?
Yes, I’m for real. The American public will never elect Republicans again (or for 20 or 50 years) if they believe the Republicans are responsible for the collapse. It will be like Hoover being blamed for the Great Depression. We Must make sure the Blame is pinned squarely on the backs of the Democrats because it’s Their FAULT.
I don’t believe we will see anything as deep as the 1930’s in terms of unemployment, and no matter how low our living standards may get they are better than when our grandparents grew up. That being said, January 2009 is 3 months after the stock market crash & 1 year after the official start of the recession. That is almost identical to January 1930 when (even though official numbers are sketchy) unemployment and GDP contraction figures were pretty similar to today’s. Q3-1929 to Q1-1930 looked pretty similar to the last several months (except that bank runs were more common and of a more primitive flavor), and the depression didn’t get “great” until Smoot-Hawley & money supply contractions & idiotic tax increases.
Depression deflation deflation depression
And by it's nature, Caterpillar's "the beginning". When they don't build, jobs don't follow...
With many volunteer enlistments, too.
Not at all. It seems that you're recognizing that we're in the beginnings of something quite bad, and following a similar path on our way there.
It’s 1930...
Democrats are evil and mean no good but republicans lost their way, and before winning again need to really decide a set of core principles , and need to be able to articulate them. The R party has once again become the party of “dems are more socialist than us” , just like 1990.
Borrowing massive amounts of money for a few tax cuts(and lots of spending) is just politics and disaster.
My tagline applies to many aspects of FR. :-)
This is not a cyclical recession, it is a structural one triggered with a financial crisis. The only historical economic research (http://www.voxeu.org/index.php?q=node/2877) on the consequences of financial panics average to:
* Housing prices dropping 35% over 6 years (2011 bottom)
* Stock prices dropping 55% over 3.5 years (Dow 6500 by mid-2010)
* Unemployment rising 7% within 4 years of downturn (over 10% by end of 2011)
* Real per capita GDP down 9% over 2 years.
* Public debt increase of 86% (national debt at 120% GDP by 2012).
YIKES!
interesting article.
Even during the last Great Depression, there were large numbers of people who lived very well...
Yes—very true-—
—great-grandmother was a maid for a very wealthy and they supplemented her pay with leftover food—my grandfather ate quite well—
—great-grandfather owned a bar-—EVERYONE drank away their worries after prohibtion was repealed
There are a few details where one can quibble with their analysis - for example, the US in 2009 is economically, socially and politically structured differently than the developing Asian countries studied and it’s even different than the US of the 1930s; but on the other hand, most of those crises were not global contagions. However, even removing those “outliers” from the sample doesn’t substantially change the basic scale of the eventual outcomes - in fact the point of the study was whether outcomes are substantially different in developing vs developed countries, and the answer was that they are not that much different.
“the depression didn’t get “great” until Smoot-Hawley & money supply contractions & idiotic tax increases”
You are right, used to watch Louis Rukeyser and he had his father, Merryle, on a few times. That is one of the things he talked about and he thought the government greatly exacerbated the impact of the depression. It is not encouraging when you realize that our governmental representatives are at least as obtuse as those at the beginning of the depression, any voices of reason are drowned out by the clutter. Things are made worst in that regulations impede growth (you can’t build a power plant, or even a building supply without jumping through hoops and then being sued to stop the project) and that people are not as self sufficient as they where in the 1930s. I grew up on a farm and we produced much of what we consumed, by the mid 1960s that changed and farmers began to buy from the grocery store just like everyone else. Maybe we will see some voices of reason emerge, I hope so. A couple of personal notes, my father was making $4 a day logging with a lumber company and quite, started farming, when his pay was cut to $1 a day (after that you got a voucher that was worth $1 at the company store or $0.70 cash). My mother’s father had a good crop and paid off his mortgage the day before his bank failed, the mortgage holder had insisted on cash so there was no dispute about payment and my grandfather keep his farm.
Yes, but during the Great Depression, MOST people actually had morals and Christian values. There was almost an innocence about the generation of my parents, compared to the majority of Americans today. The crime rate wasn’t nearly as high as it is now, nor were there multitudes of crack addicts and entitlement-minded welfare recipients as there is now. What we’re probably facing is the complete breakdown of society as the economy falls apart and as government, as usual, fubars everything to the ‘nth’ degree. Once the entitlement-minded Obama-voters discover that they’re no longer going to get that freebie check to pay for that new SUV or for their drugs & beer...there will be bloodshed.
Those Americans that don’t already have guns for their own protection will probably become victims of those criminal-minded that DO have guns and want or intend to take what they damned well feel like taking.
Instead of a “brave new world” we are now facing a “scary as hell-on-earth new world”. Instead of people falling back on their retirement savings that they’ve worked hard for their entire lives, they’ll be standing in soup lines right along with the indigents, illegals and criminals. Instead of our kids being able to remain kids and enjoy their childhood, they’ll be facing a stark reality of life under Marxist commies. Add to this the probability that our terrorist enemies will probably take the opportunity to nuke/WMD attack us while we’re down....since the leftist DemocRats will have made it so much easier than over the past 8 years....and will have assured them that no “in kind” retaliation will be forthcoming....
And yes, all of this...thanks to the Stuck-On-Stupid, greedy, anti-American, power hungry DemocRats and their wussy/pussy counterparts, the RINOs. If there IS any justice in this universe, they will all be roasting on a spit in Hell some day soon....
maybe sooner than they think.
bump for later
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