The Circle Jerk Economy

In my continuing efforts to win a Nobel Prize in Economics—just like Paul Krugman!—and because no prize is awarded in Common Sense, I give you Exhibit A from the Bureau of Economic Analysis (BEA).

Source: BEA data

You can easily see that if we look at only services, and not goods produced, the so-called Great Recession of 2007-2009 might as well have never occurred! The services part of real GDP (inflation-adjusted in 2005 chained dollars) flattened out a bit, but never went into significant contraction.

Do you find that a bit suspicious? Well, don't! This mystery will be explained below. Sweden, here I come!

What is real wealth? People could argue endlessly about the answer to this question, but we can probably agree that real wealth must be physical. Energy (fossil fuels and food) and raw materials (e.g. iron ore, phosphorus, bauxite) are obviously forms of real wealth, but in the economics sense we can extend the meaning of real wealth to include the things we make out of those materials with that energy. That's a good enough definition for today.

Now, suppose there is the potential to manufacture something which is useful and has durable value. In keeping with economic parlance, and because I am angling for the Prize, let us call it a widget. A group of enterprising humans get together and conceive a plan to build widgets. Along these lines, they farm out some of the planning work to a consulting firm which is tasked with fleshing out the plan. These consultants in turn farm out some of the work to various other consulting firms who have the expertise  to create detailed descriptions of various aspects of the planned manufacturing processes. All these people receive paper compensation for the services they provide. This money allows them to get haircuts, hire tax consultants, go out to movies, and so on.

In the end, everybody gets paid for services rendered, but not a single, tangible widget you can hold in your hand is ever manufactured. In accordance with our definition of real wealth, we might call this The Circle Jerk Economy. (The term clusterfuck is closely related.) In the BEA graph, the production of real wealth (goods) fell off dramatically during the Great Recession, as we might expect, but group masturbation continued almost unabated.

A Circle Jerk economy is what we have right now in the United States. Indeed, that's what we have globally in the third quarter of 2012. Thanks to Mish for some of the recent data below.

What about manufacturing in the United States?

Economic activity in the manufacturing sector contracted in August for the third time since July 2009; however, the overall economy grew for the 39th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business^®.

The PMI™ registered 49.6 percent, a decrease of 0.2 percentage point from July's reading of 49.8 percent, indicating contraction in the manufacturing sector for the third consecutive month.

This is also the lowest reading for the PMI™ since July 2009.

[My note: readings under 50 indicate contraction. Readings over 50 indicate expansion.]

What about American services, also known as the circle jerk?

Economic activity in the non-manufacturing sector grew in August for the 32nd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business^®.

The NMI™ registered 53.7 percent in August, 1.1 percentage points higher than the 52.6 percent registered in July. This indicates continued growth this month at a slighter faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 55.6 percent, which is 1.6 percentage points lower than the 57.2 percent reported in July, reflecting growth for the 37th consecutive month.

It's Jerk-off Time—abbreviated by the military slang JOT—in the global economy too.

(Reuters) — The global manufacturing downturn gathered pace in August, with output and new orders falling at their fastest pace in over three years, a business survey showed on Tuesday.

The JPMorgan Global Manufacturing PMI fell to 48.1 in August from 48.4 in July, its lowest reading since June 2009 and dipping further below the 50 threshold that signifies growth.

"The August PMIs point to a further modest acceleration in the rate of contraction of global industry, as the sector is buffeted by rising headwinds in a number of key economic regions and falling levels of international trade," said David Hensley at JPMorgan.

The new orders index fell to 46.8, the lowest since April 2009, pushing factories to reduce staffing levels for the second month.

What about Chinese manufacturing?

BEIJING : China's manufacturing activity fell to its lowest level in more than three years in August as the global economic slowdown continues to weigh on the world's largest exporter, HSBC said on Monday.

The final reading of the British banking giant's closely-watched purchasing managers' index (PMI), which gauges nationwide manufacturing activity, slid to 47.6 last month from 49.3 in July, HSBC said in a statement.

This was the lowest since March 2009 and marked the tenth consecutive monthly fall, the bank said. It chimed with the official PMI figure released on Saturday, which hit a nine-month low of 49.2 from 50.1 in July.

What about services in China?

The services PMI dropped to 52 in August compared to 53.1 in July, indicating stagnation in the business activity.

The index continues to remain in the area of expansion since the reading is above 50. But the fall in the reading would increase fears of the likelihood of a sharp slowdown in the economy.

"Behind the weaker rise in service sector activity was a slower increase in new order volumes, with the rate of expansion the weakest for a year," Markit Economics said in a note.

Thus manufacturing continues to contract all over the world, but of course services are still growing. JP Morgan Chase analysts expect economic conditions to stabilize soon. "Growth" will continue, although it will not be as vigorous as one might hope.

Europe is sinking deeper into recession, though the ECB has momentarily stabilized financial markets. Fears of a hard landing in China are rising fast as economic data continues its downward trajectory.

JP Morgan economists Bruce Kasman, David Hensley, and Joseph Lupton, however, say it looks like we've reached a bottom, and they expect global economic growth to stabilize shortly. In a note to clients, they write:

With this week’s August PMI release and new information on July activity, the DFM-Eco index estimate of current quarter growth rose to 1.8%. Interestingly, the rise in our nowcaster is driven by July activity readings that were stronger than what was anticipated by the July PMI. The index estimate is now in line with our bottom-up forecast (2%) that looks for a stabilization of global growth this quarter.

With growth bottoming, attention now turns to assessing whether private sector behavior and policy stances are aligned to deliver the modest lift built into the forecast.

Our forecast does not expect much in the way of growth, with global GDP expected to accelerate only a touch to a still-subpar 2.4% annualized pace in pace in 4Q12. In this regard, the recent data have been mixed, raising more “maybes” than certainties.

We can have little doubt that these JP Morgan economists are correct (on their own terms) because despite the fact that the creation of real wealth (manufacturing activity) is contracting worldwide, and has been for some time, humans will continue to jerk each other off at an ever-accelerating pace. And in so far as there are more and more humans all the time, despite any decline in manufacturing activity we might see in the future, it is all but guaranteed that pleasurable mutual massage will only grow and grow.

In the future, perhaps we can achieve a perfect Circle Jerk Economy in which all human activity revolves around the mutual exchange of recycled paper, assuming humans can adjust so they are able to eat and drink paper. Global economic activity, as measured by GDP and similar indices, would grow without limit, leaving the Natural World untouched. And wouldn't that be a good thing?

Comments

[T E Cho]

Dave,

Yep, great post and a key point in the Rube Goldberg world economy.

The only reason manuf goods are not inflated here due to the BS-service-dollars being of minor value is; China's keeping their currency so low artificially. So comparison of China GDP and USA GDP is apples and oranges. People would be shocked to see the real GDP of China if the exchange rate were fair.

Put another way, in an economy which goes from 9 people growing food, making electricity, building houses, making autos, sewing, canning, making bicycles, making computers, etc and one person cutting hair -to an economy where 9 people cut each others hair for $1000 a haircut, and one person does all the rest, the cost of food and goods would skyrocket. But China is doing the manuf for now.

And what have we done with the 'savings' from cheap Chinese goods? We've invested it in BS services.

BTW, for govt accounting purposes, isn't military costs a service? Is that in the GDP?

[T E Cho]

One more question, shouldnt the graph add up, Goods + services = GDP? Or maybe the govt is he last component, not seen in the graph.

[Dave Cohen]

@T E Cho

No, the graph shown doesn't need to add up. There are other components left out. For the curious, follow the data link under the graph.

-- Dave

[Bill McDonald]

Let me see if I get this.

The banks like JP Morgan and the Central Banks, create money out of the thin air by keying it in to the computers. This "money" is handed out and starts spinning round and round, changing hands, while nothing real is being built, spinning like a top(whirling dervish economy?) and the banks and the governments take a little cut as it spins from hand to hand. Gee, I think I just learned what the "velocity of the money supply" means,and the whole system starts to look huge through the optical illusion of all these tops spinning all over the place- and this makes the graphs start climbing, as if something real is happening and like the economy is finally beginning to fire on 4 out of 8 cylinders instead of the two that are actually laboring away.

These same banks and the bigger spinning top owners want to see the spinning to continue so they find inventive ways to give the politicians and regulators their own little tops to spin, which so enthralls them that no way will they ever consider enforcing those silly old laws which said you must actually build your own top or buy it from someone honest who will make that top to exacting legal standards- that's too old fashioned and slow, f--- that!

As long as the "money" keeps being created right out of the ether and the old standards keep being ignored, this Grand Top Spinning game, or Great Circle Jerk, can continue; my question is when the "money" dries up and the tops stop spinning, who will be there except the rest of us, the ones not in on the action, to clean up all the mess and destruction caused by these runaway spinning tops flying all over the place?

[T E Cho]

Yes, and be sure to save your pennies, so the banks can take it and loan it out at 10x to their golfing buddies, to invest, create jobs, and grow the economy - overseas. Why would they loan it back to the lazy, stupid, greedy middle class, instead of the hardworking, brilliant, generous 1%.

Financial Onanism at it's best.

[Ben]

The Economy. Plus ca change, plus c'est la meme chose.

[adam]

"Real wealth must be physical"

That's why it's called real estate. Also called real property. It's pretty much the only souce of wealth until industrialization came along, and to this day underlies every other source of wealth. The bubble was a mess... for those deeply in debt. The banks made off with the real property through foreclosure. Also notice that the vast majority of truly rich people have lots of real estate.

The problem with the circle jerk economy is that service jobs are often extremely low paying. So what you get is relentless downward pressure on standard of living, which due to the various movements to centralize real property in the hands of a few over the last couple hundred years, means you have people who take money in for service and then pay it right back out in rent, since they own nothing but personal property.

This is especially true of urban dwellers, and most people are now urban dwellers for various reasons. There are ways to change the distribution of real property, of course, but not within the current system.