Those of us who ridiculed the possibility of a "V-shaped" recovery can now sit on our laurels, but many in the same group (including me) are also predicting a "double-dip"—a second recession, assuming we ever left the first one. Technically speaking, the sacred but fraudulent GDP number must indicate the economy is shrinking again (in billions of 2005-chained dollars) to get a double-dip.
Following the meeting of the Federal Open Market Committee (FOMC) yesterday, the news reports on NPR were particularly gloomy this morning. The August 10th statements of the FOMC declare the "official" opinion of where the economy stands.
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.
As compared with the June 23rd opinion, there was a distinct change in tone toward the downside. Whereas the economic recovery was "proceeding" on June 23, and the labor market "improving," now the pace of recovery in output and employment "has slowed" in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
Actions speak louder than words, and the Fed did very little—Mish called it Quantitative Nothingness. The Fed will continue to hold short-term rates at zero, and instead of letting it's balance sheet shrink, it will buy Treasuries as it sells mortgage-backed securities. Modern day warrior Ben Bernanke and the rest of the FOMC stand alert to danger like prairie dogs guarding their burrows. We have been led to believe they are ready, willing and able to fight off the Demons of Deflation, but that fight has not yet begun.
In other words, we are in Economic Limbo, waiting for events we can not control to unfold. This state of affairs is terrifying. We don't know what's going to happen. And neither does the Fed. Will things stabilize for a while at our current pain level? Or will the pain get much, much worse?
How far will house prices fall from here?
Graph from Housing Wire, courtesy of Tim Iacono's How Big Will The Housing Double-Dip Be? Our Fate lies somewhere between the orange and green lines. As house prices fall, household wealth decreases (household debt increases), consumer spending declines, Fannie & Freddie get hammered, etc.
The economic stimulus is petering out. The seemingly endless inventories "rebuild" is definitely over. Where will new growth come from?
Graph from Tim Iacono's The Effect of Inventory Changes on GDP. "The change in private inventories has accounted for almost two-thirds
of all economic growth reported over the last year and, based on the
latest calculations following last Friday’s advance look at second
quarter growth, that right-most red bar in the chart is set to get much
smaller, possibly swinging below the x-axis when all the revisions are
complete."
The jobs situation is much worse than generally acknowledged—
Charles McMillion, the president and chief economist of MBG Information Services in Washington, is an expert on employment and has been looking closely for years at the issue of labor force participation. “Over the past three months,” he said, “1,155,000 unemployed people dropped out of the active labor force and were not counted as unemployed. Even ignoring population growth, if these unemployed had not dropped out of the labor force, simple arithmetic shows that the official unemployment rate would have risen from 9.9 percent in April to 10.2 percent in July, rather than — as it has — fallen to 9.5 percent.”
Ben Bernanke and the rest of the FOMC do not want to incite a riot, a complete loss of confidence in the economy, which would lead to Panic & Fear in the markets, which would lead God Knows Where. But even their obligatory cheerleading lacks conviction now—the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. That's about the minimum they can say. For example, they can't say this—
the Committee anticipates a sharp drop-off in output with concomitant effects on resource utilization in a context of falling prices & wages
As August winds down, you can almost smell the fear in the air. Economic Limbo is a state of painful suspense in which you wait for the other shoe to drop. I have an anxious feeling in my gut about what might happen this coming fall, and if you throw in the insanity that always accompanies elections in America, it's easy to see how things might get really ugly, really fast.
We'll know where we stand in a few months. As I've said before, now might be good time to Duck & Cover.
Dave, Your posts are always an immediate read for me - keep them a comin'. Two burning areas I'd wish you touch on is ... I understand the purpose of your blog is to document the "Decline" of the US Empire. Am I right in assuming this? (1) What about the global prospects? I've been reading Project Censored's work where the world seems caught by a small band of elites that run the media, banks, corporation, intelligence, military, etc. In your experience what is your take on this line of thought? (2) Global Research almost daily puts out reports of imminent war in the Middle East certainly raising the threat of World War. Do you think this is a spastic result of the decline you describe? This prospect of war seems to me more of an immediate threat than financial collapse as war to the elites is more preferable than meekly suffering a long economic slow down. Thanks. Hope to hear from you on these.
Posted by: Jason Casper | 08/11/2010 at 11:09 AM