The US Economy Today - Amazing Resilience

Over the last 4 years, the US has averaged 3.5% annual GDP growth, which is exactly at the long-term trendline.  The unemployment rate is lower than it has been for 35 of the last 38 years, with seven million jobs being created in the last 3 years alone.  What is remarkable is that in this period, a number of factors that have caused recessions in the past have occurred, even as new negative forces have simultaneously emerged, and all these in tandem have not derailed economic growth.  But does this mean we could be growing even faster, had these problems not emerged?  Let us look at all the bullets that did not manage to do the damage that they once did, and the new bullets that we have successfully endured. 

1) Terrorism and War : Depending on how one measures it, the Sept. 11, 2001 terrorist attacks cost the US economy anywhere from $200 to $800 billion.  In addition, it worsened the recession on 2001-02, and still slows the productivity of the US economy through longer lines at airports, increased security expenditures, difficulties that law-abiding foreign tourists face in getting visas to enter the US (costing us over $100 billion a year in tourist revenue), etc.  This is effectively a new tax that we will be paying in perpetuity.

While the War on Terror has still cost the US just 3000 troops in 5 years (vs. 50,000+ in VietNam and Korea), the negative media coverage and resultant burden on the mood of the US consumer today may comparable to what it was during the VietNam War.  Add to that the threat that Americans could be killed in the US mainland when they least suspect it, and thus exists a lingering fear that makes consumer confidence lower than it should be. 

2) Oil Spike : When oil reached $90 in today's dollars back in 1980, this caused a very deep recession, even though prices quickly dropped after that.  In 2006, oil reached $78 per barrel before dropping, without causing a recession.  In fact, it appears that sustained prices near $60/barrel are not sufficient to cause a drag on the US economy.  This is partly because of the US economy evolving to a state where a large portion of output is derived from innovation and technological advancement, which are much less tied to oil prices.  An oil spike hurts GM and American Airlines much more so than it hurts Google and Microsoft. 

Read : $70+/barrel oil, the non-crisis.

3) Massive Natural Disaster : Hurricane Katrina was the largest natural disaster the US has been struck with in several decades, with the direct economic costs of a major city being submerged with water compounded by the displacement of hundreds of thousands of people and the economic activity they would otherwise generate.  It cut the GDP growth of Q305 down to 1.8%.  But in the next quarter, GDP bounced back smartly to 5.6%.  The US economy adapted to the shock in a very short time. 

4) Corporate Scandal Tax : While scandals like Enron and Worldcom could happen in any era, the resultant Sarbanes-Oxley (SOX) legistation has proven to be so oppressive to law-abiding corporations that the economic cost exceeds that of the implosion of Enron and Worldcom by a large margin.  Medium-sized public companies have to pay an estimated $3 million per year to comply with SOX, which is money that could otherwise go towards R&D, or be passed onto shareholders.  Estimates of the total opportunity cost of SOX over the last 3 years run as high as $1 trillion.  Hopefully SOX can be scaled back for medium-sized enterprises with under $1 billion in annual revenue. 

5) Trade Deficit : The US trade deficit, or the amount by which imports exceed exports, is not entirely a negative economic force, but it currently is over 5% of GDP, vs. just 2% of GDP in the mind-1990s.  This reduces the total US GDP growth rate by over 1% a year. 

I do not consider 'outsourcing' to be a negative for the US economy.  I consider it to be a positive, for reasons described here.

Despite all these blows, the US economy has continued to grow at 3.5% for the last 3 years.  It almost appears that the forces that would traditionally cause a recession are running out, with only three remaining :

1) A Housing Bust : The effect of this could be similar to the stock-market crash that contributed to the 2001 recession, but as the housing decline is already 1 year on, if a recession does not occur by the end of 2007, the US economy will have successfully digested this correction without a recession.  This is a once-in-a-lifetime occurance, just like the dot-com bubble was. 

2) A terrorist attack larger than September 11, 2001.  Of course, this may happen tomorrow, or may not happen for several years. 

3) A pandemic like bird flu could cause tremendous economic damage, but the US would still be able to cope better than almost any other country in the world. 

Even then, it sounds too good be true that recessions will be increasingly less frequent in the future.  But consider that economic growth is exponential and accelerating, permitting the trendline of economic growth rates to move increasingly higher.  The number of quarters in which the US experiences negative continues to decrease as a percentage of all calendar quarters.  But what if other parts of the world have accelerated even faster?

The trendline for World GDP growth is now at a robust 4.5% a year at PPP, and the world economy has not had a year of negative growth since 1973, with almost no year growing under 1% since 1983.  A year with negative growth is so many standard deviations below the mean 4.5% trendline that the probability of it occuring in the next several years is mathematically small.  In other words, the proportion of years in which world GDP growth is negative continues to decrease, and is asymptotically approaching zero.  A global slowdown would still constitute growth of around 2% a year for a couple of years.  Only a calamity such as a major bird-flu pandemic could cause a genuine recession for the world economy. 

But this also means that while the US economy is growing at a strong rate relative to historical trends, it is actually lagging the world economy for the first time in several decades.  If the US is chugging along at its long-term 3.5% trendline, the world is accelerating faster.  In fact, developing regions by themselves are growing at nearly 7% a year.  This graph shows how the developed world has remained steady (with the US exceeding the growth rate of the rest of the developed world) even as developing regions have broken away. 

So in conclusion, the US economy is performing very well relative to historical norms, and this is even more remarkable given the many blows it has taken in recent years.  But these blows have taken a toll - and the toll is that the US now lags the growth rate of the world economy by a significant margin. 

Comments

[jeffolie]

All of that cheering is history. The future of the economy is bleak.

Just the Housing Bust alone will be enough to lead to economic collapse. The bust has just started with yoy now down about 10%. These take time to impact the economy and last 3 to 15 years.

As mortgages become delinquent lenders have recently had to take back their mortgage backed securities and eat the losses. This event has only just started. The MBS, CDOs and derivatives markets are in the hundred of Trillions.

Deflation worldwide is just around the corner.

You misrepresented the GDP. It slowed to 1.6% in the most recently reported quarter.

[jeffolie]

Yes, the crash in housing is leading to a massive and rapid crash at Home Depot and any company associated with feeding the housing beast. The suppliers to the housing bubble are just like Cisco and Level 3 Communications way back in the dot-com days, and most will now go belly-up, and their employees sadly shown the door (who will then default on their mortgages).

Get ready for some shocking performance and layoff numbers throughout the DIY and construction supply business, it just can't be avoided at this point in the cycle with housing starts crashing 30% - 50% in most areas.

When bubbles unwind, they unwind. When historic, epic bubbles unwind, they take the entire economy with 'em. Thank you Alan Greenspan.

Home improvement business slows with housing market

The slowdown threatens to shut down First Choice Flooring for good. "We haven't seen it this bad in 10 years," she said. "I'm considering selling it because of the market."

Trisler's First Choice Flooring is one of several businesses feeling the chill of the "cooling" housing market.

Sales of existing homes are down 33 percent and applications for new-home construction permits are slowing sharply. The declines are causing sales to drop at many local businesses that supply residential housing with products from carpets to sod for front lawns.

"Everybody is feeling it," said Molenaar, executive vice president for the California Professional Association of Specialty Contractors' San Diego chapter. "They just have to weather the storm."

Dick Marsala, a salesman for Direct Carpet Sales in San Marcos, said sales at his store are down at least 35 percent from last year.

"I can't figure it out," he said. "The economy's supposedly great and people are working.

An Encinitas home decorations store owner, who didn't want to be named, said store traffic has dropped from about 500 people per day three years ago to 10 today."People are scaling down," the owner said.

from another blog

[jeffolie]

This article will be the most important one you'll ever read about the late-great-housing-ponzi-scheme. Essentially a shocking admission from the Fed that they caused it, that the government's inflation reporting is bogus, and that the collapse of the speculative bubble will now wash away trillions of bogus equity from the market.
http://www.realestatejournal.com/buysell/mortgages/20061106-ip.html?mod=RSS_Real_Estate_Journal&rejrss=frontpage

[Tushar D]

Run, jeffolie, run! The sky is falling! Hey, while you run away(to Cuba, France or Venezuela I presume), I can buy your house and your stock portfolio for half it's current market value. Deal?

[GK]

jeffolie,

The GDP trendline for the past 3 years has been 3.5%. The 1.6% of the last quarter is included in this.

I don't think the housing bubble will cause a nationwide recession. The bubble is restricted to a few markets like California, Florida, Nevada, etc. About 75% of the US population does not live in bubble markets. Plus, we are already about a year into the housing correction. If it does not cause a recession in the next 14 months, I don't think it will. Job loss due to housing is already being offset by gains in high-tech, healthcare, etc.

[jeffolie]

Constuction workers and realtors are not going to get reemployed in high tech nor healthcare, etc.

Much of the slowing economy was driven by real estate and equity loans. The real savings rate is negative. You are in denial.

[GK]

jeffolie,

Constuction workers and realtors are not going to get reemployed in high tech nor healthcare, etc.

Why not? That is what they worked in before the bubble. Do you think every new realtor has been a realtor all along?

You have not addressed my points.

The real-estate bubble correction is already 1-year on. But the unemployment rate is still 4.4%. Plus, the inflated RE markets are only in cities of CA, FL, NV, etc. 75% of the US population does not live in bubble zones. These local markets are not going to be enough to cause a 'depression'.

At worst, there will be a recession, and if that does not happen by the end of 2007, it will not.

You are trying too hard to find increasingly far-fetched reasons to be pessimistic. If you want to worry about something worry about terrorism.

[jeffolie]

When Disasters Collide
November 13, 2006 (Susan Witty - Barron's)

How to Make Money in a "Bubblequake"

WORRIED ABOUT THE HOUSING BUBBLE? You should be, but don't let it monopolize your agita. There are four other bubbles also deserving of attention, according to America's Bubble Economy: a stock-market bubble, a foreigner-supported-dollar bubble, a consumer-debt bubble and a U.S.-debt bubble. When the five collide in a "bubblequake," the book's authors predict, the air will rush out of the pumped-up U.S. economy, deflating the average American's assets and standard of living.

“The nine projects cover a nearly 1 mile stretch of S Gulfview Boulevard. Work on eight of them was to begin by the fall; the ninth was to start early next year. But all but one have stalled or changed.”

“The market soon became oversaturated. In April 2005, there were 1,430 condos on the market countywide, and about 62 percent were selling. In April, there were 6,100 on the market, with 5 percent selling. ‘People are saying ‘enough is enough’ and they’re walking away,’ said Ray Ferrara, president of a Clearwater-based financial planning firm.

What makes you possibly conceive that high tech workers became realtors and will revert to high tech workers. The skill sets are all wrong.

[Regal]

pessimist and leftist are synonyms. Woe, woe, I say.

[GK]

All,

jeffolie is not a leftist. He is a rare breed - a superpessimistic American patriot.

[mishu]

jeffolie's evidence is all anecdotal. He never takes economic resiliancy into account. Chances are, if we see GDP growth slowing next year, the Fed will cut borrowing rates. We will probably see a series of interest rate cuts over the first half of 2007. Then the yield curve will flatten out. You will see a lot of refinancing activity which will start to stimulate growth again.

As far as real estate bubble burts, GK is correct. Most of the correction is out west where corrections happened in the past. They didn't really have an effect on housing in the rest of the country. There are other things that protect the value equity of housing. For example, if you are in a condo/townhouse community where you pay association fees, you need to make sure that your community has a healthy cash reserve account -- about 7 years worth of assessments per unit. In our association, we have 10 years of assessments per unit. We will have a very low risk of a special assessment. Therefore, our unit market values are increasing as opposed to similar units in the market.

[jeffolie]

I have never been a leftist and never will be a leftist. I am conservative family man that was honorably discharged from the Army. My family and I vote almost entirely Republican.

I am bearish and expect a deflationary recession or depression. I follow the Kondratieff theories.

Did the real estate bubble make home owners rich?..Nope, just deeper in debt!!
American homeowners in twice as much debt as before bubble began!
"Back in 2000, when homes were worth $11.4 trillion, there were only $4.8 trillion in mortgages against them. In the second quarter of 2006, that mortgage debt increased to a whopping $9.3 trillion. "
What happens when the home equity cookie jar is empty? - Money Week

Detroit Rock City gets rocked by foreclosures, leads nation!
"According RealtyTrac's Q3 2006 U.S. Metropolitan Foreclosure Market Report released last Friday, Detroit topped the charts with the highest metro area foreclosure rate, reporting one new foreclosure filing for every 80 households which was more than 4.5 times the national average. Ft. Lauderdale and Denver filed in at second and third, respectively, with foreclosure rates that were a little over four times the national average."
Detroit Takes First Seed in Q3 Metro Foreclosure Rankings

The Housing Bust is not limited to the coasts!

[GK]

Yes, jeffolie is not a leftist. That I can guarantee everyone. He is a valuable commenter here.

His pessimism is useful in that it forces me to explain why I don't agree with the gloomy outlook, which is a good exercise.

[jeffolie]

U.S. Economy: Producer Prices, Retail Sales Decline (Update2)

By Joe Richter and Shobhana Chandra

Nov. 14 (Bloomberg) -- Prices paid to U.S. producers matched the biggest monthly drop on record and retail sales fell, reflecting slower economic growth and reduced inflationary pressures that may let the Federal Reserve cut interest rates.

Prices paid to factories, farmers and other producers last month fell 1.6 percent on lower energy and vehicle costs, the Labor Department reported today. The decrease followed a 1.3 percent decline in September. Sales dropped 0.2 percent and were revised lower for the prior month, the Commerce Department said.

[GK]

jeffolie,

So if inflation fell.... then the Fed no longer needs to raise rates, and may actually start to reduce them.

This then does cushion the ARM payments from jumping up. The main trigger for the housing collapse was rising interest rates, and it seems that the feared effect of higher rates might have just passed its peak capacity for damage.

What you posted as a negative is actually a reason that the housing decline will be gradual and not lead to a recession.

[jeffolie]

The ARMs were made with very low introductory, teaser rates such as 2%. With them resetting at 6 to 8%, the results are horrible. Over a trillion dollars in ARMs are resetting in the next year. Foreclosures which are already about 50% higher than last year will increase dramatically over the next year.

[jeffolie]

I look for continuing declines in prices (deflation), continuing declines in sales (recession or worse), continuing worsening in foreclosures (negatively impacting the fanancial system) and imploding mortgage backed securities.

[Michael Cushman]

I came across your blog today and read several postings. All quite interesting to me, a futurist with a background in economics and business. I appreciate that you share data and opinionate from it. Of course, there are some obvious bias in your writings. When writing about the economy for example, you left off the national debt. That's like only looking at a pay stub and forgetting to look at a credit report for an individual. It's sad you fool yourself into thinking that negative observations are the press's fault. In about 7 years, the US doubled the debt of the preceding 225 years. That's not healthy. What's the average burden? $300,000 per person? I also get a kick out of your insistence that Iraq will become stable by 2008 and will become a democratic wind sweeping through the Middle East. It might be time to look at pictures of Iraq in 2002 and in 2006, city by city, and ask yourself if this is progress? Would you live there? Does it surprise you to know that 2 million have left Iraq because they are staving? Just as the British left in 1920 because it could not contain a civil war, we too will leave behind a civil war, but unlike the Republican propaganda, it will not spread outside of Iraq, only the human tragedy will spill over the boarders in the form of refugees. That's my soap box speech for today. Thanks again for the overall quality blog, and I agree with your basic premise, the world is going in the right direction and more and more people are leading better lives. Not so much from democracy, but from innovation and fewer wars. The mobile phone and the internet are doing more to boost productivity than voting for one politician over another.

[GK]

Michael Cushman,

The US national debt is stable as a percentage of GDP, for the last 10 years.

Your 7 years/225 years point is a surprising (given your background) omission of the inflation factor and compounding factor. US GDP took 220 years to get to $7 trillion, but added the next $7 trillion in 10 years. The Dow Industrials took 220 years to get to 6000, but added the next 6000 in 10 years.

US Debt may be $8 trillion, but US assets are $58 trillion, resulting in a national net worth of +$50 trillion. The assets are rising at the same rate as the debt, so the ratio is not worsening, and net worth is growing.

[TM Lutas]

When everybody was overjoyed at the fast rise in housing prices, I was a little disappointed. My house was moving up but at the "normal" rate that my parents' house had for the past few decades. I was missing out on all those paper gains. I expect that while there was little euphoria, in my area there will be much less of a correction in my county as well. There are 3000+ counties in the US. There are at least 3000 real estate markets. Realistic predictions have to take that variety into account.

I had an ARM and refinanced before the reset, getting out with a lower 30 year mortgage rate than the original purchase rate when we bought. A lot of people are like me. We're not in trouble and are unlikely to be in trouble.

The plural of anecdote is not data but why give the pessimists all the emotional punch of the anecdotal sob stories?

I am not incredibly knowledgeable on political or economic issues. However, I'm taken more of an active interest in these things because I can see that I'm spending more money for less goods. I am employed in retail, our price on consumer goods have rapidly increased at an average of 10% per quarter, now at a 30% increase since January, with more increases expected for this quarter. I'm not just seeing this in my retail outlet, this is average for ALL outlets in my area. After figuring my personal finances I am spending $275.00 a month more in just necessities (food, housing and utilities)than I was in January, while my wages have increased only by 32.00 a month in that same period. This alone is driving me into cheaper housing, and reduced our spending in the marketplace. Yet, some economists are saying that there is little inflation. I can see how these increases would have little impact on individuals who currently have an excess of money to burn.This is HUGE inflation for individuals with lower incomes. If you have the money to soak up the rising costs of goods, .30 cents on the dollar is probably bearable for you.

Those who are not in trouble currently due to the housing market, are expecting the economy to stay where it is today...may find themselves re-thinking their stability if a trip to the grocery store for one gallon of milk ends up costing $10.00.

Although we are hearing a lot about job layoffs, and job losses..we are still seeing low unemployment rates. This reflects that individuals are moving to other companies when these job losses occur. What we don't see, is if these individuals are taking massive pay cuts in their new jobs, and what industry their new jobs are in. This is important because it contributes to the employment and education trends in this nation. In my area ALL the job losses have been in high tech and production fields. Nearly no cuts in the service and retail sectors have been made in comparison. Currently our service sector is growing at a much higher rate than our production sectors. This means many of our "high-tech" and high paying production jobs are moving overseas or cutting production. Easily turning us into a service related economy, which are generally low paying jobs that stay within the local economy, decreasing our exports, and export revenue. Are imports already greatly exceed our exports today, this is a growing national deficit.

The education departments regularly match curriculum along with employment trends. This is particularly important as we could see education move away from high tech and manufacturing curriculum, creating a poorer nation, both financially and educationally. Those high paying jobs could significantly decrease in number where those positions only remain in service industries such as healthcare and government. The fact that those positions will be highly sought after may drive down some of the wages in those fields.

The GDP doesn't seem to take into account the effect of inflation. As seen between Feb.04 and Oct'.06 where there was an increase in the average wage by nearly a measly dollar and a half, while costs of goods were rising due to increases in minimum wage requirements. (no..my company didn't take a bite out of their overhead to pay for the increased wages. They-like all the others..took it out of yours). This is the same period in which service industries and superstores like Wal-Mart, Best Buy, ect..were expanding their business all across the country and reaching the West Coast creating bunches of jobs. Safeway, who is popular for paying generous wages has closed 3 major stores in my area since the arrival of 3 new Wal-Mart superstores in that same time period.

I don't know what's wrong with that GDP, but it doesn't seem concurrent with what I am seeing where I live.

It was mentioned that Hurricane Katrina didn't have the effect on the economy as expected, I feel it is because we didn't behave as expected in response to that disaster. Much of that area is still in disarray today, the federal monies are all tied up, and little has been done improving the condition of that area.