Brad DeLong tries to assess the situation. One thing that doesn't get talked about enough is that people in Washington are pretty out of touch with the basic economic picture in the United States. Not in the usual, pat, pseudo-populist "oh you're out of touch" sense but in a pretty literal one -- the DC metro area is both quite affluent and economically unusual; much of our region is experiencing a war-driven boom that doesn't have much to do with the experience of other areas (though parts of the southwest are, I believe, the same way). People know, intellectually, that "data" isn't the plural of "anecdote" but still people tend in practice to be affected by what they see, and what there is to see around here doesn't really mirror nationwide trends all that well.
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Are We In a Recession?
18 Jan 2008 08:21 am
Comments (46)
That and the fact that CPI metrics have been continually changing since the 80s masks how bad inflation is. McClatchy once again shows itself superior to other newspapers with an excellent article on the real breakdown of inflation. This is stuff that those of us looking at our grocery bill (and heating oil bill) have known for some time. Eggs are up 29.2%; milk is up 13.1%. The low CPI numbers the government calculates come from discretionary goods, not staples.
Irregardless his gold-bug rambling, John William's 1980 CPI calculations are correct. If you use the 1980s method of computing CPI instead of the modern, broken method, we are currently just below 12% inflation. In an apples-to-apples comparison of CPI numbers we are at 1981.
On the whole, Matt, it's true that the DC area seems to be mostly immune to the slings and arrows of the nation's economic problems.
The bursting of the real estate bubble has had some effect on people's lives, though. I don't know what's happening in the District and the inner 'burbs, but out in the eastern exurbs, house prices are falling, there are way fewer sales than a few years ago. I know one couple who are retiring and trying to move out of the area that's had to knock $100K off the sale price of their house, and it still isn't selling.
It's not going to affect Congresscritters, pundits, or higher-ups in the Executive branch anytime soon. Though some of the departing Bushies, a year from now, may find that their houses are worth a lot less than they figured.
Contra low-tech cyclist, I think another reason the economy's probably doing better in the northeast (including DC) is that there wasn't as much as a speculative housing bubble as in places in the south and west, thus most consumers haven't seen their home equity drop propitiously in the last few months.
Median income of Metrorail rider in DC: $102,110 [source (pdf)]
Yeah, I'll say DC is probably out of touch with the economy in general.
People know, intellectually, that "data" isn't the plural of "anecdote"
You mean data aren't the plural of anecdote.
New York City is clearly less than one year away from a major correction. The bonus pool on Wall Street for the past year was $36 billion, about $2 billion less than last year but still the second highest ever. Wall Street provides 5% of the jobs, but 25% of the income in NYC. Given the disarray at Citi, Lehman, Merrill and the (likely) demise of Bear Stearns, the bonus pool next year may not crack $20 billion.
When Wall Street dries up, the New York economy goes into the dumper. Real estate falls off precipitously, luxury goods spending, restaurants and entertainment all plumet. The tax base goes down, lead to austerity budgets in the City and Albany. If things get bad enough (as they did from 1989-92), even co-ops start having foreclosures, despite most having rules requiring 20% down and proven assets equal to one year's carrying costs.
New York was propped up in the aftermath of 9/11 by the infusion of $20 billion federal dollars, which basically replaced the missing bonus pool. There is absolutely no likelihood of that being repeated, absent another horrific attack.
No, he meant "isn't", because he was referring to the word "data". You're committing a use / mention confusion.
Rolling Stone's Matt Taibbi was on Bill Maher's show a earlier this week and he was the first person I've seen make this point in such a public forum. He remarked that the Washington press corps, especially the punditry, as a group are very well-off and thus share the same basic economic interests of the politicians and corporate executives they cover. Tony Snow, who shared Maher's panel with him that night, called him to task for telling that bit of truth, but never disagreed with its verity. Snow also had the unmitigated gall, while discussing the state of the economy, to cite high home ownership figures as a sign that things really aren't so bad. We'll see how those numbers look in another FU or so...
"what there is to see around here doesn't really mirror nationwide trends all that well."
Housing prices are down, houses aren't moving on the real estate market, Montgomery county MD government has a job freeze and is looking at huge budget cuts. Other than that, things are peachy.
Rolling Stone's Matt Taibbi was on Bill Maher's show a earlier this week and he was the first person I've seen make this point in such a public forum. He remarked that the Washington press corps, especially the punditry, as a group are very well-off and thus share the same basic economic interests of the politicians and corporate executives they cover. Tony Snow, who shared Maher's panel with him that night, called him to task for telling that bit of truth, but never disagreed with its verity. Snow also had the unmitigated gall, while discussing the state of the economy, to cite high home ownership figures as a sign that things really aren't so bad. We'll see how those numbers look in another FU or so...
Steve, move out here to the Cleveland, OH area if you want to see what "not peachy" REALLY looks like.
Re "One thing that doesn't get talked about enough is that people in Washington are pretty out of touch with the basic economic picture in the United States"
-------
In the same way that fat Mandarins of the predatory Ming Dynasty were "out of touch" with the massive famines that swept China.
most consumers [in the DC/Northeast] haven't seen their home equity drop propitiously in the last few months.
We aren't losing house equity, here, as much as people are elsewhere, but the stocks in our retirement accounts have actually lost quite a bit over the last several months. The economic contraction is pretty widespread.
Something that's not getting a lot of play in all the "stimulus" discussions: the trillion dollar black hole that is Iraq. When the government borrows that much, credit has to tighten for the foreseeable future. When oil prices are that high, inflation will be rampant, again for the foreseeable future. When Congress and Bush are done rearranging the deck chairs, the Titanic will still be sinking. The ONLY thing that will help the American economy in any real way is to GET OUT OF IRAQ.
Re Don Williams
How come Mr. Williams isn't blaming the recession on Hiam Saben?
Steve, move out here to the Cleveland, OH area if you want to see what "not peachy" REALLY looks like.
I'm from Cleveburg too. Sometimes when watching the news and reading commentary I wonder if we aren't out of touch with the "reality" of the US economy in other direction. Feels like we're headed into something like the great depression around here.
One of the things that Brad Delong hasn't "grasped with both hands" is the difference between the federal government pissing away $1 Trillion on wasteful consumption (excessive defense spending, Iraq) vice productive investment.
Nor does Brad see the difference Between $2 Trillion in tax cut capital flying to China -- to build up competition to the US --vice that capital being invested in the USA.
Hey, 50 million Americans elected a spoiled rich kid who had all the benefits of wealth -- Andover, Yale, Harvard MBA, his own company -- and yet who was a drunk and a failed businessman on the verge of bankruptcy when he reached middle age.
Those 50 million voters knew that everything George W has -- his wealth, power, and self-respect -- has been given to him by rich friends.
Yet those 50 million morons thought George W would look out for the common herd in a competent fashion just because Karl Rove had George sober up and wear a cowboy hat/drive a pickup truck.
The market punishes stupidity. 300 million Americans are about to learn that.
Hey, maybe Romney was right. Maybe Michigan was like the canary in the coal mine, since it seems to have spread out to Ohio, parts of Pennsylvania, and down south.
Well, didn't Bush lead his first couple of companies into bankruptcy? C'mon---what's the odds he could make it three-in-a-row?
And regarding the D.C. economy, it's important to remember that since parasites generally extract only a fraction of the host's resources, the host may become quite sickly while the parasites are still thriving in full feasting-mode...
Re Don Williams
"Yet those 50 million morons thought George W would look out for the common herd in a competent fashion just because Karl Rove had George sober up and wear a cowboy hat/drive a pickup truck."
Now let's be fair to President Bush, as hard as that may seem. He actually got on the wagon in the early eighties, long before he ever met Karl Rove, after his wife threatened to say adios is he didn't.
It's amazing how no one ever disagrees with the guy [DeLong].
You must not read his blog very much.
You must not read his blog very much.
How much time do you have to spend there to realize that he deletes comments that disagree with his posts?
Thanks for this post, Matt. Seriously. There are few people in Washington that acknowledge that "flyover states" are in fact states.
McClatchy once again shows itself superior to other newspapers with an excellent article on the real breakdown of inflation.
Wow - that McClatchy story really belongs in among the dumbest newspaper stories of all time. Not that I expect anything better from McClatchy, which is probably the most incompetent newspaper chain going.
I mean, the reporter in that story apparently doesn't understand how averages work! Gee, you mean when prices as a whole go up by X%, then it goes up by over X% for some items and it goes up by under X% for other items. Really? Shocking.
Hey Al! Have you found all those WMDs Yet?! Maybe you and NYT's Judy Miller should go looking some more...
Perhaps you should travel east of the Potomac and ask how the DC economy is doing...
Re SteveH
Same thing in the Virginia suburbs.
much of our region is experiencing a war-driven boom
Who could have forseen that our glorious War on Terror would provide such a glorious river of pork for the Republican hogs? Bonus!
Perhaps you should travel east of the Potomac
To Georgetown, Dupont Circle, Capital Hill, Spring Valley?
"Perhaps you should travel east of the Potomac and ask how the DC economy is doing..."
I assume you mean East of the Anacostia?
I'm not aware of any signs of recession in Georgetown, or in Charles County for that matter.
I don't know about the rest of the Northeast, but the Washington DC area has experienced a significant housing bubble that is now starting to deflate. Home prices are down almost 10% from the peak in May 2006 (per the Case-Shiller index) and now doubt have further to fall.
The area is not experiencing a war-driven boom. Federal spending that flows through the local economy did go up significantly after 9/11 but has been relatively flat since 2004. The unemployment rate is low but that is partly due to low population and labor force growth (related to the high cost of housing). The area is definitely not immune to what is happening the broader economy.
States like Michigan and Ohio that are dependent on the auto industry are doing much worse than the rest of the country and have been for some time.
From today's Washington Post:
One-Third of Children in Poverty.
I was born in DC, I grew up across the Potomac in Alexandria, and I've lived in the District since 2001...and I find it rather disheartening that the same people in the DC metro area who are out of touch with things in "real America" are also out of touch to the fact that one in three children living in DC is below the poverty line. "Hey, things are great here! Isn't this war profiteering boom fantastic!"
Median income of Metrorail rider in DC: $102,110 [source (pdf)]
Yeah, I'll say DC is probably out of touch with the economy in general.
And it gets better. Note that there's even such a creature as a "Metrorail rider". Many (most?) American urban areas with about a million people don't even have a regional public transit system.
sglover:
Where in the world did you get the idea that the D.C. area has "about a million people"? Fairfax County, VA itself has a population of over a million, and Montgomery County, MD (where I live and work) is almost there as well. That doesn't include the other 20 jurisdictions in the D.C. portion of the Washington-Baltimore MSA.
The population of the Washington Metropolitan Division is over 5.4 million per the 2004 census bureau estimate.
http://en.wikipedia.org/wiki/Baltimore-Washington_Metropolitan_Area
By now, it's probably well over 5.5 million.
Note that this figure DOES not include the Baltimore Metropolitan Division, which is another 2.6 million. Some of these folks commute to DC and use Metrorail as well.
I think with over 5 million people, we don't have to justify our transit system to anyone.
I think the area Fish was referring to is SE DC. Also,I agree with jsmdlawyer. You said what I wanted to say much better, than I could.
I think the area Fish was referring to is SE DC
So maybe Fish is the one who needs to do some travelling, not Matt.
are also out of touch to the fact that one in three children living in DC is below the poverty line
Yep. And it's been run by Democrats for over 30 years. Working out so well, isn't it?
D.C. commentators are out of touch--but not necessarily in the way Mr. Yglesias thinks.
Many (most?) of the D.C.-based commentators are newspaper/tv reporters, or come from that background, or have many friends in the industry. And since print newspapers are all pretty much tanking, the commentators' perspective, based on the fact that many of their friends and colleagues are losing jobs, is inevitably colored by these personal worries.
In short, since their profession is losing jobs, they extrapolate from that and assert that the whole economy is sinking.
In the Dallas area, the number of homes sold in Q4 2007 is down, but price declines are fairly small.
http://www.dallasnews.com/sharedcontent/dws/graphics/homesales/074q.html
Most neighborhoods didn't experience crazy price increases in recent years either, so there was less incentive to invest in real estate here.
The trend I see is higher gasoline costs make overall cost of living in the outermost suburbs higher than it was several years ago. Extra cost isn't enough to kill demand out there, but it's high enough to be part of the budget calculations. Food prices are also up and consumers experience these higher food and fuel prices on a weekly basis.
The job market seems ok. Still see help wanted signs in stores.
Where in the world did you get the idea that the D.C. area has "about a million people"? Fairfax County, VA itself has a population of over a million, and Montgomery County, MD (where I live and work) is almost there as well. That doesn't include the other 20 jurisdictions in the D.C. portion of the Washington-Baltimore MSA.
Oy.... Let's split the difference. I was thinking the entire DC/Balto MSA population was about 5 million, and that DC proper is about half a million. But yeah, that's a pretty embarrassing gaffe on my part. Thanks for the correction.
But anyway, what I was really getting at was how few American cities of the same size as the national capital region boast a transit system anything like Metro -- which is a disgrace. Your correction actually emphasizes my point. Look at my link, and reflect on how few of those cities have a transit system. I mean, do any of the Sunbelt cities have one?
Oy again. In my last comment, what's "a disgrace" is how few cities have a system like the capital area's Metro. Metro itself is very good, though it'd be nice if had the density of the NYC system.
Matt's in trouble again, and I think we need an intervention. No sooner did he dial back "that said" than his addiction to "inane" took over. Friends of Matt! He needs our help! Provide substitutes for "inane"! I got the easy one: "stupid."
Housing and related industry was a large part of GDP
for the last several years. It's over. We have been borrowing and gaining investment on the strength of our dollar. Not anymore. I really don't see what replaces it for a long time. Ben's in a box and I'm not confident having the President and Paulson coming out saying we need stimulus fast. Japan is a good example but ....we are not savers?
I'm hopeful oil comes down some as I see it having a froth of speculation.
down to 70 would help.
I think Matt's point has been proven by the fact that half the comments posted have been from people living in the DC area arguing over whether people in DC are "rich" or not.
Meanwhile, a typical MSNBC article says:
"A Friedman Billings Ramsey analyst said Thursday that he now thinks there is a 70 percent chance a recession will hit the U.S. economy in the next 12 months, as home prices, consumer spending and the economy are likely to decrease...
Eventually, East said, economic researchers will determine that the recession started in late 2007 or early 2008."
Greg Mankiw, a Harvard economics prof, says on his blog:
"In online betting, the probability of recession is now about two-thirds, compared to about one-half a few weeks ago.
Larry Summers says, "I told you so," and calls for a fiscal stimulus. The Economist disagrees.
Update: Doug Elmendorf disagrees too."
Back in September of last year, Econbrowser said:
"In contrast, coming from a non-scientific direction, WSJ is doing an online poll of recession predictions. When I checked (8pm Eastern on Thursday), 48% said the economy in the next six months will -- or has already gone -- into recession; 52% said no recession.
Finally, something from the prediction markets. MidasOracle has some interesting graphs showing the evolution of the intrade's views on recession probabilities in 2007 and 2008. It looks like the bettors are guessing over 45% probability in 2008 (although on low volume)..."
Then there's Merrill Lynch:
"...a report by Merrill Lynch Chief Economist David Rosenberg suggesting a 100% probability of a recession. Reading from his latest writing:
'We recently unveiled a new recession probability indicator that uses the shape of the yield curve (10-year note/3-month LIBOR) and corporate spreads (Baa) to predict the probability of a recession within the next 12 months. (The model is based on a recent Fed paper, which used the 10/2-year yield curve and Aa spreads.) The results are striking: taking into account corporate spreads, the model is flashing a 100% chance of a recession in the next year, up from 75% in October and essentially zero in the summer. Looking at history, the model did a pretty good job predicting the 1990-91 and 2001 recessions. In December 1989, recession odds jumped to 95%, and by August 1990 an official recession had set in. Similarly, the model was showing 100% recession odds in October 2000; by September 2001, the economy was in an official downturn.'"
Based on the history of recessions in my lifetime, when people start talking "probability of recession" - you're in one or about to be in one.
Bottom line: we're in one or about to be in one.
And a lot of people are saying it will be SEVERE, not moderate.
Folks -
No one seems to talk about the reason that this recession is going to be the one recession we will talk about with our kids:
Since we started opening up our markets, we have slowly eroded the earnings of the middle-class, which, creates the very demand that upholds this economy.
As such, the middle-class compensated through increasing their debt and, as luck would have, a speculative bubble in the late 90's stock market as well as easy credit in 2001 - 2006 which both allowed people to go further into debt but, also to off-set declining earnings power at work with rising asset prices. The problem with this is that rising asset prices are illiquid and can be erased. Earnings are as liquid as you get.
So, after 30 years of free-trade policies, the consumer, the American middle-class is our of options. We are still losing jobs to China and India, and the replacements are low-wage, dead-end jobs that create subsistence, which, as anyone can tell you, does not create the organic demand needed to spur the economy.
To add to all of this, any increased monetary actions by the fed or the government is thwarted by the fact that productive asset investments (i.e. - factories and job creating industries) are being invested in China.
Think of it this way- if BUsh gives his tax cuts to the wealthy again, where are they going to invest those earnings? America? Where, what industry? They are now investing in China.
So this further thwarts the ability of America to stimulate its own economy, since globalization has freed-up the beneficiaries of the stimulus to invest it elsewhere.
I am fairly depressed just thinking of it all.
Why shouldn't DC be ahead of the rest of us economically? They have the power to take our money away essentially at gunpoint.
Have you ever ridden the goldplated Metro in DC? Compare it to what we schmucks in Chicago have to suffer.
Comments closed February 01, 2008.
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Heads in the Sand
Whatever Brad DeLong's assessment, you can be confident that no commentator on his website will post anything other than slavish agreement with His Brilliancy. It's amazing how no one ever disagrees with the guy.
Posted by y81 | January 18, 2008 8:52 AM