Looks like Q4 of 2007 featured truly anemic growth of just 0.6 percent. That's a reminder that some of the "is it a recession?" talk that you hear in bad times is fairly arbitrary. To qualify as a real recession, you need economic contraction. But in the real world a quarter of 0.2 percent growth is very similar to a quarter of -0.2 percent growth, and quite different from a quarter of 3.2 percent growth. The hop over the zero mark doesn't actually cause anything magical to happen. A prolonged period of 0.6 percent growth would cause a ton of hardship and falling living standards even if things never crossed the line into official recession territory.
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The Slowdown
30 Jan 2008 12:05 pm
Comments (55)
I don't see how hopping "over the zero mark" is arbitrary. In one circumstance, on net, the economy is growing. So, relative to the previous period, people should have less hardship (even if it's only slightly less). In the other circumstance, on net, the economy is slowing down. So you'll see at least a marginal increase in hardship compared to the previous period. That strikes me as a significant distinction.
Of course, it's macroeconomic data so some individuals can do quite poorly (or quite well) under either scenario, but that doesn't make the overall direction of the economy meaningless.
This post gave me a good laugh. You aren't helping the cause by trying to redefine recession. Just an FYI even one quarter of negative growth isn't considered a recession. It has to be two quarters in a row.
Well, this all depends on who doing the the defining of what is or is not a recession. The NBER, for example, does NOT define a recession in terms of two consecutive quarters of decline in real GDP.
In one circumstance, on net, the economy is growing. So, relative to the previous period, people should have less hardship (even if it's only slightly less). In the other circumstance, on net, the economy is slowing down. So you'll see at least a marginal increase in hardship compared to the previous period. That strikes me as a significant distinction.
Not really. Living standards will also be impacted by population growth and imports. In particular, at 0.6 percent growth I'm pretty sure the economy is growing slower than the population.
Consecutive quarters of 0.6% growth will not produce falling living standards. Perhaps falling relative to other countries, but not relative to the one's own past.
http://www.nber.org/cycles/recessions.html
If you read the above link to NBER (including the Q&A section that follows) there is CONSIDERABLE latitude employed by this organization in declaring a recession. They specifically deny adhering to any rigid rules as to precise growth rates/slowdowns and the duration of such downturns when arriving at such a judgment.
Consecutive quarters of 0.6% growth will not produce falling living standards. Perhaps falling relative to other countries, but not relative to the one's own past.
Evan is right, sort of. 0.6% growth will probably entail slowly rising standards of living for some and slowly falling standards of living for others. The mean may rise, but the median may not.
But he makes an important point that, psychologically, a small gain is in general VERY different from a small loss. This is the core of "prospect theory".
Matt, just call it a recession when it's a recession. If the economy contracts for a while, it's a recession. If you don't have a contraction, and it's not been a while, what you've got is anemic growth.
Consecutive quarters of 0.6% growth will not produce falling living standards. Perhaps falling relative to other countries, but not relative to the one's own past.
Any GDP growth that is slower than population growth will certainly mean falling living standards, generally. US population grows at 0.9% per year. Since 0.6%
If GDP per capita falls, living standards take a hit. Is this that complicated?
Re Matthew's comment "A prolonged period of 0.6 percent growth would cause a ton of hardship and falling living standards "
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It's also a very opportune time for terrorists to strike -- like pushing someone when they're at the top of the stairs. Voila Sept 11,2001
I think that was on Greenspan's mind when he warned of recession a few weeks ago -- ref:
http://www.npr.org/templates/story/story.php?storyId=17210282
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"We're getting close to stall speed" in economic growth, he said. "And we are far more vulnerable at levels where growth is so slow than we would be otherwise.
"Indeed ... somebody who has an immune system which is not working very well is subject to all sorts of diseases, and the economy at this level of growth is subject to all sorts of potential shocks."
I think html tags got in the way of my previous comment.
0.6% is less than 0.9%, so therefore GDP per capita falls.
Any GDP growth that is slower than population growth will certainly mean falling living standards, generally.
Hardly. Population growth is mainly babies and poor immigrants, who consume much less than the typical American. In addition, the standard measures used to calculate real growth are widely believed to overstate inflation and understate true increases in wealth.
Matt fails to discern the bright side of all this. A slowing economy gives the D.C. republicratic whores another excuse to do what they do best - "stimulate" their re-election chances by spending our children's money.
Hardly. Population growth is mainly babies and poor immigrants, who consume much less than the typical American.
The immigrant and baby mix as percentages of the overall population would be relatively constant over short periods of time, no? So this is just foolish.
The notion that inflation has been overstated is also silly, as measures excluding rising food and energy prices are usually used to calculate inflation. Excluding everything that goes up in price while including everything that goes down had managed to give the Fed the low inflation numbers they were looking for. Until now.
MY: Not really. Living standards will also be impacted by population growth and imports. In particular, at 0.6 percent growth I'm pretty sure the economy is growing slower than the population.
tomboy: 0.6% is less than 0.9%, so therefore GDP per capita falls.
I think there's some confusion on terms here. As I understand it, the US economy grew 0.6% in the last three months of 2007. Meanwhile, the population grew 0.89% for all of 2007 (presumably, the population something like 0.22% for the last three months of the year). As the New York Times said:
Over all, the economy expanded by 2.2 percent in inflation-adjusted terms for all of 2007, the slowest rate of growth in five years.
If I'm reading this right (and I like to think that I am), the rate of economic expansion has not yet fallen below the population growth rate. So I think you're wrong.
Your abstract point, however, about the comparison of the two is well taken.
tomboy,
Wrong on both, I'm afraid. Short-term population growth is mostly babies and poor immigrants. They consume less than the typical American. So typical living standards can rise over the short term even if the rate of population growth outstrips the rate of GDP growth.
You're also wrong about measures of real GDP.
Re smallpox' comment "the rate of economic expansion has not yet fallen below the population growth rate. So I think you're wrong"
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You're forgetting about the huge growth in DEBT.
$10 Trillion divided among roughly 110? million households equals about $91,000 per household.
Actually, roughly 50 million households have less than $40,000 /year in income and can't pay shit on the debt. So make that $10 Tril/60mil or
$167,000 per household.
With a yearly compounded interest payment of what?? $8000/year per household alone.
Mazel Tov.
We shouldn't read too much into that 0.6% number, anyway. According to the chart in the Times piece, the first quarter rate of growth was about the same. Then it zoomed up to nearly 4% in the second quarter and above 4% in the third.
Ooops. Forgot to mention -- the debt of $167,000 per household I cited above was just the FEDERAL debt owed per household. Doesn't include the PRIVATE debt -- credit cards, mortgage, student loans, car loans etc. Nor the STATE debt owed by each citizen.
That's right.
You're fucked.
You're forgetting about the huge growth in DEBT. $10 Trillion divided among roughly 110? million households equals about $91,000 per household.
According to the Federal Reserve's most recent Flow of Funds report, household net worth (assets minus liabilities) increased in the third quarter by $0.6 trillion to $58.6 trillion.
Wrong on both, I'm afraid. Short-term population growth is mostly babies and poor immigrants. They consume less than the typical American. So typical living standards can rise over the short term even if the rate of population growth outstrips the rate of GDP growth.
You have to be a real idiot to think that babies constitute 'short term' population growth. A stable population with no net immigration will have some kind of age distribution profile. If that profile is maintained over the long run, then every segment of that profile will be growing by the same amount each year, whatever that growth rate happens to be. In real life, however, things are not that stable. If growth rate has peaked recently, this growth will be mostly in young people. But if growth rate has slowed recently, the most growth will be seen among older segments of the population. In particular, in the United States there is this concept of the 'baby-boomers'. You may have heard of it. As they approach retirement age we will undergo and substantial increase in the number of low contributing, high consuming old people. The negative impacts involved have been discussed many times in many contexts.
RE "household net worth (assets minus liabilities) increased in the third quarter by $0.6 trillion to $58.6 trillion"
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Is that $58.6 Trillion in overpriced houses or does it also include a lot of securities laced with derivatives and subprime mortgages?
As Warren Buffet noted, you don't know who's swimming naked until the tide goes out.
You have to be a real idiot to think that babies constitute 'short term' population growth.
Population increase occurs in two ways, births and immigration. You have to be a real idiot to think people are not born as babies. And recent U.S. immigrants tend to be much poorer than the general population. Babies and recent immigrants tend to consume much less wealth than the general population. This means that over the short term, contrary to tomboy's claim, population can increase faster than GDP without reducing general living standards. It's not exactly rocket science, mpowell.
Is that $58.6 Trillion in overpriced houses
No, it's $58.6 trillion, and rising, in current household assets of all types.
I just don't see how long term debt is relevant to this discussion.
There are big problems with fiscal policy and consumer credit accounts and what have you, and I don't mean to minimize them. But that's a separate discussion from determining what kind of hardship people are facing today.
According to the Federal Reserve's most recent Flow of Funds report, household net worth (assets minus liabilities) increased in the third quarter by $0.6 trillion to $58.6 trillion.
Acccording to the Financial Markets Center, net worth has risen 7.5 percent per year on average since 1950. A 1.1% quarterly increase, which works out to 4.4% yearly increase, is below the average rate of growth of new worth.
Most of the wealth of this country is held by the top 5% of the population. So we better hope that they don't pack up, emigrate and leave us holding the bag when Obama raises their taxes.
PS Re net worth, is that after paying roughly $50 Trillion in unfunded US government liabilities ?
So we've gone from "American households are fucked!" to "American households have a huge positive net worth, and their net worth is growing, but recent growth hasn't been as fast as the long-term average."
No, we've gone to:
a) If I sell my house, I can use the profits to pay off Reagan/BushI/BushII IOUS so that
b) I can get back a small fraction (future dollars vs present --actually past value) of what I paid into Social Security and
c) Have enough left over to buy a bottle of Aspirin in order to take care of my long term medical needs , provided that
d) Our wealthy elites don't do what the ancient Romans called "the Constantinople flit" , in which case I would need to
e) Find a drug lord among the Mexican invaders to whom I could grovel in order to get a few crumbs
This country is enormous. There are regions that are in recession and have been for awhile. The 0.6% figure reflects that.
Re Don Williams
I am very disappointed in Mr. Williams. He didn't blame the economic problems in this country on Hiam Saban or AIPAC. Must be getting soft in his old age.
Hmmm. I was waiting for Mixner to
a) Go back to 1995, take the net Housewealth wealth, deduct the federal/state debt and size of unfunded federal liabilities, and then
b) identify what percentage of the residue belonged to the middle class and divide that residue by the number of people in the middle class bracket and then
c) Do the same for 2007 data --with adjustment for inflation and
d)Tell me how much better off we are after working for 12 years.
So we've gone from "American households are fucked!" to "American households have a huge positive net worth, and their net worth is growing, but recent growth hasn't been as fast as the long-term average."
Looking at net worth figures only partially tells the story about the financial condition of American households. It's a fact that over the decade, households have been engaging in deficit spending (i.e. household expenditures have been greater than disposable income). Deficit spending is not necessarily inconsistent with rising household net worth, if asset prices also continue to rise. However, if those appreciations in asset prices are unsustainable (e.g. real estate), then, eventually, households are going to be forced to cut back on spending, which will have a negative effect on the US economy.
Re SLC's comment "I am very disappointed in Mr. Williams. He didn't blame the economic problems in this country on Hiam Saban or AIPAC "
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Actually, SLC, I have only (partially) blamed Haim Saban for the loss of 3000 lives on Sept 11, the loss of $1 Trillion in economic knock-off from that attack, the loss of 4000 men in Iraq, the crippling for life of a few thousand US citizens, and the loss of $1 Trillion from fighting the unnecessary war in Iraq.
I'm not unreasonable -- he only needs to be hung from a lamppost once. Twice would be excessive and unfair.
I was waiting for Mixner to ...
Were you? I don't know why. If you want to do those things yourself, go ahead. But before you do that, you might want to explain what you think the point of the exercise would be.
Re Peter H's comment "However, if those appreciations in asset prices are unsustainable (e.g. real estate), "
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Aye, there's the rub. I recall $250,000 houses in Washington DC losing about $70,000 of their value circa 1990 when the Reagan printing presses had to be slowed down and the defense contracting gravy train slowed. Layoffs in real estate, constructions, defense etc rippled throughtout the retail community. The multiplier crowbar can work both ways.
Same happened elsewhere -- a co-worker of mine who had been in San Antonio (big military base) had to dip into his savings to pay the $50,000 difference between what he owed on a mortgage and the selling price of his previous house.
Peter H,
Looking at net worth figures only partially tells the story about the financial condition of American households.
True. But since Don Williams was falsely asserting that households are "fucked" by debt, it seems a rather relevant part of the story.
It's a fact that over the decade, households have been engaging in deficit spending (i.e. household expenditures have been greater than disposable income).
Is that a fact? Before we bother exploring the implications of this alleged fact, let's first make sure it really is a fact. Can you substantiate it?
Mixner,
Look at the chart on page 7 of the Levy Institute Report I linked to. As the report says:
"As of the first quarter of 2006, the gap between household sector expenditure and income in the United States widened to an annualized deficit of approximately $600 billion. The deterioration in the household financial balance has been going on since 1997, and the rate of decay has accelerated noticeably since early 2005. The household sector financial balance has been plunging."
Re Mixner's comment "But since Don Williams was falsely asserting that households are "fucked" by debt"
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How "falsely"?? Social Security is unfunded by $8 Trillion and Medicare by $40 Trillion plus .
You did not address that.
Plus the $58 Trillion in household assets can evaporate in no time under a competitive assault from 2 Billion workers in China and India. Houses aren't worth shit if the local businesses decline --just look at what housing values have been doing in Detroit. Jack gasoline up to $10 per gallon and see what happens to real estate in the suburbs
"Assets" are worth nothing if you don't have a competitive business. Yet we've stupidly spread our supply chains all over the the globe for much of our industrial matrix.
Which means we're screwed unless we spend $600 Billion /year (actually more like $900 Bil to $1 Tril/year) on a military to enforce order all around that globe. What happens when we can't keep that up? E.g., Ask the oil companies what happens to their stock if their foreign assets are nationalized or sabotaged.
Look at the chart on page 7 of the Levy Institute Report I linked to.
Okay, Figure 1 on Page 7 does support the factual claim in question. So let's go back to your discussion of the implications...
Deficit spending is not necessarily inconsistent with rising household net worth, if asset prices also continue to rise.
Right. And that is in fact what has been happening.
However, if those appreciations in asset prices are unsustainable (e.g. real estate), then, eventually, households are going to be forced to cut back on spending, which will have a negative effect on the US economy.
The spending boom fueled by the rapid rise in real estate values over the past decade cannot continue indefinitely. The ratio of spending to income will likely return to something more like the long-term average. But household net worth is high, and has continued to grow even in the most recent quarter. Households have not been spending more than they can afford.
Social Security is unfunded by $8 Trillion and Medicare by $40 Trillion plus .
I completely agree that Medicare is unsustainable in its present form, and either spending must be cut, or payroll taxes must be raised, or both. I don't see much support for either among Democrats.
Re "But household net worth is high, and has continued to grow even in the most recent quarter"
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measured in what? A dollar that's lost a third of it's value? Euros? Pounds? Gold?
Re Mixner's comment "I completely agree that Medicare is unsustainable in its present form, and either spending must be cut, or payroll taxes must be raised, or both. I don't see much support for either among Democrats. "
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Sure there is. It's called "Soak the Rich". But not via payroll taxes, of course.
Thanks for pointing out that the rich have ..what? ..$54 Trillion X 1/2 = $27 Trillion that we can grab. That will definitely help out.
Re: So we better hope that they don't pack up, emigrate and leave us holding the bag when Obama raises their taxes.
Where would they go? Any country with first world living standards has higher taxes than than the US.
Re: Our wealthy elites don't do what the ancient Romans called "the Constantinople flit"
You need to study history. Constantinople was not some foreign country: it was part and parcel of the Roman Empire for centuries before Constantine set up shop there. Moreover the East had been the richer region all along. The Roman rich moving to Constaninople would be the equivalent of our rich moving to Manhattan. And Byzantine taxes were eventually even higher than Roman taxes had been due to the Christian Church insisting on redistributive policies to benefit the poor and also wanting a lot of really extravagant churches built in New Rome.
Re: Social Security is unfunded by $8 Trillion and Medicare by $40 Trillion plus .
They've always been unfunded by some massive amount, so why the doom-mongering now? That bill comes due over the course of the entire century, it's not like we have to pay it all at once. Your scare story is like saying that because someone has a mortgage larger than his annual income he must necessarily default.
Re: What happens when we can't keep that [current military spending] up?
We go back to our former role and stop scaring the pants off the rest of the planet by acting like we want to rule the whole world. Oil prices will fall considerably when we are no longer playing bull in the chian shop in the Middle East. Were you sleeping during the 1990s when military spending fell (some at least) and oil prices were also rock bottom.
Where would they go? Any country with first world living standards has higher taxes than than the US.
I'm not sure why you think it's necessary for an entire country to have "first world living standards" in order for rich ex-patriate Americans to enjoy a fantastically luxurious, low-tax lifestyle in them. Rich people build mansions and estates all over the world, often in quite poor countries.
We go back to our former role and stop scaring the pants off the rest of the planet by acting like we want to rule the whole world.
We're not responsible for the paranoid fantasies of people in other countries--or yours. Not that many of them share your paranoia anyway. They need us more than we need them.
Re: I'm not sure why you think it's necessary for an entire country to have "first world living standards" in order for rich ex-patriate Americans to enjoy a fantastically luxurious, low-tax lifestyle in them.
A Bill Gates or a Warren Buffet can buy his own island and set himself up as Lord High Poobah thereof. But interestingly enough people at that ultra-high income stratum show no desire to do so; in fact many of them argue publicly for higher taxes on the rich, including themselves. (See also, George Soros). The merely rich (your average millionaire) cannot set himself as Lord of All in some Carribean paradise and while he might have a vacation home in such places, he is still dependent on First World medicine, security, education systems, capital markets etc, and he needs a First World country to call home. I have no fears that the US rich will decamp en masse to some Third World hell hole to escape tax rates that will still be in the bargain basement compared to Europe. Also left out of your analysis is the possibility that some of the rich may harbor that quaint old feeling called patriotism, and might be loathe to turn their back on their countries over mere money.
Re: They need us more than we need them.
If this is true then we need to start charging for our services. If we are going to become an empire then for goodness sake we need to start levying tribute and stop giving away the Pax Americana for free.
The merely rich (your average millionaire) cannot set himself as Lord of All in some Carribean paradise and while he might have a vacation home in such places, he is still dependent on First World medicine, security, education systems, capital markets etc, and he needs a First World country to call home.
No, he doesn't need a First World country to call home. He only needs one to visit, and maybe to send his children to for school. Numerous wealthy citizens, or former citizens, of European nations have given up their residency status in their country of origin in order to avoid paying high taxes. It was more common in the 60s and 70s than it is today, because most European nations have drastically lowered their top tax rates since then. If Obama were foolish enough to try and "soak the rich" he'd run into the same problem.
I have no fears that the US rich will decamp en masse to some Third World hell hole to escape tax rates that will still be in the bargain basement compared to Europe.
Then maybe you should read this recent New York Times piece, about how Denmark is losing many of its best and brightest young workers to other European countries on account of its confiscatory income tax rates. And these aren't even the rich, just the upper middle.
If this is true then we need to start charging for our services.
I agree. Europeans, for example, have been enjoying the benefits of our security umbrella on the American taxpayers' dime for far too long. They need to pay their own way.
Re JonF's comment "I have no fears that the US rich will decamp en masse to some Third World hell hole to escape tax rates that will still be in the bargain basement compared to Europe."
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1) Then you might look at this New York Times article: http://www.nytimes.com/2006/12/18/world/18expat.html?ei=5090&en=5655d020c1763b3f&ex=1324098000&partner=rssuserland&emc=rss&pagewanted=print
Note the citation of the law Congress felt compelled to pass in 1996 to halt/punish a wave of wealthy people denouncing their US citizenship.
2) The above article applies to people renouncing citizenship in normal times. But if you look at countries which have suffered currency devaluations/depressions (e.g. Argentina) you see people fleeing because the entire country becomes a ghetto. Electrical power blackouts, bad water supplies, high crime, frequent kidnappings/extortion, food shortages, high incidences of home breakins/rapes, unpredictable corruption and police who are a threat, not a source of security.
3) A relatively wealthy resident of Argentina has posted an interesting description of what it was like living in Argentina over the past few years.
Although he made many ingenious adaptions to the situation in Buenos Aires, he notes in the end that it is best to simply flee the country if one has money. See
http://www.frugalsquirrels.com/cgi
bin/ubb/ultimatebb.cgi?ubb=get_topic;f=1;t=044387;p=0
Sorry -- the link posted above (to the poster in Argentina) is broken. Try this instead:
http://www.frugalsquirrels.com/cgi-bin/ubb/ultimatebb.cgi?ubb=get_topic;f=1;t=044387;p=0
This 1995 NY Times article talks about a number of wealthy US citizens renouncing their citizenship in order to avoid capital gains or estate taxes. My understanding is that the 1996
law tried to fix this, but it is obviously difficult to enforce.
I see no reason why a foreign country would cooperate with the US IRS in persecuting a new citizen of the foreign country. Especially one who bought in needed capital, business expertise, maybe new technology. I am also skeptical how the government can block the flow of hidden capital to a foreign country prior to renunciation of citizenship.
I'm not advocating a position either way. Just pointing out that a small percentage of our citizens own much of the wealth -- and that the burden of the $10 Trillion federal debt (plus $50 Trillion in unfunded obligations) becomes much greater on us if a sizable number of our superrich chose to emigrate. A bad effect from allowing an intense concentration of wealth.
We could probably handle loss of the Fortune 400. Loss of the next 10,000 under them would hurt, however. Especially extended families.
And when they revamp the figures - as they always do - in a few months, we'll see that .06% growth go negative, most likely.
And we're definitely going to see quarter one and quarter two go negative.
By July or September, it will be official - recession.
That should have been ".6%".
Re: If Obama were foolish enough to try and "soak the rich" he'd run into the same problem.
To be a bit realistic, no one is talking about confiscatory tax policies. A5t mpost we are talking about restoring, more or less, the tax regime of the 90s. That decade did not send hordes of the well-heeled fleeing to the exits.
Re: Then maybe you should read this recent New York Times piece, about how Denmark is losing many of its best and brightest young workers to other European countries on account of its confiscatory income tax rates.
A complete non-sequitur. And in a way it proves my point: the rich may emigrate to another first-world country with lower taxes. Buy since American taxes, even on the wealthy, are the lowest in the First World, they aren't likley to depart these shores. And no, a small handful of exceptions to that statement does not disprove it.
Re: A relatively wealthy resident of Argentina has posted an interesting description of what it was like living in Argentina over the past few years.
Again, we are not talking about duplicating the tax regime and public dysfunction of Argentina, just about restoring the status quo ante of the 90s.
Comments closed February 13, 2008.
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Heads in the Sand
Waterboarding isn't torture. 0.6 growth doesn't signal in impending recession. Who ya gonna believe, me or your lyin' eyes?
Posted by steve duncan | January 30, 2008 12:19 PM