Monday, May 27, 2013

Lies, Damn Lies and GDP Statistics

Holy Moses I have been deceived
Now the wind has changed direction and I'll have to leave
Won't you please excuse my frankness but it's not my cup of tea
Holy Moses I have been deceived
(Elton John)

In February (Some Experts Got Some Splainin’ To Do) I pointed out that some economists thought GDP was being overestimated by as much as 2% because an incorrect “GDP deflator” was being used when adjusting the data.  At that time I did consider the possibility that the government could be intentionally manipulating the data to overstate GDP for their benefit. I did not raise the issue then because it would have sounded like “kooky talk” and appeared politically biased.  And I didn’t think it could be true because I did not believe the government would blatantly lie and abuse power this brazenly for political gain.

Based on the events of the past few weeks, it’s time to take a closer look at this.  The GDP numbers are calculated by the Bureau of Economic Analysis which is part of the Department of Commerce.  This is not the IRS, Justice Department or State Department, but this article (click here) details how government power was also misused at the FBI, OSHA and ATF.  With corruption this widespread, no government agency is immune from suspicion.

Last July I thought the U.S. economy was entering into a recession (Feelings, Really Bad, Feelings) and The Economic Cycle Research Institute (ECRI) said a recession had already begun. ECRI is very accurate in predicting recessions and recoveries.  However it has been predicting an upcoming recession since October 2011 and has received much criticism since then for its “faulty” forecast. The subsequent GDP numbers for the time period were 1.3% for Q2, 2012 and 3.1% for Q3, 2012.  However, when looking back at some important data for this period, it is difficult to find collaborating evidence that the economy was growing at all:

-         Data for the shipping ports track import and export activity which is a good indicator of overall economic activity.  A growing economy should show steady increases in both.  In mid-2012, this data was very flat. (See graph from Calculated Risk).  No signs of growth here.

-         Key measures of consumer discretionary spending (clothing and hobbies) were negative or very weak from June – October 2012. This type of consumer spending is vitally important for economic growth. Again, no signs of life here.

-         Miles Driven data remained flat and depressed (from 2008 levels, see graph).  If people are driving to work, driving to buy things, driving on business, driving on vacation, then miles should increase as they did until 2008.  Economists have been trying to explain away this data by saying more people are using public transportation and demographic shifts, but this should reduce the growth, not stop it.  There are no signs of economic growth in this data. 
-         And of course if the economy were really growing, then the job market would be growing.  I previously wrote that we have been in a “jobs depression”.  The rate of job growth is not even fast enough to handle the number of new workers entering the work force; so many people are leaving the work force. No real signs of growth.

So what difference does it make?  The GDP is just a description of reality, it does not determine it.  The only time this would really matter is before an important election, which of course happened just after preliminary Q3 was released. 

The story we were sold, and which we bought, was that the economy was getting better and faster growth (and good times) were just around the corner.  The story changes dramatically if we were really around 0% growth or in a very mild recession.  (And this corner has taken another year and counting).

I have no evidence that the GDP numbers have been intentionally overstated.  I only have my sense of economic smell and something doesn’t smell right.  I hope some economists will investigate this in much greater detail and share their findings.  There is no way to “audit” the government so it may take years to figure this one out.

So who do you trust now? I think we are operating in an “economic fog”.  Some major economic indicators are still “broken” and GDP numbers are now suspect.   On the other hand, ECRI has never backed off its recession forecast.  People have accused them of being arrogant and stubborn for not acknowledging they were wrong. But maybe, just maybe, they were right and we just don’t know it yet. 

Tuesday, May 14, 2013

We Are Losing This Decade

Many economists have said that although the U.S. economy has taken a big hit, it will not experience a “lost decade” as Japan did from 1991 to 2000. But from where we sit right now, I’m not so sure.

The problems in Japan started when an “asset price bubble” burst.  This resulted in the Japanese economy basically stalling out (with weak or negative growth) for around 10 years.  The problems here started when the housing market bubble burst, leading to severe damage to our financial system (Japan’s financial system was similarly damaged back then).  Additional damage occurred because the housing bubble also diverted capital to that should have been invested in other developing industries rather than housing.  When the bubble burst, these industries were behind the foreign competition and were not providing the jobs they could have.

If we say the economic problems started in January 2008, we are over five years into an economic malaise and we don’t really know when a strong recovery will begin.  The stock market is smoking, but it just recently exceeded its previous peak.  Any shock or cyclical correction would put us behind again.

The part of the economy where we are really losing is the job market.  We frequently talk about unemployment numbers. But numbers do not get unemployed, people do.  And the people losing the most in this mess are those who lost jobs since 2008. Once you lose your job in this economy, you can stagger around in the “employment wilderness” for years. Not being employed productively in your field of expertise causes you to lose income, professional value and personal fulfillment. Here are some examples from my personal network (names changed):
This economy can make you feel like
a "castaway"

-       Rich is a marketing executive who was let go in 2007.  Under normal circumstances he would have found another position in his industry in 2008.  However due the recession, he bounced around several jobs outside of his industry before finding something that fully utilized his experience in 2012.  Rich lost five years of productive work.

-       Bill is a 53 year-old industrial engineer. He has been unemployed for two years because his skills are most valuable when companies are expanding. Companies are not expanding in this uncertain environment.  Bill’s loss is two years and counting.

-       Cindy is a 50-year old marketing communications professional who was laid off from a large company in 2010.  She found a new job within a year with a small Internet-based communications firm.  However, she did not fit in with the culture of the new company and lasted less than two years. She is back looking for work the second time in three years. Even though the job situation has improved since 2010, there are still four unemployed people for every job opening and competition for good jobs is fierce.  She is on her way to losing two years.

-       Joe, a web-based marketing guy, was downsized from his company and it took him 15 months to find a new position. But after two years, his company was sold and he is on the market again.  He will also lose two years.

-       Craig is a 54 year-old marketing communications professional and has been looking for work for three years.  Becky, a product manager, has worked one year out of the last four.

-       Many college graduates have not found jobs in their field.  Some are still looking three years after graduation while working part-time.  They just lost the first three years of their careers and it will take them three years longer (or more) to pay off sizable college loans.

All these people have valuable skills that they could be using to grow the economy, but they can’t because companies are not expanding, jobs are not being created and the economy is plodding along.  This is a huge waste of human capital.  The economy suffers and the people suffer.

And the suffering has consequences. Largely due to the Great Recession, the U.S. Centers for Disease Control and Prevention reports that the suicide rate for men in their 50’s has increased over 50%.  Rates for other demographic groups are up also.

If we have already “lost” five years, when will this end? The Wall Street
Is this guy running our economy?
Journal reports that at the current rate of job growth (adjusted for population growth) it will take nine more years for employment to return to pre-recession levels.  Of course the rate of job growth is expected to increase soon. However if it takes even five more years (instead of nine), then five plus five I believe equals a decade.  We haven’t lost the decade yet, but we are well on our way.

Some people may argue that the situation is not that dire and that displaced middle-aged workers will just have to work into their 70’s to make up the difference. 

But just because people are living longer in general does not mean people are healthy enough or able to work this long. If you have to work that long, there is no guarantee that you will even have a retirement.

For example, my friend Jerry, age 64, planned to finish his long, successful, career this fall and begin enjoying a great, extended, retirement. They buried him last week.

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