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More Than a Little Doubt

Courtesy of Michael Panzner of Financial Armageddon

For those who believe, as I do, that the U.S. economy is in far worse shape than Washington and Wall Street have let on, here are five recent reports that cast more than a little doubt on the official story of how things are going.

1. Inflation

"Food Inflation Kept Hidden in Tinier Bags" (New York Times)

Chips are disappearing from bags, candy from boxes and vegetables from cans.

As an expected increase in the cost of raw materials looms for late summer, consumers are beginning to encounter shrinking food packages.

With unemployment still high, companies in recent months have tried to camouflage price increases by selling their products in tiny and tinier packages. So far, the changes are most visible at the grocery store, where shoppers are paying the same amount, but getting less.

In every economic downturn in the last few decades, companies have reduced the size of some products, disguising price increases and avoiding comparisons on same-size packages, before and after an increase. Each time, the marketing campaigns are coy; this time, the smaller versions are “greener” (packages good for the environment) or more “portable” (little carry bags for the takeout lifestyle) or “healthier” (fewer calories).

2. Growth

"Things Are Not as Good as They Look" (The Aleph Blog)

[Editor's note: Curious about how the economy was actually doing, David Merkel looked at the 4Q “Final” GDP figures.]

After a little while I realized that we are facing the same phenomenon as we did back in 2Q 2008, when I write the piece, Another Look at Preliminary Second Quarter GDP.  Let’s start with the definition of Gross Domestic Purchases, which I think more closely tracks the way average Americans feel than Gross Domestic Product does.

Gross domestic purchases

The market value of goods and services purchased by U.S. residents, regardless of where those goods and services were produced. It is gross domestic product (GDP) minus net exports of goods and services. Equivalently, it is the sum of personal consumption expenditures (PCE), gross private domestic investment, and government consumption expenditures and gross investment.

Source: U.S. Bureau of Economic Analysis

Pretty simple — GDP minus net exports equals Gross Domestic Purchases.  The trouble is that import price increases increase real GDP relative to real GD purchases.

In 4Q 2010 real GDP rose 3.1%, while real Gross Domestic Purchases fell 0.2%.  Why? Energy and other import costs rose which depressed the price indexes for GDP versus Gross Domestic Purchases.

Over the long haul, the two series are close to equal, but when they diverge, they tell a story.  The current story is that average consumers in the US are doing badly, while those benefiting from high corporate profits, and increasing exports are doing well.

4. Housing

"Flawed Housing Data Might Mask Depth of Woes" (Msnbc.com)

Critics say Realtors’ monthly report overly optimistic

Two high-profile reports on home sales this week confirmed that the housing market is still mired in a deep slump with prices still falling and sales activity sluggish at best. In fact, the market may be in much worse shape than even those numbers suggest.

Figures from the National Association of Realtors that are among the most closely watched indicators on the housing market have been called into question by economists who say they may overstate existing-home sales activity by up to 20 percent.

"It’s very important for the industry but also for policy makers," said Mike Fratantoni, head of research at the Mortgage Bankers Association, one of the groups that is challenging the Realtors’ data.

"Folks at the Fed and at the Treasury and anyone involved in economic policy throughout government are very concerned about the health of the housing market. So if your primary indicator is giving you an overly optimistic reading, that’s cause for concern," he said.

The Realtors, a trade group of licensed real estate agents and brokers, concede that there has probably been some "upward drift" in its numbers since the unprecedented collapse of the housing market in 2006.

4. Unemployment

"Hidden Workforce Challenges Domestic Economic Recovery" (Washington Post)

Overshadowing the nation’s economic recovery is not only the number of Americans who have lost their jobs, but also those who have stopped looking for new ones.

These workers are not counted in the Labor Department’s monthly unemployment rate, yet they say they are willing to work. Since the recession began, their numbers have grown by 30 percent, to more than 6.4 million, amounting to a hidden labor force that could stymie the turnaround.

Adding these workers to February’s jobless rate pushes it up to 10.5 percent, well above the more commonly cited 8.9 percent rate.An even broader measure of unemployment, which includes people forced to work part time, stands at nearly 16 percent.

Economists say the longer these workers stay out of the job market, the harder it will be for them to find employment, creating a vicious circle that can spiral for months or longer. Meanwhile, their delayed entry into the job market means smaller paychecks in the future. And if these ranks remain high, economists worry that it will signal a much deeper and more troubling problem for the country: Workers’ skills don’t match the jobs available.

“It can be a self-reinforcing problem, where it just gets worse over time,” said Burt Barnow, an economist and professor at George Washington University.

Part of the reason these workers are not factored into the unemployment rate is a technical quirk: Workers are counted as unemployed only if they are actively job-hunting. Otherwise, they are considered outside of the labor force altogether.

5. Productivity

"How Much of the Productivity Surge of 2007-2009 Was Real?" (Mandel on Innovation and Growth)

In the 2007-2009 period, the U.S. economy experienced its worst recession since the Great Depression. Nevertheless, despite this deep downturn,  the near-collapse of the financial system and unprecedented global economic turmoil,  U.S. productivity growth actually seemed to accelerate in the 2007-2009 period, or at least maintain its previous pace.

The 2007-2009 productivity gain had a major impact on both economic policy and political discourse. First,  it gave the Fed a free hand to feed mammoth amounts of liquidity into the system without worrying about inflation. Second, it convinced the economists of the Obama Administration that the economy was basically sound, and that the big problem was a demand shortfall. That’s why they expected things to get back to normal after the fiscal stimulus.

However, I’m going to show in this post that the  productivity gain of 2007-2009 is highly suspect. Using BEA statistics,  I identify the industries that contributed the most to the apparent productivity gain, including primary metals, mining, agriculture, and computers and electronic products. Then I analyze these high-productivity growth industries in detail using physical measures such as barrels of oil and tons of steel. I conclude these ‘high-productivity’ industries did not deliver the gains that the official numbers show.

Based on my analysis, I estimate that the actual productivity gains in 2007-2009 may have been very close to zero.  In addition, the drop in real GDP in this period was probably significantly larger than the numbers showed.  I then explore some implications for economic policy. 


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