Double-dipping?

Gentle reader,

Here is an excerpted take on the question of a double-dip recession, from the people at CalculatedRisk, a blog I dip into now and again. Echoes a post here a couple days ago, but with some more detail. Call us a pair of Pollyannas, but maybe we’re onto something.

Personally, I get nervous when conventional wisdom all moves in one direction — as the sliding markets lately seem to suggest. I’ll stick with the contrarians.

Tuesday, June 29, 2010
2nd Half: Slowdown or Double-Dip?

by CalculatedRisk on 6/29/2010 04:00:00 PM

No one has a crystal ball, but it appears the U.S. economy will slow in the 2nd half of 2010.

For the unemployed and marginally employed, and for many other Americans suffering with too much debt or stagnant real incomes, there is little difference between slower growth and a double-dip recession. What matters to them is jobs and income growth.

In both cases (slowdown or double-dip), the unemployment rate will probably increase and wages will be under pressure. It is just a matter of degrees.

The arguments for a slowdown and double-dip recession are basically the same: less stimulus spending, state and local government cutbacks, more household saving impacting consumption, another downturn in housing, and a slowdown and financial issues in Europe and a slowdown in China. It is only a question of magnitude of the impact.

My general view has been that the recovery would be sluggish and choppy and I think this slowdown is part of the expected “choppiness”. I still think the U.S. will avoid a technical “double-dip” recession.

Usually the deeper the recession, the more robust the recovery. That didn’t happen this time (no “V-shaped” recovery), and it is probably worth reviewing why this period is different than an ordinary recession-recovery cycle.

# First, this recession was preceded by the bursting of the credit bubble (especially housing) leading to a financial crisis. And there is research showing recoveries following financial crisis are typically more sluggish than following other recessions. See Carmen Reinhart and Kenneth Rogoff: “The Aftermath of Financial Crises”

An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. … Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt.

# Second, most recessions have followed interest rate increases from the Fed to fight inflation, and after the recession starts, the Fed lowers interest rates. There is research suggesting the Fed would have to push the Fed funds rate negative to achieve the same monetary stimulus as following previous recessions. See San Francisco Fed Letter by Glenn Rudebusch The Fed’s Exit Strategy for Monetary Policy.

The graph from Rudebusch’s shows a modified Taylor rule. According to Rudebusch’s estimate, the Fed Funds rate should be around minus 5% right now if we ignore unconventional policy (obviously there is a lower bound) and probably close to minus 3% if we include unconventional policy. Obviously the Fed can’t lower rates using conventional policy, although it is possible for more unconventional policy.

# Third, usually the engines of recovery are investment in housing (not existing home sales) and consumer spending. Both are still under severe pressure with the large overhang of housing inventory, and the need for households to repair their balance sheet (the saving rate will probably rise – slowing consumption growth).

On this third point, I put together a table of housing supply metrics last weekend to help track the housing market. It is hard to have a robust economic recovery without a recovery in residential investment – and there will be no strong recovery in residential investment until the excess housing supply is reduced substantially.

During previous recoveries, housing played a critical role in job creation and consumer spending. But not this time. Residential investment is mostly moving sideways.

It isn’t the size of the sector (currently only about 2.5% of GDP), but the contribution during the recovery that matters – and housing is usually the largest contributor to economic growth and employment early in a recovery.

Two somewhat positive points: 1) builders will deliver a record low number of housing units in 2010, and that will help reduce the excess supply (see: Housing Stock and Flow), and 2) usually a recession (or double-dip) is preceded by a sharp decline in Residential Investment (housing is the best leading indicator for the business cycle), and it hard for RI to fall much further!

So I’m sticking with a slowdown in growth.

Wall Street’s Jitters — Just a Summer Chill

Wall Street’s jitters about the durability of the economic recovery are beginning to get worrisome – at least to investors. The question is, however, are all those flashing yellow lights really portending another economic plunge, a so-called “double-dip?”

My answer: nope. It seems more likely that the market’s enthusiasm for the recovery just got ahead of itself. Call it another dose of irrational exuberance or, more likely, just excessive exuberance. I suggest that the latest reversals are nothing more than a predictable correction, not an ugly omen. Indeed, I’m reminded of economist’s Paul Samuelson’s hoary trope, hailing from a Newsweek column in 1966, that “Wall Street indexes predicted nine out of the last five recessions.”

Let’s look at the numbers. The S&P 500 index, which closed at 1,095.31 on June 22, has slipped 11.1% from its April 23 peak. On its face, of course, that drop seems big enough to rattle cages from Manhattan to Manchuria. Northern Trust economist Asha Bangalore, who has argued that the S&P 500 index is a “leading indicator par excellence,” pointed to a smaller decline in the index – less than 7% — in early 2008 to suggest that a “rough ride” was in store that year.

Of course, she was right. But, as with any economic question, it would all seem to boil down to timing and perspective. If we pull back the camera to take in a broader picture, the S&P 500 has been on a tear for nearly a year. Between the middle of last August and its late April high, the index climbed 24%. True, the 1,217.28 point peak in April was a long way from the nosebleed pre-recession October 2007 1,565.15 point. Still, that 24% rise over just nine months would seem to make a correction all but inevitable. Indeed, Bangalore herself has noted that the S&P 500 has given off “false signals.”

Pointing to the dazzling climb of recent months, some analysts have marshaled data to show, in fact, that the stock market has been wildly overvalued. The folks at Smithers & Co. contend the overvaluation tops 50%.

Out in the real economy, the rebound from recession certainly has come nowhere near the market’s lofty expectations. After plunging 6.4% in early 2009, the U.S.’s gross domestic product eked out a 0.7% annualized gain last spring, a 2.2% summertime rise and then leapt 5.6% in the winter quarter. Since then, GDP growth has slowed, notching a 3% rise in the first quarter of this year. Does this justify a 24% gain? A cooling, reflected in the market’s latest slide, seemed baked in the cake.

The big question, of course, is whether the cooling is likely to turn frigid this summer. Possible, but it seems unlikely. For one thing, policymakers seem committed to keeping the growth on course, with the folks at the Fed signaling zero interest in raising interest rates. For another, the pressure continues to grow on bankers from President Obama on down to ramp up their still-anemic lending – and the economy managed in the last year to grow even without all the help that looser lending might bring. Sure, Washington’s tap may be dry, but the bankers’ isn’t.

Just as the economy’s slide was anything but orderly, the recovery seems likely to be a stop-and-start sort of thing. One step back for every two forward, as the cliché goes. Lately, we’ve had a step back, for sure. Indeed, the outfit that fixes dates on recession and recovery – the National Bureau of Economic Research – still isn’t confident enough to say that recovery has been under way, despite the year’s worth of positive GDP performances.

But investors who look at the latest gloom on the Street and see darker clouds ahead could be missing the bigger picture. Summertime storms, maybe. And it may yet be a long time before recovery is so strong that it makes a dent in the painfully high unemployment rate. But, if history is any guide at all, the blasts will pass.

(This ran first on the Tabb Forum site).

A mentor’s passing

Chris Welles, a longtime editor at BUSINESS WEEK and former teacher of mine, died the other day. Chris Roush, who edits the blog Talking Biz News, ran the piece below.

I suspect it is one of many tributes to come about Welles, a major figure in business journalism.  I had occasion to write about Welles myself a few weeks ago. He and another former BW editor, Ron Krieger, introduced me to the foreign world of business journalism in 1980 at the Columbia J School. It’s not too great a stretch to say the pair changed my life.

Welles asked tough questions of business people, making for penetrating journalism. He had a hand in much of the best work BW published. Only time will tell, but I believe that BW peaked during Welles’ time there.

Some profound thoughts here by a former editor for us all at BW:

Ex-BusinessWeek editor Shepard fondly remembers Welles  — 2010.06.21

Talking Biz News asked Steve Shepard, the editor of BusinessWeek from 1985 to 2005, for some thoughts about business journalist Chris Welles, who worked at BusinessWeek for 13 years and died this weekend.

Here is what Shepard, now the dean at the CUNY Graduate School of Journalism, had to say:

“Chris Welles was a genuinely good guy with a journalistic soul. He very much believed that it was the job of the press to hold people in power accountable for their actions and to ferret out wrongdoing. He spent his career doing that, first as a writer, then as a senior editor at Business Week. From the late 1960s to the early 1980s, Chris was probably the premier business writer around, the guy who did the tough stories.

“In his early years, Chris was one of the regulator writers for Institutional Investor, an innovative magazine about Wall Street in the 1970s. He specialized in narrative accounts of shennaigans, abuses, and downfalls. He was also a very successful freelancer, contributing to New York magazine, among others. From 1977 to 1985, he headed the Walter Bagehot Fellowship Program in Business and Economics Journalism at Columbia University. I had served as the first director (1975-76) and Soma Golden the second (1976-77). The program ran into financial difficulties during Chris’s tenure, but he fought to continue it and eventually weathered the storm. Now called the Knight-Bagehot Fellowship Program in Business and Economics Journalism, it has just finished its 35th year as a mid-career opportunity for business journalists.

“When I was editor-in-chief of Business Week, I jumped at the chance to hire Chris in the mid 1980s as a senior writer specializing in investigative and narrative pieces. Though he was soft-spoken and always polite, he was a tenacious reporter with a passion to get the bad guys. I eventually promoted him to senior editor in the finance department because I figured his impact would be felt more by having him work with writers every week rather than write a piece himself every couple of months. And I wanted him to teach the next generation of upcoming reporters. Chris took to editing like a fish to water, passing along a lot of knowledge about finance, a lot of wisdom about reporting complex stories. He was respected and liked by his colleagues.

“Like Lou Gehrig in 1939, Chris started losing some of his skills, and nobody knew why. He was eventually diagnosed with early onset Alzheimer’s disease and retired from Business Week. It was a tragedy for him and his wife Nancy, and a terrible loss for all of us. He took business journalism to a new level, setting the bar ever higher for the rest of us. He has left a legacy for all of us to honor.”

Baby Steppes: Memories of Kazakhstan

I’ve not yet seen Paris, but how many seasoned travelers can boast of spending time in cafes in Almaty, Astana and Karaganda? Clearly, I’ve got a leg up on veteran globetrotters.

Our three-week stay in Kazakhstan, for an eight-student photojournalism trip, was nerve-wracking at times. Reservations and credit cards were foreign ideas in some hotels and cold-water walkup flats in crumbling Soviet apartment blocks were the norm. Being unable to read street signs or tell taxi drivers where you want to go (my Kazakh is as good as my Russian) was also unsettling. And long, dusty bus rides and rickety train rides through the barren steppe gave us far too much time for reading.

But then there was the magic of the place. There were, for instance, Almaty’s “random taxis,” where you stick out your hand and, voila, some guy happening by in an old Lada or somesuch with an invariably cracked windshield stops to whisk you away (with the help of hand-signals and mumbled Russian). There was the city’s Green Market, an immense bazaar where you can buy just about anything. There was Panfilov Park, a gorgeous island of green that commemorates 28 Almaty soldiers who died fighting Nazis (immense memorials, including an eternal flame that brides and grooms pose near on weekends).

Almaty, the financial center and biggest city in the country, is a pedestrian-friendly place of tony shops, nice parks and rising new apartment towers. A leafy, cool place that stretches downward from the snow-covered Tian Shan mountains, the city was great for a morning run. It’s a busy town. It is home to the Kazakhstan Stock Exchange (KASE), the most visible sign of the nascent capitalism that could – if managed well – turn the country into a substantial regional force.

Almaty’s financiers could help enrich a population that, despite the rise of a middle class, is still relatively poor by western standards. At $1,322 yearly, Kazakhstan’s per capita income ranks it 94th globally, just below Tonga but well ahead of China, according to NationMaster.com. By contrast, each resident of No. 1-ranked Luxembourg boasts an income of $37,500. Some 1.26 million people live in Almaty and, income issues aside, it felt like most of them were shopping in the Green Market when we were.

Astana, for its part, is an enormous World’s Fair. The new capital city, which officially became the seat of Kazakhstan’s federal government in 1998, is much more of a car place (fancy cars predominate, too, for the status-minded Kazakhstanis). Giant buildings with stunning architecture are great to look at, but challenging to get to. It’s pretty, glitzy and new. In an odd way, it has a Washington-like feel, with monumental buildings and a feeling of power, but nowhere near as intimate as Almaty. If Almaty — population over 700,000 — were New York, Astana would be D.C.

Still, Astana has huge promise. From its spanking-new Eurasian National University, where we met with journalism instructors facing many of the same issues we do at UNL, to the wonderful new U.S. embassy, the place seems fresh and new. That freshness could help sweep away the old Soviet apartment blocks over time. Some of those five-story apartment blocks, with their steel doors, security locks, overgrown common areas and sewer smells, made South Bronx highrises seem palatial. One hopes most such places will disappear in Almaty and Karaganda, as well.

In some ways, Astana is a bold, optimistic statement. Just think about the religious nature of the place. A gleaming mosque, a stunning synagogue, Roman Catholic and Russian churches coexist, with representatives sometimes meeting in a huge glass pyramid built to celebrate the world’s religions. It all reflects the ebullient attitude of the country’s founding president, Nursultan Nazarbayev, who has kept power since Kazakhstan emerged from the Soviet Union in 1991. His long reign has been helped by the nation’s vast oil and mineral riches (despite sometimes questionable elections, he seems popular and the big question mark over Kazakhstan’s future is who will come next once the 70-year-old leader steps aside).

Then there’s Karaganda, the regional center where we spent our final week. There’s something tragic about the place, probably because it was shaped by the KarLag system, part of Russia’s Gulag internal-exile system. Many people in Karaganda, it seemed, had ancestors connected in some way to the KarlLag, as prisoners, exiles or guards. And folks there, even the Russians, still seem suspicious of Russian things – most notably, blaming rockets launched from the Baikonur space base for headaches, high blood pressure, joint pain and weather changes.

Outside of Karaganda, we visited the village of Dolinka, where barracks and other buildings from the KarLag remain. The place seemed desperately poor to Western eyes, but residents don’t seem to feel that way (and there were plenty of satellite dishes on ramshackle houses). Indeed, I’ll never forget the young Russian college student who was appalled at my suggestion that it was a poor town. Her friend lived there, she said, and didn’t think it poor at all. Poverty, it seems, is relative (though running water, heat and the chance to get an education would seem to be handy universal barometers).

Karaganda is a place where Peace Corps folks and missionaries are reaching out in earnest to the local population. Saving souls or helping people think well of America is certainly not a bad thing. Already, the public seems enamored of things American, as reflected by the constant stream of music videos in cafes and restaurants, as well shop names (U.S. Polo Assn. has an outlet there). College students in an English club, which is helped along by U.S. aid, were fascinated to hear us talk about the U.S. Western cultural elements dominate: I’ll never forget the boy in Dolinka, about 10, who strummed his crude homemade guitar and talked about Pink Floyd.

Perhaps my favorite memory of Karaganda will be the city’s sprawling downtown park. There’s a delightful amusement park, where we challenged our nerve on a rickety old Ferris Wheel that looked like it hadn’t been oiled since the fall of the Soviet Union. And one of the students, Megan Plouzek, and I got to run an impromptu marathon around the park (14 circuits approximated 26.2 miles, and I managed five while Megan logged about eight, covering more than 15 miles). The marathon was the brainchild of a local American former college athlete now working for a missionary group, and drew about 15 competitors.

Kazakhstan seems very much a country still emerging. Its economic system, dependent on natural resources, needs to diversify. Its educational system, despite such dubious features as college students occasionally paying teachers for grades, offers a way up for the people. Its government-funded foreign-study programs, which pay full-freight for students who qualify in exchange for five years work back in the country, represent a smart bet on the government’s part.

But I believe the country will make a mark globally over time. Already a regional powerhouse in Central Asia, it could ride its oil wealth and strategic location between China and Russia to great things. I suspect Americans will hear much more about the place in coming years, and it makes me feel like we got a ground-floor view. Paris can wait.