Signed, Sealed, Delivered: It's a Recession
Our latest web-only article, this one by John Miller, D&S collective member and professor of economics at Wheaton College. It is posted here, accessible via the newly-delineated "Special to the Web" section of the home page (but it is short enough that we thought we'd post it on the blog also). Also check out the first and second installments in D&S collective member Larry Peterson's series of web-only articles on the subprime/securitization panic.No ifs ands or buts about it, the U.S. economy is in a recession. In February the economy lost 63,000 jobs, after losing 22,000 jobs the month before. A recession has never failed to follow two consecutive months of jobs loss. And not just construction jobs were lost—manufacturing and retail jobs disappeared as well.
Investment houses—Goldman Sachs, JPMorgan Chase, Lehman Brothers, and Morgan Stanley—and Warren Buffet, the sage of Omaha and the world's most successful investor, have already declared the economy in a recession.
When the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the private research organization designated by the Commerce Department as the nation's arbiter of the business cycle, meets this summer, they too will undoubtedly find that a recession began either in the last months of 2007 or the beginning of 2008. By that time the economy would have contracted for two straight quarters, fulfilling the shorthand definition of a recession. Still, the NBER Dating Committee will examine a wide variety of data and ascertain that there has been "significant decline in economic activity spread across the economy, lasting more than a few months"—their official definition of a recession.
The mortgage crisis continues to be the epicenter of the tremors spreading across the economy. A record high 7.9% of all loans are past due or in foreclosure. In addition, housing prices continue to drop, down 8.9% in the fourth quarter of 2007 from a year earlier, the largest drop in the 20 years of data collected by the S&P/Case-Shiller national home-price index.
Falling housing prices have left more and more borrowers with houses worth less than their mortgage. A Goldman Sachs/Morgan Stanley report projects that if home prices fall 15%, as they expect, some 21% or borrowers, or 10.5 million households, will be stuck with negative equity.
It is not just homeowners who are under water. The Fed as well is unable to right the insolvency problems of the economy. Despite the Fed having cut short-term interest rates by 2.25 percentage points [and another .75 on March 18th], long-term interest rates remain stubbornly high. With mortgage companies out to recoup their losses and reluctant to lend, and few willing to buy the mortgage or other long-term securities—including banks reluctant to lend even to other banks—the Fed seems to have little hope of getting the economy going.
On top of that, inflation rates are picking up, with the price of oil at record levels, and food prices and the price of imports rising quickly. In January alone the price of imported goods from China increased 0.8% as the value of the dollar fell.
Hard times are upon us. Debt-deflation threatens not just the value of homes but other assets as well. Inflation drives up the prices of household staples. Job losses mount. And Fed policy has proven ineffectual.
Now is surely the time to bring the speculative economy under control, to put people to work at green jobs, and to remedy the lack of affordable housing through a massive building program that would free low-income families from the grip of predatory lenders.
Labels: debt-deflation, Goldman Sachs, John Miller, JP Morgan Chase, Larry Peterson, Lehman Brothers, Morgan Stanley, mortgage meltdown, NBER, recession, The Fed, unemployment, Warren Buffet
D&S Columnist John Miller on the Air
On February 16th, John Miller—economist, D&S collective member, and author of our regular column "Up Against the Wall Street Journal"—was a guest on the news program This Is Hell, broadcast on Saturday mornings on WNUR (89.3 FM) in Chicago. Besides discussing the current economic downturn and answering questions about his latest D&S feature article, Stormier Weather, John answered that week's "Question from Hell" ("The question we hate to ask, and you may hate to answer"): "Does it matter to the economy who the next president is?"Another highlight: John recalled hearing economist Hyman Minsky (the newly popular theorist of economic crises who died in 1996) say, "There's nothing wrong with macroeconomics that another depression wouldn't cure."
The show's host, Chuck Mertz, is a great interviewer and quite well-informed. And we enjoyed his birthday shout-out to Kim Jong-il at the beginning of the show, and the nod to Lithuanian Independence Day.
Listen to the podcast here.
Labels: Chuck Mertz, John Miller, Kim Jong-il, Lithuania, recession, This Is Hell, WNUR
Recession linked to workers' rights
Dean Baker, co-director of the Center for Economic and Policy Research, writes on the AFL-CIO website about the relationship between the current economic recession and the suppression of workers’ right to organize over the past three decades. As unions have been attacked, wages have stagnated, and economic growth has become increasingly driven by bubbles -- the stock bubble in the 1990s and the housing bubble in the current decade. Baker calls for a return to wage-driven economic growth to pull us out of the recession and put us on a path toward long-term stability.Labels: AFL-CIO, Center for Economic and Policy Research, Dean Baker, labor organizing, recession
AFL-CIO Proposes 5-Point Economic Stimulus Plan
From the AFL-CIO Blog:Unemployment is climbing. The stock market is dropping. The housing boom is bust. Corporate earnings are tanking. The nation’s economy is in the worst shape it’s been in years. Maybe even headed toward recession. Working families are worried.
Today, the AFL-CIO outlined several proposals to
develop a short-term stimulus package that 'offers the
biggest bang for the buck' and began to address the
underlying causes of today's economic anxiety.
Read more...
Labels: AFL-CIO, economic stimulus, recession, taxes
Dollars & Sense not surprised by falling markets
This morning, the New York Times is aflutter about sharp dips in global stock markets and a new report on the decline of U.S. manufacturing. Dollars & Sense has been following the economic developments that led to this situation for years. Excerpts from the NYT and links to Dollars & Sense coverage below.In the lead NYT story, Global Markets Fall Again on Fears About U.S. Economy, Keith Bradsher and Martin Fackler report:
Stock markets fell sharply across most of Asia again today and continued declining in Europe as investors worried about weakness in the American economy.
The stocks of Asian companies that export to the United States, such as the Sony Corporation, suffered particularly heavy losses today following a report on Tuesday from the Commerce Department that orders for cars, washing machines and other durable goods dropped 8 percent in January.
"There is a worry that U.S. consumption could slow substantially..." the chief Asia economist in the Hong Kong offices of Credit Suisse, Tao Dong, said.
In Floyd Norris and Jeremy W. Peters' Wall St. Tumble Adds to Worries About Economies, Stuart Hoffman, chief economist of PNC Financial, adds that, since "global markets have been strong for years, 'We've had this 'What me worry?' mentality. And this is a little bit of a wake-up call.'"
In January 2006, Dollars & Sense on the fragility of world markets' dependence on the dollar and the health of the U.S. economy:
It's what lies behind the slide of the dollar that has even many mainstream economists spooked: an unprecedented current account deficit—the difference between the country's income and its consumption and investment spending. The current account deficit, which primarily reflects the huge gap between the amount the United States imports and the amount it exports, is the best indicator of where the country stands in its financial relationship with the rest of the world. (Dollar Anxiety: The advantages of imperial finance have propped up the U.S. economy—but they may not last. By John Miller, in Dollars & Sense Jan/Feb 2006.)
In his NYT analysis A Recession That Arrived on Cats' Paws, David Leonhardt writes:
The nation's manufacturing sector managed to slip into a recession with almost nobody seeming to notice. Well, until yesterday.
Wall Street was caught off guard when the Commerce Department reported yesterday morning that orders for durable goods ... plunged almost 8 percent last month. That's a big number, but it really shouldn't have come as too much of a surprise. In two of the last three months, the manufacturing sector has shrunk, according to surveys by the Institute for Supply Management that have been out for weeks.
But the new report seemed to focus investors' attention on the problems in manufacturing and became one more reason for people to sell stocks.
Dollars & Sense wasn't surprised, given our coverage of recent declines in the U.S. manufacturing sector. In the Mar/Apr 2004 issue of Dollars & Sense, John Miller wrote:
By 2000 ... manufacturing had already hit the skids. Industrial production fell steadily, contributing to a general excess of industrial capacity. Today, capacity utilization rates still hover at about 75%, and the manufacturing sector has shed jobs for some 42 straight months. (High and Dry: The Economic Recovery Fails to Deliver)
And in January 2003, Ellen Frank answered Dollars & Sense reader Lane Smith's questions about the effects of NAFTA on the U.S. economy:
Since the North American Free Trade Agreement (NAFTA) between the United States, Mexico, and Canada went into effect, trade within North America has increased dramatically.
NAFTA's effects on employment, on the other hand, are hotly debated. Clinton administration officials estimated in the late 1990s that expanded trade in North America had created over 300,000 new U.S. jobs. Economic Policy Institute (EPI) economists Robert Scott and Jesse Rothstein contend, however, that such claims amount to "trying to balance a checkbook by counting the deposits and not the withdrawals."
Employment in virtually all U.S. manufacturing industries has declined since NAFTA went into effect. (Doctor Dollar, Dollars & Sense Jan/Feb 2003.)
In the NYT, David Leonhardt continues:
Is the entire United States economy in danger of going the way of the manufacturing sector? Is it possible that we're headed for a real recession?
The forecasters at the Economic Cycle Research Institute in New York, who have accurately predicted each of the last three recessions, argue that the current slowdown won't amount to much more than a lull. Lakshman Achuthan, the institute's managing director ... thought the odds of a recession over the next year were less than 20 percent. ... [t]he chief United States economist at High Frequency Economics, who's more bearish than most forecasters right now ... still puts the odds at only 30 percent.
But for all the attention that formal recessions get on Wall Street, they are not really the benchmark that matters to most people. A significant slowdown that falls short of a recession can do a lot of damage to stock prices, profits and wages.
Only in the last few months, for example, has the current expansion grown strong enough to give most American workers pay increases that outpace inflation. Those raises would be endangered if the economy were to slow from last year's growth rate of 3.4 percent to even 2 percent.
Dollars & Sense on how the U.S. economy has spent years stiffing wage-earners:
The current economic recovery has done less to raise wages and more to pump up profits than any of the eight other recoveries since World War II. No wonder inequality continues to worsen, and most people still doubt that the economic turnaround will ever benefit them.(Slow Wage Growth But Soaring Profits in the Current Recovery. By John Miller, in Dollars & Sense Sep/Oct 2004.)
Also in March 2004's High and Dry: The Economic Recovery Fails to Deliver, John Miller discusses the causes behind today's turmoil: "Tax cuts, home sales, mortgage refinancing fueled by low interest rates, and Iraq-driven military spending—not self-sustaining job and wage growth—fueled the ... growth spurt."
For the best (and most prescient) economic news and analysis, reports on economic justice activism, primers on economic topics, and critiques of the mainstream media's coverage of the economy, subscribe to Dollars & Sense.
Labels: dollar, durable goods, manufacturing, recession, stock market, wages