James Pethokoukis

Politics and policy from inside Washington

Prof. Copper and the V-shaped recovery

Jul 27, 2009 14:03 UTC

Ed Yardeni takes note:

The S&P 500 is one of the ten components of the Index of Leading Economic Indicators. It seems to be forecasting a robust V-shaped economic recovery. This has got to be the most contrary scenario of all right now. Everybody is hung up about the anemic outlook for employment. I am too. So what is the S&P 500 seeing out there? How about yet another global bubble boom? This one is led by China, where M2 was up 28.5% y/y in June. Professor Copper seems to agree with this outlook. The price of this basic metal rose to $2.52 a pound at the end of last week, the highest since October 7, 2008. China’s Dow Jones Shanghai Composite is up 53% since March 6, well ahead of the S&P 500. It actually bottomed on November 4, 2008, and is up 122% since then to 383.78. That’s certainly an impressive meltup. Even more impressive would be if it recovers back to its record high of 588 on October 16, 2007. Anything is possible in a bubble.

Bad economy overwhelming Obama’s agenda

Jul 22, 2009 17:42 UTC

Just how much trouble is President Obama and his economic agenda in?  Allies will point to the president’s still-robust 55 percent approval rating, according to pollster Gallup, but that number has been declining steadily from a high of 65 percent in early March. (He’s actually a point lower than George W. Bush at similar points in their presidencies.) And while the House of Representives has passed historic cap-and-trade legislation, the bill seems to be going nowhere in the Senate and the president may have little to crow about at the December climate change conference in Copenhagen. Even his plan for a consumer financial protection agency looks like it’s in doubt. Then, of course, there’s healthcare reform, which Obama again will be making the case for during a prime-time news conference tonight.

But no matter how cleverly Obama makes his points or how skillfully he wrangles the Washington press corp, his efforts may be futile as long as unemployment continues to rise and sap American economic confidence. Here are the numbers that should worry team Obama: A recent AP-GfK poll found 54 percent of Americans think the country is on the wrong track, the same as in January and up ten points from mid-April. A recent Diageo/Hotline poll found 55 percent of American think the country is on the wrong track, the same as in early March and up 12 points from early June. A CBS poll has the wrong track number at 57 percent, up from 48 percent in early May and the same as in early March.

The trend is clearly not Obama’s friend, particularly with unemployment expected to continue to rise to at least 10 percent and stay elevated for some time. The outlook is dire enough that economist Gluskin Sheff economist David Rosenberg, formerly of Merrill Lynch, has speculated that Obama might turn to extreme economic measures to juice the economy and his political fortunes: “We are sure that as the unemployment rate makes new highs and increasingly poses a political hurdle in a mid-term election year, that it would make perfect sense, for a country that always operates in its best interest — even if it may not be in everyone’s best interest — to sanction a U.S. dollar devaluation as a means to stimulate the domestic economy.”

That would certainly have the potential for worrying financial markets mightily. But as for now it’s tough to find much investor concern over Obama’s troubles or his bogged down agenda. The Dow has scored seven-straight winning sessions for the first time since April 2007, gaining nearly 10 percent over that span. With fear of a depression subsiding — see Larry Summers new favorite metric, the plummeting number of Google searches on “economic depression”, for evidence — political gridlock may again be good.


Okay, can anyone show when unemployment went down BEFORE we got out of a recession? There have been 13 recessions since the Great Depression, we NEVER came out of a single one of them because of the governments action or inaction. The US government might be the single largest employer, but compared to the rest of the remaining US employers, they are a drop in the bucket.

It is up to the US consumers to decide to no longer believe the media hype and US business owners to be willing to grow their businesses. People still need to eat, need electricity to run appliances, still call their friends, raise children, and work. Most countries in the world have never seen 10% unemployment (they have never been that low in those countries. Many have unemployment upwards of 20% and they still seem to work as a country. When unemployment falls below 6% in the US, economists are worried that we have a labor shortage! This is nowhere near the longest recession nor is it the deepest recession, but what else would the media have hyped about to sell sensationalism? Swine flu?

Summers: Google searches prove economy is recovering

Jul 17, 2009 18:35 UTC

White House economic adviser Lawrence Summers said in a speech today that the number of people searching for the term “economic depression” on Google is back down to normal levels, proof anxiety and fear are on the fade. OK, here is the chart:


And here is another chart of consumer confidence from the Conference Board …still a ways to go:


Two years into the credit crunch: a status report

Jul 17, 2009 14:30 UTC

Where is the US economy, some two years into the credit crunch (numbers gathered by David Rosenberg of Gluskin Sheff)?:


Geithner on economy: Two steps forward and one step back

Jul 14, 2009 13:58 UTC

America’s Treasury Secretary speaks in Saudi Arabia: “Given the extent of damage to financial systems, the loss of wealth, the necessary adjustments to a long period of excessive borrowing around the world, it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.”

My spin: This sounds closer to a W-shaped recovery than a V-shaped recovery to me. Ugh.

Roubini: ‘Around 11 percent’ unemployment in 2010

Jul 9, 2009 13:38 UTC

Nouriel Roubini speaks (or, rather, writes in Forbes):

The other important aspect of the labor market is that if the unemployment rate is going to peak around 11% next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11% in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans and commercial loans–much bigger numbers than what the stress tests projected.

The econ chart that should worry David Axelrod and the Dems

Jul 9, 2009 11:11 UTC

Brad DeLong worries that the downturn in bond yields is hinting at an anemic economic recovery.

A recovery in which unemployment is higher two years later than when
the recovery began is not much of a recovery. And I don’t see what is
going to keep the probability of such an eventuality low.

The lower are ten-year Treasury interest rates, the more are people
trading in the bond market willing to bet their money that the future
holds that kind of non-recovery recovery. And so I worry.

Me:  Think a second stimulus would change that trajectory? Remember that the 2001 Bush tax cuts were considered to be almost perfectly timed stimulus.



Recall the first Stimulus Plan. The “design” is the problem.

The first Stimulus is not based on Political-Economy. Rather its based on Political-Political.

Fed study: Bailouts and stimulus plans can recessions into depressions

Jul 9, 2009 11:03 UTC

Some interesting conclusions from a Minneapolis Federal Reserve Bank study of how country’s deal with financial crises. The White House might want to take a peak at the whole thing. Here is a bit of it (bold is mine):

1) Governments are now spending huge sums of public money to bail out financial institutions that had not been previously regulated. … Labor and capital will stay employed in unproductive uses. Incentives for future investment will be distorted by moral hazard problems.  …  Indiscriminate bailouts in the financial sector will reward many of those who made bad decisions and make it even more difficult to assess risks in the future. Understanding the moral hazard problems created by bailouts, many citizens and politicians will call for massive regulation of all financial institutions. Directly and indirectly, massive and indiscriminate bailouts of the financial system will create inefficiency and low productivity.

2) What do we need to do now? The central banks in the countries that are in crisis should lend to banks to maintain liquidity.  … The bailout should not be used to maintain high returns either to the equity holders or to the bond holders in these institutions. Investors who made risky investments should not be rewarded when these investments have  gone bad. Any public spending on investment in infrastructure should be justified on its own merits, especially in terms of its potential for increasing productivity. Otherwise, we should let the market work in letting unproductive firms go bankrupt and reallocating what remains of their resources to more productive firms. Reforming bankruptcy laws in some countries could make this process more efficient.

3) Studying the experience of countries that have experienced great depressions during the twentieth century teaches us that massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression. Those who try to justify the sorts of Keynesian policies implemented by the Mexican government in the 1980s and the Japanese government in the 1990s often quote Keynes’s dictum from A Tract on Monetary Reform: “The long run is a misleading guide to current affairs. In the long run we are all dead.” Studying past great depressions turns this dictum on its head: “If we do not consider the consequences of policy for productivity, in the long run we could all be in a great depression.”

Unemployment a leading indicator?

Jul 6, 2009 18:02 UTC

No, says economist Mike Darda of MKM Partners:

At no time in history — from the deflationary wipeout of the 1930s to the inflationary recessions of the 1970s and early 1980s, to the balance sheet downturn of 1990-1991, to the bursting equity bubble and the 2001 recession — was the labor market or the unemployment rate a leading indicator of either the business cycle or stock market trends.

My spin: Unless, of course, the jobless rate is a leading indicator of a double-dip recession.


Mohammad El Erian takes the opposite side of Darda’s argument in a recent FT commentary. “America’s Jobs Data is Worse Than We Think”

“….The unemployment rate is traditionally characterised as a lagging indicator and, as such, is viewed as having limited predictive power. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground – or so says conventional wisdom.

This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviours and outlooks.

Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system.

In just 16 months, the US unemployment rate has doubled from 4.8 per cent to 9.5 per cent, a remarkable surge by virtually any modern-day metric. It is also likely that the 9.5 per cent rate understates the extent to which labour market conditions are deteriorating. Just witness the increasing number of companies asking employees to take unpaid leave. Meanwhile, after several years of decline, the labour participation rate has started to edge higher as people postpone their retirements and as challenging family finances force second earners to enter the job market. ”

Here’s another way of looking at the situation. From RealClear Markets. “Get Ready For 14% Unemployment” — Louis Woodhull. He makes the case for the link between Government deficits and unemployment. The key factor is the negative effect of deficits on Private Business Investment (PBI).

http://www.realclearmarkets.com/articles  /2009/07/06/get_ready_for_14_percent_un employment_97295.html

“…Here’s why. Because a lot of PBI goes toward offsetting depreciation and increasing productivity, it takes a 5% year-over-year increase in PBI to produce a 1% increase in the number of jobs. Correspondingly, a 5% decrease in PBI will yield a 1% reduction in total employment.

The unemployment rate a year ago was 5.5%. Because the potential labor force is growing, we need employment to increase by 1% annually to keep the unemployment rate from going up. The 37.9% investment decline reported by the BEA can be expected to eventually produce a reduction in total employment of about 8.5%. Accordingly, we can expect unemployment to rise to about 14% within a year unless the downward slide of PBI is reversed………………………………….

While doing nothing to boost demand, Obama’s “stimulus” will depress PBI, and therefore employment. This is because the “stimulus” plan requires selling an additional $787 billion in government bonds. The money to buy these bonds will have to come from somewhere, and much of it will come from people who would otherwise invest in starting or expanding businesses. Indeed, the bonds will have to be priced so that this risk-free investment is more attractive to investors than their other alternatives.

In the fourth quarter of 2008, the Federal government ran a deficit of $303 billion (and therefore had to sell $303 billion of new bonds) and business investment fell by 21.7%. In the first quarter of 2009, the Federal deficit was $650 billion and business investment fell by 37.3%. The economy is being forced to invest in Barack’s Bailout Bonds rather than in businesses that create jobs.

Virtually everything the Obama administration wants to do will have the effect of increasing unemployment. As bad as joblessness is now, be prepared for it to get much, much worse.”

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This is how bad that jobs report was …

Jul 2, 2009 19:40 UTC

Economist David Rosenberg thinks the jobs report was, in effect, a boot heel stomping all over the green shoots:

1) The headline came in at -467k compared with -350k consensus and the back revisions were negligible (+8k). At no time in the 1990 or 2001 recessions did we ever come close to seeing such a detonating jobs figure, not even at the depths of those downturns, and yet we have a whole industry of ‘green shoot’ advocates today telling us that the recovery has already arrived. As always, the devil was in the details.

2) In almost every industry, job losses were deeper in June than they were in May. The diffusion index fell to 28.6 from 31, which means that nearly three-quarters of the corporate sector is still in the process of shedding jobs.

3) The Household Survey showed a 374k job decline, and all centered in full-time jobs. In fact, we have lost a record 9 million full-time jobs this cycle, more than triple what is normal in the context of a post-WWII recession, with over 2 million pushed onto part-time work (and the number of people now working part-time because they have no other cho! ice due to the weak economy has more than doubled).

4) This in turn has take the total hours worked in the private sector down to a new record low of 33 hours from 33.1 hours in May – in fact, what this means is that if companies had kept hours worked at May’s levels, then to achieve the same labour input that they achieved would have required a 800,000 job slice!