Free Markets, Free People

The economy – what we’re facing right now

Despite all the assurances by politicians that “things are turning around” and that while “we still have a long way to go”, we’ve “survived the disaster”, I’m not at all sure that’s true.  Nor are a number of other people, to include Hale Stewart at FiveThirtyEight.  He does an extensive analysis of why unemployment had “unexpectedly” stalled out after showing signs of recovery.  He accompanies his analysis with a number of charts that demonstrate his point, but in essence his finding supports what we talked about last night on the podcast – the decline of the euro:

So, the central issue is a decreasing euro, which has led to an increasing dollar, which in turn has led to decreasing commodity prices. Recent reserve tightening issues in China have added downward pressure to commodity prices, which adds further evidence to the argument the US is facing an increased possibility of deflation.

That and a decrease leading economic indicators lead him to caution us that  we may see a lack of further economic growth in the next 3 – 6 months unless a few things happen:

1.) A decrease in initial unemployment claims below the 450,000 level. In addition, the economy needs to keep up its current pace of job creation. Last month we had a great employment report. That needs to be repeated in the next report.

2.) The euro needs to stabilize. The European Union has proposed a massive $1 trillion dollar package, which was announced several weeks ago. However, the euro has continued to drop since that announcement. Markets are now concerned that austerity programs will hurt overall economic growth.

3.) Commodity prices need to rebound. An across the board drop in commodity prices indicates the markets think decreased demand is an issue going forward. An increase in commodity prices will indicate demand is picking up.

Keep your eye on number 2, because if the euro doesn’t stabilize the chances of 1 and 3 happening aren’t good.  And that brings us to the second part of the story.  Europe.  It is there our fate lies at the moment.  And it is a fragile thing:

If the trouble starts — and it remains an “if” — the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland’s economic output.

But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.

For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.

“If what happened in Greece were to happen in a large country, it could fundamentally mark our times,” Angelos Pangratis, head of the European Union delegation to the United States, said Friday after a panel discussion on the crisis in Greece sponsored by the Greater Washington Board of Trade.

If you’re in the US that is not something you want to read. We’re talking, of course, of the possibility of a double dip recession with the second recession most likely more devastating than the first.

The writers of the Washington Post piece cited above don’t feel the “worst-case scenario” is a high probability noting that European countries have pledged hundreds of billions of dollars to fix the economic problems. And they repeat the assurance that the US economy “has been strengthening through the year” to include adding jobs and with higher consumer spending and better industrial output.

But, as FiveThirtyEight notes, that’s not at all what the leading economic indicators promise will continue. Manufacturer’s orders and supplier deliveries have dropped. Commodity prices have continued to slide (indicating demand has dropped) and building permits are way down. None of those promise that the economy is strengthening.

The Post goes on to paint Europe’s travail is at least temporary good news for the US. But I don’t see it – certainly not in the numbers Stewart cites. In fact I see it as more whistling past the grave yard. As they mention in their opening paragraphs, this all depends on a number of things going right among a group of European nations at financial risk for not doing what they should have been doing for years. My confidence in the ability of “the experts” to successfully negotiate the financial and economic mine field – given their history – is not at all as great as the Post’s. And, I’d further note, that while everyone is assuring everyone else that they have this crisis in hand, they’re winging it, having never done or had to do anything like this to the scale they’re now involved. The law of unintended consequences is sitting in waiting salivating at the possibilities this crisis presents.

Bottom line – keep your eye on the Euro and hope like hell the Europeans can pull off what they have to do to keep us out of a double-dip recession.


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6 Responses to The economy – what we’re facing right now

  • But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals.

    Wait a minute.  I thought the Euros were blaming US for the problem.  What the hell???

    / sarc

    The saying is that victory has a thousand fathers, while defeat is an orphan.  In this case, the opposite is true: this disaster that has overtaken us – and may get worse (heaven help us) – is the result of a lot of people around the world making bad decisions for many, many years.  At the bottom, in my view, is the welfare / nanny state: trillions have been drained out of the global economy and structural debt has been built in due to the mania of countries around the world to try to give free lunches to all comers AND regulate risk out of existence.  In trying to meet these impossible (though commendable) goals, we’ve set ourselves up for a catastrophe AND robbed ourselves of the tools to dig out of it.  Just as we did with TARP, Porkulus and all the other spending we’ve done since ’08, the Euros are throwing money at the problem: money that they don’t have since they, like we, have driven themselves into debt.  There is no reservoir of wealth.  There is no young and vibrant workforce, itching to get into padlocked factories, blow the dust off the machinery, and start cranking out goods again.  Instead, there’s debt and a huge pool of retirees who have no other resources than the check they expect every two weeks from Washington, London, Paris, Berlin, Tokyo, etc.  To cap it all off, the political class has no experience or education outside of the Keynesian / socialist / welfare state model: all the know how to do is spend, spend, and spend some more.  They’ll hack the goose apart in their desperation for more golden eggs.

    I hope and pray that I am wrong, but when I look at the boobs in charge of our government and consider that the folks in charge across The Pond are no better, I fear for the future.

    I’m not sure if this is Sept. 1929 or Aug. 1939 all over again, but either way, I am pretty frightened.

    • Pish and tush. With Obama & friends at the helm what could possibly go wrong in this, the best of all possible worlds?

      Oops. I forgot. There is a specter haunting the US-the specter of Bush.

    • I am of the same mind.  What we are seeing is government growth becoming the “Little Shop of Horrors”.  Feed me, Feed me.  But, the taxpayers can no longer feed the beast.  Greece is the canary, but we can see Spain, Portugal, and Italy following right behind.  We can also see England finally trying to come to grips with their debt and spending.
      But, through it all, our fine government is telling us by both words and deeds, they think we should be more lie Europe.  In fact, via the IMF, the US is involved in bailing out Greece (but this is really a bailout of the the big European banks by taking Greek debt off the banks balance sheets and putting it on the sovereign balance sheets).
      The whole thing is astonishing.  We find the push for “green energy” in Spain is a chimera resulting in significantly increased costs and very substantial job loss.  So, Obama switches from talking about Spain to talking about Denmark without even hinting at what the differences might be.  Is he too stupid to look, too afraid to look, or has he looked and won;t tell us what he has found?    How much will it take for Obama and Congress to step back and ask if their push to be more like Europe is going to give us the same results as Europe is getting?  A rational person would at least take pause and look into that, but we see no sign at all of that happening.    Just like we do with the mule, we need to hit these guys on the head with a 2×4 just to get their attention.

  • Europe you say?
    We’re screwed.

  • Throw this from Reuters into the mix (H/T Blogs for Victory):

    The number of mass layoffs by U.S. employers rose in April led by manufacturers who shed workers even as the economy began to recover.

    The Labor Department said the number of mass layoff events — defined as job cuts involving at least 50 people from a single employer — increased by 228 to 1,856 as employers shed 200,870 jobs on a seasonally adjusted basis.  [emphasis mine – dj505]

    I’m not an economist, but shouldn’t a recovering economy be ADDING jobs?

  • The writers of the Washington Post piece cited above don’t feel the “worst-case scenario” is a high probability

    Isn’t this the kind of thinking that usually precedes the “bust” in boom and bust cycles?  In fact, isn’t it the kind of thinking that creates boom and bust cycles?  During the height of the internet boom, as companies were enjoying paper values that were enormously greater than their actual worth, people claimed that this was “the new economy” and that reality would not intrude upon it.  And thus, VCs continued to sink hundreds of millions of dollars into companies that were designed to do little more than drain venture capital.
    During the credit boom, financial firms put themselves at risk to the tune of trillions of dollars because they felt that there was no way their gambles would fail.  Why?  Because they never failed before.  During the real estate boom that was the face of the credit boom, prospective home owners did the same thing, risking crushing debt on the assumption that home values would continue to increase at a fast rate, allowing them to replace one time-bomb mortgage with a new one.  Why would they continue to dig themselves into a deeper hole?  Because, they reasoned, real estate values always go up.
    So now we’re told that the worst-case scenario is unlikely, in spite of indicators to the contrary.  Why?  Because Europe has agreed to a bailout package, and because everyone is sooo sure that the US economy is about to rebound and save the world.  Pardon me if this sort of reasoning makes me just a wee bit nervous.