Free Markets, Free People

OECD


Is the economy headed toward a double dip?

There seems to be more and more evidence and economic consensus that a double dip recession may be about to occur, something we’ve been warning about for some time.

The outlook for economic growth in developed countries has got much worse in the last three months, the OECD said on Thursday and urged central banks to keep rates low and be ready to pursue other forms of easing.

The latest estimates marked a sharp slowdown from the Paris-based organization’s last forecasts in May but used different methodology so were hard to compare precisely.

The Organization for Economic Cooperation and Development forecast growth across the G7 group of major industrialized economies would average 1.6 percent on an annualized basis in the third quarter before slowing to just 0.2 percent in the final three months of the year.

"With respect to three months back the growth scenario looks much worse, one would say that growth is stagnating," said OECD chief economist Pier Carlo Padoan.

"We are witnessing a growth slowdown across OECD countries."

Not good.  To put it in graphic form, check out this projection from OECD:

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Those are not good numbers for growth.   Now check out this particular graphic.  One of the obvious keys to economic growth is consumers since they make up about 70% of the GDP numbers.   What you’ll see is not something which inspires feelings of well being:

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The title is an understatement.  Consumer confidence, especially in the US, has tanked.  In fact, if you look closely, it is slightly less than at the depth of the recession in 2009.

Again, not good. 

The New York Times now puts the possibility of a double dip recession at 50%.  I think they are optimistic.  But here’s the reason this particular graph is so important:

Economies have a strong self-reinforcing nature. When people are optimistic, they spend, which begets hiring and then more spending. When people are anxious, they pull back, which leads to a cycle of hiring freezes and further anxiety that often lasts for months.

And history tells us:

The United States appears to have entered some version of the vicious cycle. Most ominously, job growth has slowed to a pace that typically signals the start of a recession .

Over the last 50 years, every time that job growth has been as meager as it has been over the last four months,the economy has been headed toward recession, in a recession or in the immediate aftermath of one. From early 2010 through this spring, by contrast, employment was growing fast enough to make the economy look as if it were in a recovery, albeit a modest one.

That’s not the case now. 

More immediately, the main significance of the recent slowdown is that the economy may not merely be going through a weak phase that will soon pass, as many policy makers hope. Instead, history seems to suggest that the situation will probably get worse before it gets better.

In a recent research paper, Jeremy J. Nalewaik, a Federal Reserve economist, described this concept as “stall speed”: once the economy slows markedly, it often continues to do so. (He did not make a forecast.) In the other two severe downturns of the last 80 years—in the 1930s and the early 1980s—the economy suffered just such a stall and fell into a second recession not long after the first.

So the consensus opinion forming is we’re in big trouble economically:

“For the U.S, we now expect GDP growth in the second half of 2011 to average just 1.3 percent at an annual rate, down from 2.8 percent,” said HSBC Chief US Economist Kevin Logan in a research note.

“Don’t be fooled by an autos recovery in the third quarter,” said Logan Jonathan Loynes, the chief European economist at Capital Economics, feels similarly about Europe.

“The latest activity indicators suggest that the euro-zone economy might soon slip back into recession.

In the second quarter, the economy expanded by just 0.2 percent, compared to 0.8 percent in the first quarter of 2011,” said Loynes.

“Growth this weak means the economy will likely remain on recession watch throughout the remainder of this year,” Logan said of the U.S. He believes the key risk is stagnating consumer spending.

On the economic side of things, this is not something anyone wants to see, but the metrics are lining up to indicate that a double dip is what we’re going to see.   On the political side of things, if that’s the case, it spells big trouble for the incumbent president.

There’s your economic setting for the big Presidential jobs speech tonight.

~McQ

Twitter: @McQandO


Why the “tax the rich” mantra rings hollow

One of the things you constantly hear Democrats claim is the rich in our country simply don’t pay their “fair share” and we should be taxing them at an even greater percentage than they’re taxed now.  Other than the appeal to class warfare, as it turns out the claim simply isn’t true for a number of reasons.   The rich in this country pay more in income taxes – both in amount and percentage – than any other group.  And interestingly enough, according to the OECD, the “progressivity” of the tax system as it pertains to the rich, is highest here as this chart demonstrates:

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Just a public service and a little ammo for the next time you hear the left whining about fair shares and a more progressive income tax – a code phrase for “tax the rich”.  Hey, we here in the land of the free lead the world.

Then, with perfect justification, you can say, ‘its not about who is or isn’t paying their “fair share” in taxes, it’s about an out of control federal government spending more than it takes in …. or said very succinctly – cut spending and cut it dramatically”.

~McQ