Brad DeLong's Semi-Daily Journal (2004)

What does this mean? Is this just an aberration, or is the economy gradually slipping back downhill?

Combined with the recent jobless numbers, this seems like pretty sobering news, but I'm no expert.

who:I'm not an expert either, but I would consider that a large part of it is A (Higher Productivity) + B (Lower output) = C (Change in jobs)

Not a good sign I think.

Economic growth is slowing sharply, but I doubt we are going into a recession. More likely are now in stagflation. --IMHO

Meanwhile claims remain low and industrial material prices are rebounding-- even lumber prices have recently rebounded.

June was a down month -- but early signs that July is OK.

It looks like bond yield rally is ending at the 4.4 to 4.5 level versus a recent 4.9 peak.

I/S ratio implies no problem.

It's about overproduction catching up with the failure of incomes to grow. Our little flirtation with general inflation may be over.

The rotten new on industrial production was due largely to a 2.5% drop in auto assemblies (lowest since November 2001) and a 2.3% drop in utility output (driven by weather, as exogenous as you get). Machinery, computer, business equipment output were all up. Home electronics and business supplies output fell, but in the grand mix, it was things that we already knew (autos and weather) making a bigger difference than had been expected, that made the difference.

Meanwhile, the Empire State and Philly Fed factory surveys both putting roaring performances for July - no surprise to Spencer. Oh, and prices received have started coming in a good bit stronger in these two Fed surveys, as well. There are other signs of increased pricing power, as well.

Mfg is still in the midst of structural change. I think that this is about what to expect. Mfg was not exactly booming in the late 90s. Back then there were lots of other jobs being created to take their place. If mfg is to re-emerge in the US, it will be higher tech computer assisted mfg, nanotech, etc.

An interesting study on public transportation suggests that if we had put $50 Billion into public transit projects instead of Iraq, we would have 2 million new jobs.

http://www.sierraclub.org/sprawl/report04/transit.asp

Damn it! This way we'll never get rid of the chimp! Even Bill Clinton is ranting on his blog about Chimpy's tenacity.

I'm starting to develop a thesis that what we may be starting to see is a reversal of the 1980s. See trade deficit peaking -- not immediately -- and a weak dollar leading to a revival of traditional manufacturing industries to limited extent.

Already seeing sign of it in stock market as these are leading mkt industries -- where shortage of capacity leading to strong profits and in turn new capital spending. Of course the relative performance of these stocks all have positive correlation with interest rates so this may be all we are really seeing -- not a major new economic trend
Anyone care to support this thesis or shoot me down?

The PPI reflected drop in oil and commodity prices that have already reversed. Otherwise
PPI continued to show that core inflation has bottomed and on the way up.

How does the trade deficit peak as long as there is a structural deficit in our government budget? Private saving is not high enough to offset the government deficit, so we need to run a trade deficit to consume all we wish. Now I do believe the dollar will decline in value, but I think the trade deficit persists.

Will American manufacturing benefit from a weaker dollar? Already has.

Spencer

Please expand the stagflation thesis.

Lot of things go into inflation outlook.

1. China now exporting inflation rather than deflation.-- also will see weak dollar as rate spreads will not be high enough to attractive sufficient capital.

2. Basic industries need capacity -- so commodity prices will rise.

3. Now seeing cyclical slowdown in productivity so unit labor costs growth now exceeds price increases -- squeezes profits and creates viscious circle as firms keep raising prices in futile attempt to rebuild margins.

4. Leading indicators of inflation -- such as nominal personal income growth and money supply growth strong.

5. Real bond yields back down below 4% -- implies monetary velocity will quit falling
so monetary policy will be even more stimulative.
This may be reversal of 20 year downswing.

6. Fed far behind curve. long lags between policy change and inflatuon --so over stimulative monetary policy of past 2 years should generate inflation. --Taylor rule analysis implies fed polcicy in 1990s was same as before 1980 and that was inflationary --

7. Fed is not offsetting oil price increases--
looks more like they are monetizing it -- same mistake of the early 1970s.

Enough reasons to expect inflation problem?

Maybe my analysis is bias, but do not think so.

Finally, too many people are making too many excuses for bad data and trying to expain it away as special cases. that is what happened in late 1960s and 1970s -- every month fed and admin officials would claim if you took this or that out of the data there was no inflation problem.

Spencer

The case is well made, darn. What may however add a little more to our growth is the growth of China. We may find it harder to gain from American assets for a while. Interest rates that still have quite a rise ahead will not be pleasing to bond holders, real estate price appreciation should slow, and stock price/earning ratios may drift down. Have some international assets. Oh well.

A decline in the dollar however gentle over an extended period, means we had better diversify asset holdings with international stocks. But, do you index in Europe when European economies are so sluggish? Do you index in Asia when the market risk is so much higher? How do you allocate a portfolio in a rising interest rate falling dollar setting?

Couple of more points on inflation:core inflation already running at 2.5% to 3.0% in first half of year -- near top of band.

fiscal policy of guns and butter -- Kerry will not change -- leads to inflation.

Terryi -- international diversification is something I have been discussing with clients for some time. Yes, agree prospects for US markets not good -- I have clients at maximum defensive posture. Problem of markets in many countries is that they are not free market in the sense we think of. Yes, rationally Chinese mkt should do well -- but it is not a free mkt and you have no hopes of being ahead of people who really know what is going on. So many foreign mkt have a risk that you can not really understand or anticipate.

Time to worry more about return of your capital not the return on your capital.

Maximum defensive posture. Not a pleasing posture to be in. I am pushing a combination of large cap value index, Europe index, and gnma or intermediate tax free bond funds.

Spencer says: "fiscal policy of guns and butter -- Kerry will not change". I think there will be a real rationalization of military spending, including getting rid of star wars once and for all, and a series of other changes. The military iteself believes that we need to move gently in the directions Rumsfeld preached: quick strike, and small unit manuever, and so on. Also, there is much potential in aircraft and ship rationalization. Kerry knows we cannot run giant deficits, as discussed in the Weissman entry below on the blog. So, there will have to be more pay as you go.

Paul Krugman suggested the 10 year treasury note could easily rise past 7% if price pressures continue to build. I believe the 10 year note averaged about 7% during the 90s. That makes caution important. Thinking defensively is useful, but I also prefer to shift assets as little as possible. Other possibilites for defense include heath care and energy funds.

The tax cuts we have had insure a structural deficit for years unless there are dramatic changes in the laws. I would think that unlikely unless Congress is changed by the election. We have a budget problem!

My timing's off. I moved away from US assets a year and a half ago. I console myself with 'better too early than too late'. It may be a little late for energy stocks. I agree with one of the above posts: Defense, defense, defense.

Stagflation is the likely outcome if Fed keeps printing money insanely as fast as they can, but only at the loss of our shirts in the longterm.

A sane fiscal policy, from a generational POV,
will result in an Argentinian meltdown, but at least we will come out of it with our shirts.

By the way, Argentina surpassed the US in 2Q04, and Saudi/UAE futures baskets soared by +30%.

If you're old enough to have been in Viet Nam, then you remember US economy in the years after. For those then unborn, the 70's were living hell.

Get under your desk, hug your knees, and kiss your ass goodbye.

http://www.guardian.co.uk/comment/story/0,3604,1261593,00.html

One sector is still doing swimmingly. Defense. Kiewitt Off Shore in Corpus Christi is building the multi-billion$ Ship X-Band Radar, a giant offshore platform with a finicky super-radar based on the defective prototype GBR-P, though powerful as it is, still can't be relied upon to target any ICBM's when it's rolling in a 60' sea state and Force 9 stormwind, no matter how fancy it's gimbels, gyros and servo motors. Basically multi-billion$ lab-coat welfare, like the black-ops Hypersonic Space-Craft, which only tested successfully last spring, after *twenty years* of head-scratching, Cray computer modeling, and high-end re-up marketing graphics costing $50B.
With a "B". Our Defense budget is starting to sound like an old Carl Sagan astronomy lecture.
"Billions, and billions." Sci-fi Tech Welfare.

You forgot the fudge factor, "innocent fraud":

http://www.mosler.org/wwwboard/messages/1317.shtml

"The Economics of Innocent Fraud", JK Galbraith

The relative performance of defense & energy stocks both have a very strong positive correlation with interest rates.

Kerry has proposed creating an additional army division.