Brad DeLong's Semi-Daily Journal (2004)

The gain in personal consumption was all in service categories. Non-durable goods demand was essentially flat (-0.1%, annualized), while durable goods demand fell 2.5% (annualized). Absent demand for residential structures GDP would have risen just 2.2%, and both the pattern of homes under construction in Q2 and housing starts data point to a pretty flat showing for residential construction in early Q3. A worrying coincidence, given that high oil prices probably deserve a good bit of the blame for slower spending growth in Q2, is that oil futures prices reached a new high overnight.

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http://www.moveonpac.org/edwards.html

I have just had a taste of the politicization the GDP revisions are likely to suffer, just so you know. Benchmark revisions to GDP data moved the first down quarter for real GDP in the recent slowdown to Q3 of 2000. A colleague of mine who wants that to mean something in particular, and couldn't get me to bite, just came out and said "so the recession started in 2000." Of course, not working at the NBER, he is not empowered to make that determination. He also neglected to note that the 0.5% decline in GDP in Q3 of 2000, was followed by a 2.1% rise, so even a "rule-of-thumb" recession, two consecutive quarters of GDP decline, did not get underway under Clinton. He is, however, a reasonably bright (though self-deceptive) member of the right, so I would not be surprised to see the "Clinton recession" logic take wings.

Not that such logic has any actual importance for the decision that lies ahead. Presidents don't have much of an economic steering wheel, Kerry didn't work in the Clinton White House and it is Bush's policies in response to the recession, not the timing of its onset, that have real relevance for judging his fitness to make future economic policy.

Actually, the surprise is that some people are surprised.

With the downward revision of Q1 GDP growth, with various other negative indicators surfacing over the past few weeks, i expected something (and told friends this, so i'm on the record!) just north of 3 (maybe 3.2, tops).

The question is, which way is Q3 going? Are there any engines for growth out there? Prices are jumping enormously in one sector i have some personal familiarity with (construction); hiring remains tepid in another sector i have familiarity with (technology); refinancing-driven consumption seems pretty near the end of its tether. Now, that still leaves many sectors out there, and it's entirely possible that some of them are doing well enough to reverse the trendline, but which ones?

Because as i'm hardly the first to note, we are quite literally without any tools left.

I've noted before in these comments that i've been predicting stagflation as the logical outgrowth of bush economic policies since summer, '03; anyone see any reason for me to change my mind?

kharris, right-wingers do that. The early 90's were not Reagan's fault; the soft economy was due to Bush I's tax increase, and (of course) the Evil Klinton. When the economy got hot later in the decade, it was (again, of course) due to Reagan's work.

Howard, I wish you were wrong, but I don't see how.

I work at a leader management consulting firm and business is booming--easily up 25% over last year. Since we are one of the 2-3 premier firms and the market is relatively small, this has little overall impact. However, it is interesting to note that, unlike last year, we are doing growth strategy projects (ie, trying to grow the top-line) as well as cost reduction/transformation work. Nonetheless, I remain surprised by the number of very large cost reduction (including, of course, outsourcing with and without offshoring) projects we are doing. Companies are still trying to trim themselves.

Howard,

One bit of good news - personal income is up 5.8% y/y in the latest reading, the highest since early 2000. That is a bit shy of the 15-year average, and is back up to the 5-year average. There should be lessen dependence on other sources of spending power, such as refis and tax rebates. That is a nominal figure, though, so we have to carve a bit of that income rise out for to account for rising inflation.

My worry is that spending plans tend to change slowly. If Q2 is not just a fluke, slower personal spending may be a sign that spending has adjusted lower to accommodate the decline in refis and the rise in energy costs. If that is the case, then adjustment back toward more rapid spending growth in response to better economic conditions may not be very fast, either.

Not to put too much weight on the "under whose watch" issue, but what would happen to the economy if someone with obviously irresponsible fiscal policies was expected to win an election? Is it your colleague's belief that the markets would not react until one second after the guy had taken the oath of office? He needs to get a clue.

x, that's interesting: what sectors are you seeing companies seeking to grow their toplines (investing minds want to know!).

kharris: i'll have to dig into the numbers on income. However, as you know, while food and energy may not be core inflation, they still represent bills to be paid. Don't hold me to these precise numbers, 'cause i looked at them a couple of weeks ago, but the average car uses something like 600 gallons of gas a year, and the average household spends something like (i read this in the wsj, where is that damn info when you want it?!) $9K/annually, and so odds are, as you suggest, for most households, whatever income is going up (and i'm guessing that the overall income number is, of course, skewed by the well-known bifurcation of incomes) is being immediately spent on gas and food.

Observations regarding the auto makers.

Since the first of the year, I had been thinking about buying my daughter a new car. (She is a recent college graduate gainfully employed but unable to completely support herself on what she earns) In May, I saw a car on a dealer's lot and decided to make what I considered was an unrealistically low offer. I'm talking more than 25% off the MSRP. To my surprise, they accepted it without batting an eye. Available price information indicates the car was sold at a loss.

The manufacturers can't continue selling vehicles at a loss and making their profits from financial operations. Indeed word is leaking out that if sales don't improve and current excess inventories reduced, they will begin cutting output. This will drive many of their suppliers into bankruptcy.

From this and other anecdotal evidence I have to believe that the economy is teetering on the edge.

Kharris, a terrific analysis. Howard, increasingly I agree with your slow growth-moderate inflation projection.

Howard,

Agreed. The point I would make about the personal income data is that it's OK, and has been getting better. That number in isolation, however, can lead to some bad guesses about spending. Inflation adjusted disposable income, by the way, is up 3.5% on the year - less than GDP, so maybe there is a reason households didn't lead growth in Q2. I really do worry that we are seeing households running into a crunch, that spending growth slowed in Q2 because it couldn't grow any faster. The other thing about personal income growth to note is that nominal wages are up just 4.7% on the year, while non-farm proprietors' income is up 9.2%, just about twice as much. Working stiffs are lagging - but you knew that. There are also some small categories that are a real mess - rental income up 30.6% - mostly representing wobbles in the data that may not mean much for actual welfare.

anne, since you're so often right, now i'm really getting worried if you're agreeing with my thesis....

I want you to know, I predicted to all my friends last January that the economy was going to cough in the 2nd qtr. I was just blabbering--I don't know what the fuck I am talking about! But I sure wish I had recorded it in laser bits here! I thought people were going to wait and see what taxes looked like, since a clear idea was scarce to be had. My next prediction: a minor cough at Christmas, because the long-term future of the globe seems uncertain, and people are NOT gonna want to look like fools by a load-up on crap before Armageddon. You can imagine how drab you'll feel, standing there in front of Jesus, Abraham, Muhammad, with Buddha on drums, your arms full of stupid lollipops, big ol' sucker stuck in your cheek!

http://www.nytimes.com/2004/07/29/business/29tax.html

I.R.S. Says Americans' Income Shrank for 2 Consecutive Years
By DAVID CAY JOHNSTON

The overall income Americans reported to the government shrank for two consecutive years after the Internet stock market bubble burst in 2000, the first time that has effectively happened since the modern tax system was introduced during World War II, newly disclosed information from the Internal Revenue Service shows.

The total adjusted gross income on tax returns fell 5.1 percent, to just over $6 trillion in 2002, the most recent year for which data is available, from $6.35 trillion in 2000. Because of population growth, average incomes declined even more, by 5.7 percent.

Adjusted for inflation, the income of all Americans fell 9.2 percent from 2000 to 2002, according to the new I.R.S. data.

While the recession that hit the economy in 2001 in the wake of the market plunge was considered relatively mild, the new information shows that its effect on Americans' incomes, particularly those at the upper end of the spectrum, was much more severe. Earlier government economic statistics provided general evidence that incomes suffered in the first years of the decade, but the full impact of the blow and what groups it fell hardest on were not known until the I.R.S. made available on its Web site the detailed information from tax returns.

The unprecedented back-to-back declines in reported incomes was caused primarily by the combination of the big fall in the stock market and the erosion of jobs and wages in well-paying industries in the early years of the decade.

In the past, overall personal income rose from one year to the next with relentless monotony, the growth rate changing in response to fluctuations in economic activity but almost never falling.

But now, with many more ordinary employees joining high-level executives in having part of their compensation dependent on stock options and bonus plans, a volatile and relatively unpredictable new element has been introduced to the incomes of millions of workers.

"Risks used to be confined largely to executives and business owners with large incomes,'' said Edward N. Wolff, an economist at New York University who studies wealth and income.

"But now for many people with more modest incomes their earnings are more volatile,'' Mr. Wolff added, leaving them more vulnerable to losing pay they count on to meet regular expenses like mortgage payments, car loans and day-to-day living costs....

"The other thing about personal income growth to note is that nominal wages are up just 4.7% on the year, while non-farm proprietors' income is up 9.2%, just about twice as much. Working stiffs are lagging - but you knew that."

Non-farm proprietors probably have a lower marginal propensity to consume than working stiffs so I would expect spending growth to be less than income growth.

Earth calling kharris.

Check real GDP year on year if you are looking for "good news."