Is Our Economy Back? The Record Downturn Makes It Hard To Know

Dorian, the site's (increasingly less lonely) optimist wrote a post earlier linking to Daniel Gross' article in Newsweek.

I have long been skeptical of "green shoots" talk as being bad statistics; for instance the economy grew 5.9% in the fourth quarter, but after inventory adjustment is stripped out the increase was only 2%. There are many measures showing that inventory adjustment is nearly complete and we will lose that contribution starting in Q2 or Q3 at the latest. I argued that GDP is constructed in such a poor way that it is nearly a useless statistic at this point in time, and that instead it was far better to look at the individual components. I still stand by that assessment, but the water is getting very murky on those points too.

Consumer spending increases are a must going forward and there was a great report released for March. In fact overall spending has been very strong in face of all the adversity we are seeing, something that has surprised me.

However, against that backdrop other things don't make sense at all. For instance small businesses are really hurting a ton and are near record lows in their optimism, even tough traditionally they have been the first to benefit from an expansion. Meanwhile, Gallup's self reported discretionary spending poll has been flat since Feb 09, seasonal events excepted. And lastly, state sales tax collections are abysmal, often around the same levels as last year.

How can we reconcile the topline reported increase in sales with all the other data? Well if you look at the methodology of the sales report, you will find that it estimates sales based on same store sales excluding price changes. As Mish points out in the prior link, many chains have gone bankrupt and many existing chains have severely cut back on the number of stores. Thus, if people are spending a similar amount of total money as last year then same store sales will increase and the consumer spending release will rise. Moreover, the small business survey reports very poor pricing power and a lot of price decreases. Again, with minimal total inflation and an increase in buying items on sale or with coupons, the total can not change very much but the official report will show increases.

The board responsible for dating recessions recently said it was too early to call an end to the recession. That doesn't mean much, they often wait for a year and a half after a recession is over to date it. However, it did prompt Calculated Risk to have a great post showing the measures they use. I STRONGLY encourage everyone to check it out.

Not only does the depth of the downturn really shine through, but the dynamics of the recovery do as well. GDP fell a lot, but is now increasing at a historical rate, however income is lagging strongly. Industrial production fell a ton and is making a solid but under performing recovery. Employment is of course a mess, and income less transfer payments has made no recovery at all. It is very clear from the last two metrics that the government is the only thing holding together the economy at present.

I have a one word take away message: confusion. We are in such an ahistorical period that the entire way of looking at the economic world has changed and any argument can be made going forward. This is why banks can make record profits and yet still have trillions of dollars of losses; GDP can increase 6% but see employment losses; income can fall 7% sans transfer payments, but retail sales have been (or maybe haven't been) strong. People can make nearly whatever argument they want as a strong possibility going forward, from complete collapse of the world economy to the strongest recovery in history, and the data will support it.  It is no longer just about dollars and cents, but about mindset.

I personally feel that the risks are still very much strongly on the downside and that we will suffer from a surfeit of optimism instead of a deficit. I think that the statistics that show a strong recovery are based on flawed assumptions, and a sense of complacency will harm us going forward. The government is continuing to prop up the economy but it seems like all sense of urgency about making structural reforms as been lost, and that companies are more obsessed than ever at short term gain over long term wisdom. But that's just a feeling, hopefully I'm wrong...But that's just a feeling, hopefully I'm wrong...I've felt this way for quite a while now and it hasn't occurred, so maybe one day I will wake up and decide I was completely led astray.