In a Z Net article from yesterday, August 28, liberal economist Dean Baker argued that ‘Double-Dip Recession is Unlikely’. In his piece Baker maintains that everyone who is now predicting double-dip are the same ‘forecasters’ who, back in 2007, were erroneously predicting there would be no economic crisis or recession in 2008. Baker then makes his main point: “There is no reason to believe that forecasters are any more knowledgeable about the economy today than they were four or five years ago”.
But contrary to Baker’s rhetorical point, not everyone forecasting a double dip today were predicting no crisis back in 2007.
Baker conveniently forgets that some of the most prescient economists who predicted the recession and financial collapse back in 2007 are also now predicting that a ‘double dip’ in the coming months is increasingly likely. In other words, not everyone forecasting double dip today were the polyannas predicting no recession back in 2007. How about Nouriel Roubini, Dean? An economist who famously predicted the financial collapse and recession back in 2006-07, and who now believes double dip is more than 50% likely? I would add myself, Jack Rasmus, to that short list as someone who also publicly predicted the recession back in 2008, and has been predicting a double dip as increasingly likely ever since last April 2011. In fact, I predict it’s more than a 50% chance with the odds rising weekly.
Baker goes on to define a recession as meaning “the economy is actually shrinking”. Presumably he means that gross domestic product, GDP, the overall measure of the economy, must turn negative for a recession or double dip to happen. But if he means GDP must decline for a double dip to occur, he should reconsider. GDP is not the indicator by which a recession is defined, whether initially or in the case of double dip. In fact, there is no official ‘definition’ of recession, including the popular but incorrect view of two consecutive negative quarters of GDP decline.
A recession is determined by the National Bureau of Economic Research (NBER) group of economists. They loosely consider a host of indicators to determine whether a recession has occurred. That includes industrial production, sales, exports, stock market shifts, employment and potentially other factors. So, the economy doesn’t necessarily have “to shrink” according to any single indicator, and that includes GDP. In fact, some indicators may actually still rise and a recession may still occur, so long as some (undefined) collective weight of other factors are in retreat.
To show a double dip is not on the horizon, Baker then looks at the condition of several economic indicators as they exist in the present. To support his view of no double dip coming, he argues that housing and car sales are already so low that it is hard to envision them falling further. That’s true. Housing is, and has been, in a veritable depression—not a recession—for four years now. All indicators—home prices, housing starts, mortgage loan applications, home sales, etc.—are 50%-75% off their peak. Housing did experience a very short and shallow upturn for one quarter in early 2010, but then it declined again. But all that means is that housing and construction in general—which make up about 9% of the economy—have already entered a ‘double dip’ months ago. To say they can’t fall further is not much of an argument against double dip. They’re already there.
Baker looks next at consumption, 70% of the economy, and notices that it at present is growing slowly and there’s no reason to see how it will not continue to do so. He adds that 117,000 jobs were created last month, a weak but nonetheless positive statistic revealing some growth.
But he should take a second look at the job statistics. As this writer pointed out in a blog entry last month, the 117,000 purported job gains were from only one of the two surveys conducted by the Labor Department. The other survey, the one Baker ignores, and the one that picks up small business and self-employed much better, showed a decline of 198,000 total jobs last month. Moreover, like Housing, the jobs market already experienced a double dip last summer 2010. It is now headed for a ‘triple dip’.
And so far as consumption is concerned, Baker should again look forward—not at the present—if he wants to predict or deny the prediction of double dip. He should look forward, to where conditions are headed if he wants to make a forecast. Too many economists today typically forecast the present, not the future. It’s safer that way. However, in so doing, in playing it safe, they are repeatedly incorrect. They miss the true ‘shifts’ and turning points in the economy. And we’re at such a turning point once again.
Baker is also wrong that consumer spending will continue at its slow but positive rate of growth. Consumer sentiment, measured by the University of Michigan index, has been in freefall the past few months. As the latest index reported last Friday showed, it is now at its lowest point since November 2008, which was the month that consumption fell through the floor in its worst collapse since 1945. OK, Baker will no doubt reply that consumer sentiment is volatile and doesn’t always reflect how consumers will actually spend. In answer, this is often—but not always—true. When the conditions are overwhelmingly negative, consumer sentiment does predict consumer spending. And conditions in the US and globally are now converging toward an overwhelming common outlook of economic slowdown. Time will tell in the next few months if this writer’s perspective on that is correct, or if Baker’s is more accurate.
Economists are often so enamored with numbers they cannot assess the psychology and behavior of consumers and investors very well, especially at the ‘turning points’ in the economy in which we have now entered. Psychological viewpoints—whether consumer, business, or investor—are not easily quantified. And most mainstream economists ignore what can’t be put in numbers—another reason why they forecast and predict so badly when important economic shifts occur.
In further support of his view of no double dip coming, Baker also cites business equipment and software spending, and notes that it has been growing at a rate of 5%-10% and is not likely to turn down sharply in the near future. But much of the business spending on equipment and software has been slowing rapidly over the past year. From 23% it fell to 14% to 8% and in the second quarter of this year to barely 5%. The manufacturing sector has been the big buyer of equipment and software. Manufacturing has been driven in turn largely by US exports, purchased by Asia and Europe. But last month manufacturing indexes in the US and around the world both fell by their largest percent in decades. In other words, the global economy is slowing rapidly everywhere. Not just the periphery economies of Europe, already in recession, but the main economies of France, Germany and UK, all now show virtually flat and stagnant growth. The big economic engines of Europe are all about to tip into recession themselves in the coming quarter, this writer predicts. Ditto for China, India and even Brazil—which are not in recession but whose economies are projected to slow by half. That means a sharp drop off in demand for US exports, which in turns means manufacturing in the US turns from the current flat to a future negative. And that means business spending on equipment and software will decline as well, continuing the already downward trend.
Again, one must look into the future to predict the future, not simply look at the present and crudely extrapolate forward to make a forecast. But that’s the forecasting technique of mainstream economists, and apparently Baker as well.
Baker further underestimates how much the contraction underway in the government sector, both federal and state and local, will slow the US economy in the months to come. The government sector is responsible for about 20-22% of total US economic growth. Baker again looks at the present and sees only a 1% to 2% contraction today and he extrapolates that forward. He does not look beyond to see how the government sector’s contraction will soon deepen further. Just look at the budget cutting that has occurred in recent months and will escalate in the coming months. There’s the $38 billion cut last spring by Congress, the $1 trillion cut in the August debt deal, and the guaranteed minimum additional $1.2 trillion in further cuts by the end of the year. That will add to the 1%-2% already occurring.
Indeed, this writer predicts the cuts due by December 23 will approach closer to $3 trillion, well beyond the August mandated $1.2 trillion, as Obama and the Republicans attempt to outdo each other in their competition to win the title of ‘biggest deficit cutter’.
That’s a total of $4 trillion plus cuts in government spending. Not all will occur the coming year, of course, but at least $200 billion will. Add to that another $50-$75 billion in projected state and local government cuts and the total is around $275 billion. Then throw in the government spending multiplier, which is about 1.5 times the original cuts, and the total cuts to spending impacting the economy next year could reach about $400 billion. That’s about double Baker’s predicted 1.5% continuing government sector contraction.
Baker gives himself one small window of escape from his prediction of no double dip. He concludes by admitting double dip might occur “if a collapse of the euro led to a Lehman-type financial freeze up.”
As this writer predicted two years ago in a ‘Z’ Magazine article, at least two sovereign defaults would occur in Europe and the euro will break up into a type of two tier currency. If Italy, or even Spain, are among those two it is almost certain one or more French or Swiss banks will become the ‘next Lehman’ (an investment bank that precipitated the banking panic of September 2008 sending the global economy into recession within two months). And if the French banks implode, it will quickly spread to the US banking and financial sector. Credit will freeze up again across multiple markets and push the already slowing US economy, that grew less than 1% in the first half of this year, into a double dip. Contingency measures are already hurriedly underway in the US government, Federal Reserve, Treasury and among big US banks today to plan to contain this very scenario.
Baker cites this exception of a Euro crisis but then qualifies himself to argue such ‘degree of blundering’ is “difficult to envision”. Well, it’s not really so difficult to envision. Just follow the European business press and the picture looks inevitable.
And envisioning is what forecasting and predicting is all about, isn’t it? Unless of course one is content, as most mainstream economists—and perhaps in this case Baker as well—to safely forecast the present instead of the future.
Jack Rasmus is the author of Epic Recession: Prelude to Global Depression’, Pluto Press and Palgrave Macmillan, May 2010 (in which the double dip on the horizon was predicted); and the forthcoming Obama’s Economy: Recovery for the Few, January 2012, same publishers.
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