Weekly Audit: Obama's Stimulus Plan Signals End of Era

by Zach Carter, Media Consortium MediaWire Bloggger

Since the U.S. is officially in a recession, and the Congressional Budget Office has predicted the worst economic downturn since the Great Depression, just about everybody acknowledges that times are tough. Everybody, that is, except the National Republican Congressional Committee. Talking Points Memo's David Kurtz caught the Republican fundraising operation spouting some embarrassing doubletalk on their website earlier this week, including the proud declaration that "the U.S. economy is robust and job creation is strong."

In fact, job creation is non-existent. The U.S. economy is losing over half a million jobs every month and even optimistic Wall Street economists expect unemployment to keep rising for at least another year.

Another indicator of the end of deflationary recessions

It is clear that we are in an economic environment that we have not seen in over half a century. Statistics that have been generated only since World War 2 cover a period of time which was marked almost exclusively by continuous inflation. The last deflationary recession was in 1949-50.

As a result, many measures that accurately forecast changes in the economy during an inflationary period (for example, a positive sloping yield curve) may not apply now. Thus, I have been looking for statistical measures or comparisons that have data back to 1929, and appear to have given accurate readings even during deflationary periods. In general, it appears that the Kasriel indicator of positive yield curve + M1 money supply consistently growing in an absolute sense, and also faster than inflation did accurately coincide with periods of growth even during the Great Depression. Additionally, M2 money supply growing faster than commercial bank loans also coincided with the onset of recovery even prior to WW2. I have also looked at the role of an increase in the rate of real residential investment compared with GDP as a harbinger of recovery.

Today I will look at a fourth indicator.

Black September


On December 3, John Bergstrom of Bergrstrom Automotive, a major auto dealer, appeared on CNBC and said,

on about September 10, we saw our business fall off 30-35%.

A similar sudden decline in consumer spending during September was reported by Shoppertrak:

Throughout 2008, the American shopper has endured record high gasoline prices, hurricanes and flooding, and a stalled housing market in their quest to shop. While the consumer has remained fairly resilient during this time, two very recent events are dramatically impacting mall visits and consumer confidence.
- Once the financial crisis emerged at the beginning of September, retail traffic declined even further. Between August 31 and September 20, SRTI total U.S. traffic fell an estimated 9.2 percent per day....
- After the failure of Washington Mutual, President Bush’s address to the nation, the presidential debate and the initial rejection of the TARP bailout, traffic fell by an average of 10.5 percent (September 21 – 29).
- The day the TARP bailout package was rejected by congress (September 29) and the NYSE Dow Jones Industrial Average lost 778 points, consumers again responded negatively as shopper traffic fell 12 percent as compared to the same day in 2007
- Sales, which were up 4.0 Percent for the Month of July, and up 3.5 Percent for the Month of August, fell 1.0 percent in September – "the first year-over-year sales decline since March 2003."

Shoppertrak has subsequently reported that "retail sales rebounded slightly, posting a very slight 0.7 percent increase in October. sales for the week ending November 15 dropped 3.1 percent as compared to the same period in 2007." But car sales have not recovered at all. In August car sales were already down about 19% YoY. In September the loss was 21%. In October it was 23%. By November car sales had declined close to 40% from already depressed levels in 2007.

And the stock market, which was only down (-18%) from its all time high in 2007 of 1565 to 1282 at the end of August, by October 10 was down (-43%) to 899.

In the 40 day period between September 1 and October 10, the shallow recession which had crippled the housing industry and Wall Street, but left Main Street virtually intact, suddenly metastasized into a collapse of the consumer economy that some were beginning to liken to the 1930s.

This diary is "the first draft of history", an attempt to look at not only what has happened, but as best we can tell from the vantage point of several months later, why it happened.

A full fledged Deflationary Bust

This morning the NAPM reported a record low reading on their services index. This is the vast majority of the economy. Yesterday we learned that auto sales also declined by a record amount in November.
What both auto sales and services have in common is a continuing worsening of monthly measures compared with 2007. For example, in August car sales were down about 19% YoY. In September the loss was 21%. In October it was 23%. November's number, released yesterday,was more than 30% off from 2007.

Some time ago, I summarized Prof. Leamer's research on typical business cycle contractions: first housing, then durables (mainly cars and furniture), then non-durables, and finally services. When services go, you are in the full force of the recession. That's where we are now.

In the services report was another bomb: the prices index has also declined dramatically, also to a new all-time low -- from an all-time high only four months ago.

Is a 2009 recovery still possible?

This is a follow up on my previous posts in which I discussed whether we were heading for a deflationary recession or a recovery in 2009. As we found out within the last couple of weeks, the deflationary recession is already here. But are there still grounds to believe a recovery in 2009 is possible? Money supply indicators (m1 [red, green] and monetary base[orange]) continue to indicate so as of this week's update:

It is now virtually certain that the Kasriel indicator will predict a recovery in the first half of 2009.

2009: Recession vs. Recovery (Update 4)

Update 4:
This week we got a partial answer to the query posed by the title to this series: one of my two possible outcomes was a deflationary recession (an old fashioned "bust"), featuring (-1.5%) or greater deflation on an annual or shorter basis. This week we learned that in the August-October period CPI already declined (-1.5%). Since November and December have a seasonal bias towards slightly negative (-.1 and -.2 respectively) monthly CPI readings, this deflationary recession will almost certainly last into 2009.

2009: Recession vs. Recovery (Update 2)

Update 2, Nov. 7, 2008: We got three new pieces of data this week, 2 on the monetary front, and one on the inflation front.

On the monetary front, M1 was updated weekly, increasing to ~ +8% YoY. Monetary base continues to soar, up about 60% YoY now!

Meanwhile the ISM manufacturing "prices paid" index showed that more prices are declining than increasing at the producer level:

This is our first October inflation reading, and it strongly suggests we will get another month of deflation when the PPI and CPI come out in 2 weeks.

Are we at the bottom of the recession now?

Back in August 2007 when I was first formulating my idea of a "Slow Motion Bust" that would recreate the Panics of the 19th and early 20th centuries, but in multi-year s l o w m o t i o n, I wrote on the Big Orange Political Blog that business cycle research seemed to be making a resurgeance. In that blog post, I discussed the compelling data set forth by UCLA economist Edward Leamer in a paper presented at Jackson Hole earlier in August 2007 (warning: pdf).

To summarize that blog entry, according to Prof. Leamer, the 10 recessions that have occurred since World War II have followed a typical pattern. Housing declines first, well before the recession; then durable goods especially cars (which fall most precipitously during the recession); then consumer nondurables (generally retail sales); and finally at the end, consumer services: