Sunday, August 29, 2010

Where We Are?

My last comment on economic hypochondria generated a great deal of anger on Zero Hedge where the comments got nasty, so I want to address some of the valid criticism.

Mr. Wesbury's assertion that the economy is "fine" is ridiculous, and I did edit my post to bluntly state this. When the official unemployment rate stands close to 10% and wider measures of unemployment are almost twice that figure, things aren't "fine".

But I agree with Mr. Wesbury that far too many people have taken gloom & doom views to the extreme, and that the US economy might be in better shape than these people are willing to admit.

Last week, the Liscio Report posted an interesting comment on their blog, Where we are?:

Here’s an updated guide to “where we are”—how the U.S. economy is faring relative to the average of previous financial crises around the world. Though individual details vary, we’re following the script pretty well.

In the graphs of four major indicators (click on chart above), the lines marked “average” are the averages of fifteen financial crises in thirteen rich countries since the early 1970s, as identified by the IMF. GDP isn’t shown because the experiences were so varied that the averages were meaningless. But for the indicators shown, the averages do illustrate some tendencies worth taking seriously.

Employment
Though the U.S. peaked later and bottomed earlier than the average, and also rose higher and fell harder, the trajectories of the two lines are still remarkably similar. Note that after hitting bottom, employment in the average experience grew very slowly. If we’re in for anything like that average, then we’re likely to see employment growth of only about 35,000 a month over the next year—less than a third what’s necessary just to accommodate population growth. That suggests that we could see an unemployment north of 10% in about a year.

CPI
Given the gyrations in energy prices over the last couple of years, reading the headline CPI has been very difficult. But the gyration does seem to be around the average line. And core CPI—for which we don’t have international data—is tracking the average pretty tightly. If inflation follows the script, it should continue to decline into next year. With core inflation at around 1%, it’s reasonable to expect that we could go into mild deflation sometime over the next few quarters.

Interest Rates
Rates on 10-year Treasury bonds have fallen harder in the U.S. than in other crisis-afflicted countries, but the trend is typically down for almost four years after the onset of crisis. Further declines in U.S. rates seem like a stretch, but the likelihood of an upward spike looks remote.

Stocks
Stocks fell much harder in the U.S. than they did in the wake of the average financial crisis, though they did enjoy five quarters of nice recovery. As with interest rates, further declines seem unlikely; in fact, the average increase from here would be around 7% over the next year.

So, all in all, we’re getting pretty much what we might expect out of our major economic and financial variables: a weak, choppy recovery with a deflationary undertow.

I think this is a fair and balanced comment, but again, it's a very US-centric view of the world. If you factor in robust growth from emerging economies, central bank intervention and the extraordinary liquidity in financial markets, the path to recovery might surprise the staunchest naysayers.

Finally, it's Sunday, and I'll leave you with some food for thought from George Friedman, CEO of STRATFOR, who believes China “will collapse” in the coming decade and that America will be the primary beneficiary. Mr. Friedman's views are controversial but well worth listening to.


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