Yes, I've been absent way too long.

Anyway, over on Wampum, I questioned whether we're in danger of a double-dip recession, either real or perceived:

Another disappointing report out this morning:

Factory orders falter: August slide of 0.8% is wider than expected, sparked by downturn in transportation-related items.

October 2, 2003: 10:04 AM EDT

WASHINGTON (Reuters) - New orders for U.S. manufactured goods tumbled in August, the Commerce Department said Thursday in a report that provided another sign America's manufacturing sector is ailing.

Commerce said factory orders dropped a larger-than-expected 0.8 percent in August, led by a 2.3 percent drop in transportation-related orders. Orders for durable goods -- items meant to last three or more years -- were revised to a 1.1 percent decline from the 0.9 percent drop reported last week. Factory orders for July, however, were revised up slightly in Thursday's report, to a 2.0 percent gain.

This news comes on less than glowing reports out this week from consumer and manufacturing watchdog groups. At this point, the only shining star is home sales, sparked by still low, though rising, interest rates. Even GDP, at 3.3% for the 2nd quarter, is below what economists expect for healthy growth (3.5%).

Key economic indicators (source: MSNBC)

• Consumer Confidence: Sept: 76.8 Aug: 81.7
• Retail sales: Aug: 0.6% July: 1.3%
• GDP: Q2: 3.3% Q1: 1.4%
• ISM Index: Sept: 53.7 Aug: 54.7
• Factory Orders: Sept: -0.8% Aug: 2.0%
• Unemployment Rate: Aug: 6.1% July: 6.2%
• Employment situation: Aug: -93,000 July: -49,000
• Consumer inflation: Aug: 1.3% July: 1.5%
• Housing starts: Aug: 1,820,000 July: 1,892,000
• Home sales: Aug: 7,620,000 July: 7,242,000

Tomorrow, new unemployment numbers come out. If they're worse than expected, a slight uptick, then the Administration may be happy for the cover the Plame Affair offers. The ire of an awakening media may be more appealing than that of an angry, unemployed electorate, particularly since the latter influences those "unimportant" poll numbers.

Also, like Teddy, I took a crack at the September employment situation release. I expanded a bit on the impact on IDEA (the Individuals with Disabilities Education Act) in comments over at Atrios, and since Haloscan is known to be tempermental, will include them here as well:

I forgot to mention above that the educational support is also being cut while IDEA (the Individuals with Disabilities Education Act) is being weaken by Republicans in Congress. So there won't be classroom aides for special needs kids, and parents won't have legal recourse to force school districts to follow the kid's IEP (education plans.) More disabled kids will act up without such support, and under the "new, improved" IDEA, teachers will have them pulled from classrooms, and shipped off to special schools, out of the "mainstream". Of course, this allows their school test scores to increase, since under NCLB, even special ed kids have to be tested and show improvement every year.

Of course, sending kids off to institutions is much more expensive for school districts, and tax payers pick up the bill. But Repugs will figure out a way to overturn the "free and appropriate education" decision of the Supreme Court in the early '70s.

Good News, but Where are the Jobs?

"America's business productivity soared in the second quarter of 2003 and new claims for unemployment benefits dropped to a six-month low last week, a double dose of good news as the economy tries to get back to full throttle." Productivity in the second quarter grew at an annualized rate of 5.7%, which is extremely high by historical standards (note that the number is still subject to revision, but even if it's cut by 1/3, it's still very high).

New application for jobless benefits stayed below 400,000 per week for the third consecutive week. However, a slowing of the rate of layoffs is not the same as creating more jobs (recall that the recent drop in unemployment from 6.4% to 6.2% was triggered by people abandoning their job search, not by people finding new jobs; see also Matt's post below). But the productivity growth in the second quarter, if it reflects a trend and not an aberration, is good news in the long run: it will mean that when the economy starts expanding, inflation will not be a major concern.

On the other hand, excess capacity and the accompanying downward pressure on prices have been a major business problem of late. Because of that excess capacity, it would not be difficult for measured productivity (output divided by hours of labor) to increase quite a bit in the short run without reflecting what is typically thought to cause long run productivity growth--new, more efficient, technologies and processes (think 1990s). Time will tell. At the least, the latest news is not bad news; how good it is unknown.

AB

Even the Conservative Economist

The current Economist has an interesting piece, Hidden dangers: The American government's accounts look about as reliable as Enron's (article here--subscription required). The story reports on a study by two AEI economists, Jagadeesh Gokhale and Kent Smetters, that uses two new measures of how sustainable deficits are. One of them is the Generational Imbalance (GI) index, which measures (in net present value) how much society will spend on the current generation over their lifetimes versus how much society will collect from that generation over their lifetimes. They estimate that Medicare alone represents a transfer of $20 trillion (1.7 times GDP in today's dollars) from future generations to the current one!

This seemed a bit high at first, so I took a look at the 2003 Status of the Social Security and Medicare Programs, where I found this graph:

I didn't run the numbers, but based on this the Gokhale and Smetters number seems plausible. Not surprisingly, the AEI economists use their result to argue against expanding Medicare and Social Security benefits (a position I agree with, unless taxes are raised or other spending cut to pay for them). On the other hand, exacerbating the transfer from "the children" to the current generation via massive tax cuts and the accompanying deficits seems like an equally bad idea. Oh wait, I forgot, the solution is trivial: use more tax cuts to increase revenue--we better get taxes down and pronto!

Back to The Economist's assessment of the situation:

As the late Herbert Stein, a noted economist, once said, "If something cannot go on forever, it will stop." One way or another, America's budget gap will have to be closed. The question is, will it be done responsibly, by coming clean about the hidden liabilities now and taking the necessary, if painful, steps to deal with them? Or will the top management, like Enron's, stave off admitting the true state of America's finances until it is forced to do so by some spectacular collapse?

AB

Jobless Recovery

Via Ruminate this, check out John Andrew, who was recently laid off and is now using his free time to shadow the Bush Economic Crew.

AB

Good News, Right?

On the wire: "The Labor Department reported the nation's unemployment rate declined to 6.2 percent in July from 6.4 percent in the previous month." But before you get excited, read the next sentence:

The figure was slightly better than analysts' estimates, but much of the drop came from 470,000 disenchanted people who abandoned job searches.

(# people actively seeking work)/(#people in the labor force),

AB

Juicing the Growth Rate

General Glut makes an interesting point here: by the General's calculations, without the extra $40 billion in military spending, the projected growth rate for this year would be under 1%.

AB

I've been really remiss about posting over here, as I've been just trying to get past the Blogathon and setting up a few other groups blogs. But now I have no such excuses, and although still somewhat sleep-deprived, I wanted to initiate some discussion over here on the state of the recovery.

This morning, over at Wampum, I expressed some concern regarding two factors, state budget deficits and spiking natural gas prices, which I think may have an impact upon the strength, or even the existence, of the pending economic recovery. I expect that others out there have additional concerns. This weekend, while digging back in the 1991 archives, I noticed a lot of blame being directed at the purported tight lending environment, and I recall Matt S. asserting a similar argument in my old Wampum comments many months back.

Anyone care to add issues the think may derail the recovery, as well as ways the current administration, or a future Democratic one, may avert such a problem?

There's Nothing Like Data

Tom DeLay says spending is causing the deficit. Is he right? What's really causing the deficit? War? Recession? Spending? Tax Cuts? Some of each? If the latter, how much of each?

To take a quick look at some of these issues, I grabbed data on Federal Revenue, Spending, and GDP from 1992-2004E. First, the Revenue and Spending Numbers. Note that the Bush budgets and tax plans were in effect from roughly 2002 onward (Spending in 2001 was authored by Clinton; Bush's 2001 rebate did cut into what 2001 revenue was under Clinton's budget).

First, in raw numbers (inflation has been modest, so while these are not inflation-adjusted, doing so would only have a minor effect). Under Bush, Federal Spending has skyrocketed. It was $1.86 trillion under Clinton's last budget but 2.01 trillion under Bush's first budget. Under Bush's third budget (authored with a Republican House, Republican Senate, and Republican White House), spending will be $2.27 trillion. That's a 22% increase over Clinton's last year, at most 3-5% of which is due to inflation. Now that's big government. How to pay for all of this?

Certainly not with tax revenue. That's down from $2 trillion in 2001 to $1.8 trillion in 2004. But that must be the fault of the recession, right? Wrong. Here are the GDP numbers:

2000: $9.7 trillion; 2001: $10 trillion; 2002: $10.34 trillion; 2003: $10.76 trillion; 2004E: $11.3 trillion.

So while slow and accompanied by rising unemployment, growth is still positive, meaning the tax base of national income increased. The only mechanism by which terrorism could affect revenue, as opposed to spending, is by reducing GDP, and that just hasn't happened. The only explanation is the Bush Tax Cuts. If we're not paying for the Bush spending now, when do we pay? Later, starting right around when the Baby Boomers retire.

But maybe our ability to pay is also increasing, so that as a percent of GDP, the increased spending and deficit are not so bad? Wrong. Bush increased spending as a percent of GDP from about 18.5% to over 20% (and inflation affects both the numerator and denominator equally and so is not a factor). But he did get the tax burden way down, from over 20% to 16%. But there are no free lunches. If spending is over 20% of GDP and revenue is 16% of GDP, that gap has to be paid at some point. But the bill will come after the 2004 election, and Bush is hoping you are too stupid to realize that (click to enlarge).

Back to the original issue of what caused the deficit, it's not the recession because the tax base has not fallen. The Wars on Terror and Iraq amount to at most $100b per year, so that without them, spending in 2003 might have been 19.63% of GDP instead of 20.56%--still well above the 18.6% mark in Clinton's last budget. So at most 20% of the deficit can be tied to terrorism (and that's just the sort of unforseen need Democrats were referring to when arguing, in vain, against Bush's tax cut). And that's perhaps generous, since it increasingly appears that the War on Iraq was discretionary spending by the Bush administration, rather than anti-terrorism spending. Of the 80% of the deficit not related to terrorism, roughly 1/3 of the blame goes to increased spending and 2/3 to the Bush tax cuts, resulting in this approximate allocation of responsibility (click to enlarge):

AB

Data Sources:

• Numbers for 2001 and earlier are from the 2003 Economic Report of the President , Table B-78: "Federal receipts, outlays, surplus or deficit, and debt, selected fiscal years, 1939-2004" (http://w3.access.gpo.gov/usbudget/fy2004/sheets/b78.xls).
• Numbers for 2002-2004 are from the OMB,
  http://www.whitehouse.gov/omb/budget/fy2004/pdf/04MSR.pdf (See Table 7 for Revenue and Spending data, 2002-2004).

Tax Cuts in Action

This just in:

The White House is expected Tuesday to forecast record budget deficits in excess of $400 billion this fiscal year and next with little hope of a turnaround anytime soon.

The simultaneous operations in Afghanistan and Iraq are running around $60b per year, so we can forgive the administration that. On the other hand, income and GDP are actually rising, so it's hard to blame the economy for the deficit. Sure, unemployment is up, but that's a burden that falls disproportionately on the poor, who as Republicans love to remind us, pay little or no income taxes. (Of course they pay payroll taxes, which the Administration has busted out of the lockbox and comingled with general revenue).

What does this mean for you? Higher taxes and reduced services in the future, higher interest rates, and increases in the Federal Government's cost of debt service.

But surely, as a percentage of GDP, this is not so bad? So says incoming OMB Director Josh Bolten"

"Furthermore, the current deficit -- as a percentage of GDP -- is not large by historical standards and manageable within the overall context of our economy."

The CBO projects next year's GDP at $11.7 trillion, meaning that a $450 billion dollar deficit would represent 3.85% of GDP. Bolten is right that 3.8% is not high by historical standards, as long as you use the right history: the Reagan and Bush I years. On the other hand, Clinton inherited a deficit at 4% and got it down to 3% within a year. So perhaps Bolten should say that the deficit is not large by Republican historical standards. Just to make things clear, I've bracketed the years under budgets written by Clinton (1994-2001) in blue:

AB

UPDATE: The projected deficits for 2003 and beyond in the graph are, of course, way too low now--they should look roughly like the Bush I deficits.

UPDATE: It doesn't happen often, and I had to be awake at 4:30 in the morning to do it, but I beat Atrios on this subject by almost two hours. But he's got a better graph.

Recession Redefinition

Amidst all the Niger Uranium furor I almost missed some interesting economic news. Fortunately, Angry Bear commenter Stirling Newberry alerted me to a story in the Friday Washington Post: Number Crunchers vs. Recession. Said number crunchers are members of the National Bureau of Economic Research (NBER) which, among many other things, is the most widely used source for dating the start and end of recessions. You've probably heard that the latest recession started in March of 2001 (notwithstanding Bush's simultaneous attempts to say that 9/11 caused the recession and that it started under Clinton--on this topic, this Slate story is a must-read). But when, if ever, did the recession end? Well, there are two conceivable ways to get to the end zone in football. Normally a team scores by moving the ball past the goal line. On the other hand, they could keep the ball stationary and simply move the goal line. It looks like the NBER is doing the latter:

"If the committee were to rely on the same indicator to date the end of the slump, the recession would already have lasted for two years and three months, making it the longest since the vastly more serious downturn that began in 1929 and became the Great Depression...

Chances are, by giving far more weight to the GDP than it has in the past, the committee will decide before long to call an end to the 2001 recession, which many economists believe ended late that year...

This is the dating committee's [new] official definition of a recession:

A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough

...But that language was sharply revised when the next update was posted last month on the National Bureau of Economic Research's Web site:

The committee views real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, the committee therefore places considerable weight on the estimate of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce."

My first thought upon reading this was "Hey, the NBER has the top economists in the country and is largely apolitical, so there's not much of a story here." My second thought was "On the other hand, the current President of the NBER is Marty Feldstein, who was Chairman of Reagan's Council of Economic Advisers from 1982-1984. It sure would be nice for Republicans if the Recession is formally announced to be over before November, 2004."

So I checked into who is on the NBER's Business Cycle Dating Committee:

Robert Hall (Chair), Martin Feldstein (President, NBER), Jeffrey Frankel, Robert Gordon, Christina Romer, David Romer, and Victor Zarnowitz.

All members are top-notch economists, but I don't know most of their political affiliations. Fortunately, many economists on both the Left and Right recently decided to reveal their political leanings by signing one of two letters (I blogged about the letters here). Besides Feldstein, no members of the NBER dating committee signed the Republican Letter (scroll down). Frankel, Gordon, and both Romers signed the Anti-Tax Cut Letter. So I think it's pretty tough to argue that the committee was stacked with Republican economists. Also, Prof. Frankel chaired Clinton's CEA in the late 1990s.

Instead, the change most likely reflects genuine confusion induced by the historically unusual confluence of positive GDP and income growth accompanied by rising unemployment.

Still, while probably not politically motivated the focus on real GDP as the single best measure of aggregate economic activity" is troubling because it implies a focus only on the total income in the economy, not the distribution of that income. Under this logic a recession would not be in progress even at 20% unemployment, as long as the other 80% of the labor force had more-than-offsetting increases in income. But at least one in five people in this scenario would disagree with this conclusion.

AB

P.S. In the 1970s, economists thought recessions and inflation would not happen at the same time, so they had to come up with a new name for the new phenomenon: "stagflation". The only phrase I've heard for the current situation is "jobless recovery", but while acccurate, it's not very catchy. Ideas?