All Recovery Indicators are Now Positive
By Dr. Joe Webb on February 6th, 2013
The newest recovery indicators show all six at levels above those at the start of the recession, even after factoring for inflation. How can this be after a negative GDP report and an unimpressive unemployment report? The more I look at the GDP report and other analyses of it, the more it seems that the fourth quarter decline was related to anticipation of the changes in tax policy. First, the decline in GDP was primarily caused by a decrease in government spending, especially in defense; other business factors were generally good. (Click chart to enlarge)
Remember, calendar Q4 is actually fiscal Q1 of the Federal budget. There was increased government spending in calendar Q3 (fiscal Q4) as departments increased spending to their budget levels, so calendar Q4 spending was not as likely anyway. On average, they probably ended up as insignificant when considered together.
The decline hid increases in business activity in the private sector, helped by small businesses shifting revenues into Q4 in anticipation of upcoming tax increases.
As for the constant news coverage of government deficits that are increasing and out of control, hearing reports of a decrease in governments spending causing a decline in GDP does not make sense. The way GDP is calculated holds the answer: transfer payments such as Social Security and Medicare are not included in GDP. This is because they are transfers alone and are not used to produce goods, being transfers of the income of others and not new income.
Looking at the ISM reports, it seems that the recent declines in manufacturing were probably affected by delayed orders as businesses worked off inventories and did not replenish them in Q4 but started to do so in Q1. This increased their profits for tax purposes in Q4. Despite the decreases in ISM non-manufacturing new orders, the rate of new orders is at a level implying a good level of growth; manufacturing orders increased.
The NASDAQ had a good month despite the pullback in Apple stock. Higher tax rates make the use of Roth IRAs, 401ks, and other tax-favorable investments more rewarding. Because stocks had a difficult December, the lower prices of stocks were very attractive in January and also started to create incentives to leave bonds in favor of stocks. New retirement fund contributions for 2013 have been a contributing factor in rise of stock prices; mutual fund inflows have been strong. The Fed has been trying to force the shift from bonds to stocks for some time now, and we will only know if they are successful if the Dow and S&P 500 pass their pre-recession levels on an inflation-adjusted basis as the NASDAQ has. Because the S&P 500 has so many financial stocks, it is further from that level than the Dow.
December and January sent conflicting signals as business and taxpayers made changes to their flows of activity for reasons unrelated to underlying business activity. The nature of economic conditions will become more clear in the next few reports, but overly pessimistic economic forecasts of +1.5% GDP or lower may be significantly wrong. While a +2.5% economy is disappointing and not up to historical standards, the possibility that economic levels may play out better than assumed in the near term is higher than originally conceived, and perhaps the Q4 GDP will be viewed as an anomaly a few quarters from now.
8 Responses to “All Recovery Indicators are Now Positive”
By BJones on Feb 7, 2013 | Reply
Last week I complained about Dr. Joe always being negative about the recovery, so it behooves me to give him props for coming around. Thanks Doc!
By Wayne Lynn on Feb 7, 2013 | Reply
Joe, you haven’t commented lately on the relationship between employment levels and productivity levels. Maybe an article to come?
By Dr. Joe Webb on Feb 8, 2013 | Reply
This is still the slowest recovery on record, and may not have happened at all. We are still waiting for the 5-year GDP revisions that come out around June. GDP has not had the company of other economic indicators to confirm that the recovery ended and new growth began. When GDP is revised, it may show that the recovery has not been “completed”. The most disturbing aspect of this recovery is the lack of employment growth, especially the number of workers who have permanently exited the workforce. When the recession started in December 2007, nonfarm employment was 138 million, and now it is 134.7 million, still 3.3 million workers short. By this time, with natural workforce growth since 2007, that figure should be somewhere around 143 million. Historical recoveries are noted by strong breakouts to the upside, with quarter-to-quarter growth of +5%, sometimes more, accompanied by payroll growth of 300K-500K+ per month for a couple of quarters. This has not happened. Most payroll employment reports have been barely above the statistical error of that data series of +/-129K.
Regarding productivity, the emphasis is still on internal productivity and not a broad-based expansion into new goods and services. Productivity stills exceed GDP, and it might be by a wide margin especially if you believe that GDP is being overstated by using an inflation adjustment that makes GDP look larger than it actually is, for which there is some good case (see/hear my discussion about inflation adjustment from 12/2011 on SlideShare). When productivity > GDP, employment stays stagnant. When productivity < GDP hiring begins because enterprises cannot keep up with the demand for output.
Another serious problem is that workers are not getting their share of the productivity increase, something that has been evident in the data for more than a decade. Paychecks are staying about the same, but benefit and other employment costs have been rising. So businesses are showing increased payroll costs, but workers share of those costs have been decreasing as benefits costs continue rise at the approximate rate of 2x inflation. For much of this past decade and longer, the producer price index has exceeded the consumer price index most of this time. This means that workers increased productivity has been paying for the difference of PPI minus CPI because increased prices cannot be passed on to the general marketplace. The fact that workers are not being rewarded for their productivity removes incentives for employment and innovation. The psychology can only be reversed by increasing incentives for long-term savings and investment.
As far as my selected recovery indicators, this is not the first time that all six have been positive. The headline says exactly what the data are. The fact that congratulations are supposedly in order is silly, at best. The data do the talking, I don't create the data. The recovery indicators have bounced around sideways, and it should be noted that I never expected to be reporting the recovery indicators for so long a time. The fact that I am still doing them is its own indicator that a true maintainable recovery is still elusive, and that the flow of business is being unnecessarily affected by external factors like timing of taxes and regulations rather the natural forces of demand, supply, savings, investment, and innovation as it should.
This was a very interesting article in this week's Economist. It is called “The Next Supermodel: Politicians from both right and left could learn from the Nordic countries”: http://www.economist.com/news/leaders/21571136-politicians-both-right-and-left-could-learn-nordic-countries-next-supermodel?spc=scode&spv=xm&ah=9d7f7ab945510a56fa6d37c30b6f1709
By BJones on Feb 8, 2013 | Reply
That’s the pessimistic Joe! Good to have you back.
By Wayne Lynn on Feb 8, 2013 | Reply
That’s not pessimism. It’s realism. Thanks for the reference to the Economist article. Very balanced and enlightening. Sort of speaks to the idea that neither Keynes nor Hayek got it completely right…maybe?
By Hugh Griffin on Feb 8, 2013 | Reply
Another complicating factor in the employment figures is the significant surge in “temporary or part-time” employment. Whether or not these hires are reported, most of those workers are unable to contribute significantly to Gross Domestic Spending (“struggling to get by”). Pending legislative issues are certainly a driving force in the accelerating “semi-employment” trend, and as long as this continues, real Employment growth will suffer.
By David Steinberg on Feb 8, 2013 | Reply
I don’t care what the indicators are, those of us who have customers, employees, and responsibilities know this is no recovery to crow about. In fact, it stinks.
By David Steinberg on Feb 8, 2013 | Reply
And don’t forget- Nordic countries have much more favorable time-off and family support policies. American work their collective butts off for a measly two weeks? No wonder people are so angry.
If you are not angry at the US Government, you are not paying attention!