Over the last few weeks we've seen two news stories that have demonstrated how out of touch the right wing media is.
Let's start with the Phil Gramm comment. According to Gramm we're in a mental recession and are a nation of whiners. Within a few hours several right wing bloggers and talking heads rushed to his rescue to defend the comments. Among those are Ed Morrisey at Hot Air, Newsbusters, Mike Gallagher and Red State. According to all Gramm's comments were right on target -- in other words we are a nation of whiners and the economy isn't as bad as we think it is.
Most right wing talking heads are relying on the following definition of recession:
A significant decline in activity spread across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP)
Right wing people are correctly pointing out the US has not had two consecutive quarters of negative growth. Therefore everything is OK, there is no recession and talk of such is bunk.
However -- look at the first part of the definition which states, "A significant decline in activity spread across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade." This is from the definition used by the National Bureau of Economic Research which is the organization that officially dates recessions. Here is the complete NBER definition:
The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. We also look at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.
Let's look at each of the statistics mentioned above to see what they say:
personal income less transfer payments, in real terms
Here is a chart of real income from Econoday:
But Bonddad -- look at that jump in incomes! We must be doing great!
Actually, no. That's the effect of the stimulus checks. As Marketwatch reported:
Personal incomes rose 1.9% in May, the largest gain since September 2005, when insurance payments from hurricane damage flooded into bank accounts. The increase was close to the 1.5% gain expected by economists surveyed by MarketWatch. See Economic Calendar.
Real disposable incomes (after taxes and adjusted for inflation) increased 5.3%, the biggest increase since 1975, when the government also sent out rebate checks. Read the full report.
Excluding the impact of the rebates and inflation, real disposable incomes were flat.
Remember -- the NBER is looking for incomes without transfer payments. That means the stimulus checks don't count. The NBER is measuring the effects of the total economy without the help of government inputs. That way, the measurement measures the private sector without government help.
So -- without the government stimulus we have no gain. Looking at the year over year percent change in personal real income we see a solid decline since July of last year. That's recessionary, plain and simple.
Here are two charts from econoday:
Job growth has been declining on a year over year basis for about two and a half years, and
Unemployment has been ticking up since the beginning of last year. In other words, the long term trends in employment are recessionary
Industrial production has been dropping for awhile,
And capacity utilization is dropping, indicating we're using less of our manufacturing resources
Both the NY and Philly Fed manufacturing indexes have made a poor showing over the last 6 months.
And the ISM manufacturing report has been dropping since 2004. However, note this index ticked above 50 last month. But this was the first time it showed a reading about 50 in 4 months. In addition, this number has shown a recessionary reading for 4 of the last 6 months. In other words -- we'll need to see a stronger move above 50 and a longer move above 50 before we can say this number is improving. However, given that all other industrial indicators are in poor shape, the possibility of this number improving is pretty small.
"the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes"
The inventory number has been less important for one very important reason: with the advent of just in time inventory management and its continual refinement over the last 25 years, businesses are far more adept at operating with little to no inventory. As such, wholesale sales are less important. However, in the interest of completeness, here is a chart from the St. Louis Federal Reserve of real inventories
Notice this number has been dropping for about a year and a half.
So -- according to a far more detailed analysis of the economic statistics it appears the US is in a recession. In other words, Phil Gramm, Red State, Ed Morrisey, Mike Gallagher and any other right wing talking head who agreed with Phil Gramm is wrong. If you don't believe me, try reading the latest Beige Book from the Federal Reserve.
Chick Schumer caused the fall in Indy Mac.
Indy Mac caused the fall of Indy Mac. They made risky loans and paid the price. They are hardly alone. 266 lenders have stopped doing business since the mortgage mess started. And the list is growing:
The FDIC disclosed last month that it was closely watching 90 financial institutions on its "problem list," up from 76 in the first quarter of 2008. The total assets of "problem" institutions rose from $22.2 billion to $26.3 billion, the FDIC said.
The number of troubled institutions monitored by the FDIC has grown in each of the last six quarters, starting in the fall of 2006 when there were just 47 on the list, the agency said. The last time it approached this level was in the fall of 2004 when the number was 95.
The FDIC does not publish a list of trouble banks out of concern it could spur a bank run, which is what the Office of Thrift Supervision (OTS) said happened to Indymac in recent weeks.
And I guess the FDIC is now a cause of the problem, because they reported the US banking industry's overall condition is deteriorating in the latest quarterly banking profile when they wrote:
# INDUSTRY EARNINGS DECLINE 46 PERCENT FROM YEAR-EARLIER LEVEL # LOSS PROVISIONS ABSORB A HIGHER SHARE OF REVENUE # TROUBLED LOANS ACCUMULATE IN REAL ESTATE PORTFOLIOS # LENDING GROWTH SLOWS # FOURTH QUARTER 2007 EARNINGS ARE REVISED BELOW $1 BILLION
Ladies and gentlemen, the facts are clear:
-- the US is in a recession. When it started exactly we won't know for awhile. My best guess given all available information is it was sometime in the first quarter of 2008.
-- The US financial system is in serious trouble. Thanks to over 7 years of reckless lending we've got major problems. One person didn't cause this -- the entire system failed.
What really gets me about all of these talking heads are these three points:
1.) Using one statistic in economic analysis is poor analysis at best. It also indicates the people making the observations have absolutely no idea what they are talking about.
2.) The facts indicate there are major problems out there. Ignoring the facts will only lead to a repeat of the current problems.
3.) This whole "put our head in the sand" routine smacks of disinformation. And that is the really scary point. The more this incredibly shallow analysis gains traction and the more an overly simplistic analysis moves into the public dialog the higher the probability that the problem won't get fixed. And that's what we have to avoid at all costs.