Friday, October 17, 2008

U.S. Economy Slides Deeper Into Recession

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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As you go back in time until the mid-1970s, you will find that each U.S. recession was worse than the previous one. The 1973 to 1975 recession was the biggest economic downturn in the U.S. since the Great Depression in the 1930s. Next was the 1980/82 recession (actually a double dip recession) and then the 1990/91 recession. The 2001 recession was the mildest on record and the only recession in history without a drop in consumer spending (only possible because the Fed dropped interest rates to 1% and financial companies were willing to provide almost unlimited amounts of credit to U.S. households at slightly above zero interest rates). To get a grasp of what is going on in the U.S. economy now, it is helpful to note statistical comparisons to time periods when past recessions existed and this will give you some sense of how badly the U.S. economy is currently functioning.

One thing that will most certainly not give you a sense of how the economy is functioning is the official GDP figures from the U.S. government. According to these, economic growth in the second quarter was robust at 3.3.% (final revision has since reduced this number to 2.8%). The first GDP figures for the third quarter will be released in late October. Anything indicating less than a sharp decline should be considered to be just as fictional as the second quarter report. No matter where you look, current economic reports are dismal and levels being reported are similar to those reached in one of the previous U.S. recessions.

Retail sales, Employment and Housing Starts are each indicating that we are in a significant economic downturn. Consumer spending represents over 70% of the U.S. economy and has likely fallen for the first time since the 1991 recession based on retail sales dropping 1.2% in September and 1.0% in August. Private economists have extrapolated the retail sales figures to an estimated 3.4% drop in consumer spending in the third quarter. Considering the employment situation, don't expect consumer spending to improve any time soon either. There have been job losses every month in 2008, with the official total being 760,000 (the actual figure is much higher). Even this number would be much worse, except the 2008 employment reports indicate continual hiring in the categories 'government' and 'education' , which in itself is mostly government employment. As of September, there were 2.2 million more unemployed in the U.S. than there were a year earlier and this number keeps rising. Housing, which is dependent on both jobs and credit availability, has continued to fall off a cliff. Housing starts fell a further 6.3% in September to an annualized rate of 817,000 units (this figure was around 1.7 million at the top of the bubble). Once again this was the lowest rate since the 1991 recession.

Industrial production provides an even worse case scenario for the economy than the consumer related reports. Industrial production, which represents the output of U.S. factories, mines, and utilities, fell 2.8% in September, after a 1% drop in August. The September drop was the worse since December 1974. Like consumer spending, industrial production is not adjusted for inflation, so this should be taken into account. According to the September PPI eport there was a price drop of 0.4%, although the core rate went up 0.4% in producer prices (consumer prices were flat for the month). Almost all of this price drop took place because of falling oil prices. Since oil has already fallen over 50% since its July high, continual drops should not be counted on. Examining some components of the PPI report also indicate drops bigger than even those of 1974 - a time of deep recession combined with high inflation, which is very much like the current U.S. economic picture.

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Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

2 comments:

Ray said...

People are freaking out about the economy but honestly there are still jobs out there. Here are 3 job sites from About.com’s top 10 job site list.

http://www.linkedin.com (networking)
http://www.indeed.com (aggregated listings)
http://www.realmatch.com (matches you to jobs)

Whole top 10 list here:
http://jobsearch.about.com/od/joblistings/tp/jobbanks.htm

New York Investing meetup said...

Thanks for posting this list. However, we simply analyze what is actually going on in the economy and the investment markets, since the truth is not available from traditional media. Economic stability can only be built on illusion for so long and then everything falls apart. Those who are prepared can protect themselves.