End of Recession / No End of Private Sector Deleveraging

From NBER:

The Business Cycle Dating Committee of the National Bureau of Economic Research determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month.

And how were we able to get this non-recovery, recovery? The federal government (from exhibit D.3 of the recent Federal Reserve flow of funds report):

End of recession or not, any sector not labeled government or corporate continues to delever (and local government and corporations are dwarfed by the federal government), which to me says any domestic led recovery from here will be limited.

Source: Federal Reserve

Is the German Economy Booming? No...

The Globe and Mail reports:

While the rest of Europe is just beginning to crawl out of crisis and into the first tentative rays of growth and recovery, Germany is positively booming. Export sales are up dramatically, spurred especially by Chinese sales; consumer spending has returned sharply; banks and housing markets are unscathed – and, most significantly, while the rest of the continent and the United States experienced harsh job losses, Germany has actually seen unemployment fall this year to 7 per cent, below Spain’s boom-time level.

How? By bailing out workers with a unique plan that has short-term implications that aren't all that different than what is done in the U.S.:

In a system known as kurzarbeit, or “short-time work,” the German government pays up to two-thirds of the salary of employees who would otherwise be laid off, as long as they remain employed. The employer is expected to cover any hours actually worked and to keep up their pension and benefit payments.

Similar to U.S. unemployment benefits when you think about it... workers only receive government aid if they are not working (though they are not counted as unemployed even if they are working 2 days a week), but with unique long term differences.

The good? Corporations have an incentive to keep people on the payroll even if they are not needed; should the economy rebound, these individuals will be there.

The bad? Corporations have an incentive to keep people on the payroll even if they are not needed (i.e. the same thing); over the long run this may pose a structural headwind to future growth as it will prevent new companies from emerging post-recession; one of the sole benefits of recessions historically has been the new ventures that emerge (excess workers for entrepreneurs + no opportunity cost for unemployed workers = ripe recipe for new companies).

As for the quote that the German economy is "positively booming" (note German Q2 GDP has not yet been released).



Not so much when compared to the U.S., even though the U.S. recession started first.

Source: BEA

Regarding the Decline in Birth Rates

The NY Times reported the link between recession and reduced birth rate:

American births fell in 2008, updated government figures confirm, probably because of the recession. The one exception was the birth rate among women in their 40s, who perhaps felt that they did not have the luxury of waiting for better economic times.

The birth rate for women in their early 40s rose 4 percent over the previous year, reaching its highest mark since 1967. The rate for women in their late 40s also rose, slightly. But birth rates fell for teenagers, as well as women in their 20s and 30s.

“Women are postponing births to those later ages, above 40,” said James Trussell, director of the Office of Population Research at Princeton.

Paul Krugman questions the link:

Doesn’t it take nine months from conception to birth? Abortion aside, to reduce births in the first three quarters of 2008 in response to a recession that started in Dec. 2007 would have taken pretty impressive rational expectations.

What are we missing?

First the data, then the missing piece.

The data seems to support the initial theory. The chart below shows the change in GDP by state on the x-axis and the change in the number of births by state (in 2008 [red] and 2009 [blue]) on the y-axis. In both years it appears that the birth rate had a relationship with GDP growth, thus individuals may have in fact based having a child as much in late 2007, as in late 2008 (i.e. predicting the downturn).



But was it a "prediction" or was the pain already felt? I believe the missing piece is HOW the recession began.... with a crash in the value of one's home. By the summer of 2007, the year over year change in the value of homes was pretty much down in all regions of the United States. Is it a surprise potential parents are less willing to have kids (expensive) when your largest investment tanks?

The chart below shows the relationship beween the change in the price of a home (Case Shiller) and birth rate change (I took liberty to match metro area to states). The y-axis remains the same as the chart above (change in birth rate in 2008), but the x-axis is now the annual change in the case Shiller home index from June 2006 to June 2007 (i.e. WHEN these couples would have been "trying" to have kids born in early 2008).

So were people able to predict the downturn or was it simply that the recession as defined by the NBER lagged the pain felt by potential parents?

I'll go with the latter.

Source: CDC / BEA

The Recession is Over!!!

Barry (of The Big Picture) noticed that the recession is officially over!!! (well, at least according to the charts over at the Federal Reserve):

Now it appears that with the latest G17 release on Industrial Production, the Federal Reserve is making the same assumption. They make note of this referring to several charts stating:

"The shaded areas are periods of business recession as defined by the National Bureau of Economic Research (NBER). The last shaded area begins with the peak as defined by the NBER and ends at the trough of a 3 month moving average of manufacturing IP.”

They are referring to the technical definition of contractions (recessions) as starting “at the peak of a business cycle and end at the trough (as defined by the NBER).

The Fed's charts are no longer showing the shaded regions that indicate recession (re-created below sans shading).

Too early?

Source: Federal Reserve

When Will the Economy Hit Bottom?

The average recession dating back to the 1850's has been 17 months in length. With the current recession already at 14 months in length and growing, bottom callers (i.e. the average economist) are predicting things will turn around by Q3 2009. If this occurs, then this recession is... just "average" (hard for me to believe).



On the other hand, the five worst recessions since 1850 have averaged 40 months in length. If this recession plays out in a manner more consistent with one of the worst five since 1850, look for the economy to bottom in late 2010 or early 2011.

So which is it... Q3 2009 or Q1 2011? In general, it is just one big guessing game. As the WSJ details, only one "top economist" in their 2008 survey predicted GDP would contract in 2008, so how can we expect them (or anyone) to know exactly when the economy will turn.

The bulk of prognosticators were pessimistic going into 2008, but they weren't pessimistic enough. The economy would slow, they thought, but only Mr. Hatzius thought it would contract. He also foresaw a steep increase in the unemployment rate, moderate inflation and a Federal Reserve that would be busy cutting rates.

Source: NBER

Japanese Production Shows a Worsening Global Recession

Bloomberg:

Japan’s recession deepened last month as companies cut production, consumers spent less and fewer people looked for work.

Factory output fell 3.1 percent from September, when it rose 1.1 percent, the Trade Ministry said today in Tokyo. Household spending slid 3.8 percent, the eighth consecutive drop.

Companies surveyed said they plan the sharpest production cuts in 35 years as exports decline in the wake of the worst financial crisis since the Great Depression.

Looking at the year over year change in some of the components of Japan's Industrial Production, one can see the rapid decline in the production of consumer goods over the past few months, trailing similar declines seen in both construction and capital goods.

Specific areas contibuting to this decline according to METI (Ministry of Economy, Trade, and Industry were (in order):

1. Transport equipment
2. Electronic parts and devices
3. General machinery

The Japanese economy is very dependent on exports, thus tends to be a decent barometer for global growth. This in itself, was expected, but troubling nonetheless. Back to Bloomberg:

Japan’s economy shrank last quarter, entering the first recession since 2001. The International Monetary Fund predicts the U.S., Europe and Japan will all contract next year, the first simultaneous downturn since World War II.

Data Source: METI

Hot Dog! "Recession Special" Up 27%

During these tough economic times, I have always had the peace of mind that only Gray's Papaya was able to provide (for those outside New York City, Gray's Papaya is famous for its very inexpensive, high-quality hot dogs). The "recession special", two hot dogs and a papaya juice for $3.50, meant that no matter what happened in the economy, I was only a few blocks away from hot dog salvation. No more (hat tip to the beautiful Laura R... via the NY Times):

This week, the special will rise to $4.45 from $3.50, Mr. Gray said.

“Tell them I’m weeping as I do it,” he said, adding, “My prices are very low and my rents are very high, so I have a problem.” Mr. Gray blamed the rising wholesale cost of food, and lamented the price increase’s timing, which he called “the worst.”

A recession special ~50% more expensive than just four years ago as we head into a rough recession. That truly is the "the worst" "the wurst" news I've heard all week.

U.S. Budget Deficit Indicates Recession

The Age reports:

The United States federal budget deficit soared in July, pushed higher by stimulus payments and outlays to protect depositors at failed banks. The Treasury Department reported that the deficit for July totaled $US102.8 billion, nearly triple the $US36.4 billion deficit recorded in July 2007.

Lets take a deeper look...

The first chart below shows historical receipts, outlays and the deficit over twelve month rolling periods, while the second shows the year over year change in receipts and outlays over these periods, along with the difference between the two YoY changes.

Interestingly, this difference has turned negative in all of the four recessions (yes I'm calling this a recession!) since this data has been released...