End Of Recessions? — Brian Romanchuk

I saw a high profile comment to the effect that the business cycle was abolished recently. Since I will be plugging a book on recessions shortly, that represents a risk to my business plans. I do not wish to go through what exactly was said elsewhere (mainly because I did not go through the details of the argument), but just give my spin on the idea. If we stick enough qualifications into how we express ourselves, it is not that controversial an opinion....

Bond Economics
End Of Recessions?
Brian Romanchuk

Mnuchin says US must cut spending and reduce the deficit: Recipe for guaranteed recession.

Mnuchin says the U.S. government must cut spending and reduce the deficit. This will absolutely guarantee a recession.

It's amazing that these views still prevail. Complete and total ignorance.

Bill Mitchell— Leading indicators are suggesting recession

In the last two days, some major leading indicators have been released for the US and Europe, which have suggested the world is heading rather quickly for recession. It seems that the disruptions to global trade arising from the tariff war is impacting on US export orders rather significantly. The so-called ISM New Export Orders Index fell by 2.3 percentage points in September to a low of 41 per cent. The ISM reported that “The index had its lowest reading since March 2009 (39.4 percent)”. This is the third consecutive monthly fall (down from 50 per cent in June 2019). Across the Atlantic, the latest PMI for Germany reveals a deepening recession in its manufacturing sector, now recording index point outcomes as low as the readings during the GFC. Again, exports are being hit by China’s slowdown. However, while export sectors (for example, manufacturing) are in decline and will need the trade dispute settled quickly if they are to recover, the services sector in Japan, demonstrates the advantages of maintaining fiscal support for domestic demand. Japan’s service sector is growing despite its manufacturing sector declining in the face of the global downturn. The lesson is that policy makers have to abandon their reliance on monetary policy and, instead, embrace a new era of fiscal dominance. With revenue declining from exports, growth will rely more on domestic demand. If manufacturing is in decline and that downturn reverberates through the industry structure, then domestic demand will falter unless fiscal stimulus is introduced. It is not rocket science....

The US is running an unusually high deficit, indicating that fiscal flow is counteracting what would otherwise be a contractive condition. However, the expansion is dampened by the Fed's monetary policy. Adding "liquidity" to the financial system by increasing bank reserves is not stimulatory like adding spendable funds to bank accounts through fiscal policy. The latter increases demand while the latter restricts bank lending owing to Basel III requirements.

Europe on the other hand is still stuck in erroneous thinking about expansionary fiscal austerity. Mario Draghi finally warned about this as he prepares to leave his position as the head of the ECB.

Bill's point about the decline in the manufacturing sector and increase in the service sector offset each other to some degree. But manufacturing is about production and profit from production. When the profit rate falls, then so does investment in productive activity. This weakens an economy as the life-support system of the society going forward. It can also be inflationary if production falls behind fiscal injection. Moreover, it tends to increase the trade deficit as more products are imported.

Trump is concerned about the strength of the dollar and apparently believes that this is a result of Fed policy being too tight. But in a floating rate system, the policy rate does not have the same effect as in a fixed rate system. Moreover, as expectations of global recession mount worldwide, more funds flow into US Treasuries as the safest haven.

The trade war is also beginning to take its toll both as a result of expectations and also based on rising uncertainty and unsettled geopolitical conditions. The US and American economy (American consumer) were considered the anchor of the world economy. That assumption is now waning for good reasons on one hand and rising fear on the other.

We are not there yet, but the trajectory is not encouraging. Moreover, a socially and politically divisive battle is underway in the US over impeachment of the president. Banana republic stuff that further undermines confidence in the system.

Bill Mitchell – billy blog
Leading indicators are suggesting recession
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also

Angry Bear
Once again, two sharply contrasting reports to start the month
NewDealdemocrat

The Ticking Time Bomb Of Recession: Some Reasons To Worry — John T. Harvey

All but one have been preceded by a decline in Real Gross Private Domestic Investment, which we have just observed.

One indicator is hardly definitive, and presently, the economy is strong, with fiscal flows very positive.

Nevertheless, private investment along with government spending drives and economy, and in the case of a net importer, it offsets demand leakage from a trade deficit. A trade deficit is offset by a fiscal deficit, but the targeting of the spending determines the multiplier with respect to ongoing demand, that is, how soon a dollar spent is saved and thereby neutralized. 

Recessions don't come out of nowhere. They result from lagging demand or unsustainable private debt. Neither is a significant issue at present. 

The question is why Real Gross Private Domestic Investment is trending down. The reason usually given is declining confidence in business conditions to yield profits that justify the investment. But that is not based on actual measurement but polling business leaders.

John Harvey offers several reasons that may pertain. First, the expansion although tepid, is getting long in the tooth by historical standards. Secondly, even if the expansion persists at the present rate, the results are unevenly distributed, leading to social issues and therefore political ones as well. So the basic outlook is  not all that promising without greatly increasing the fiscal deficit, which also involves political issues given the current state of misunderstand about this in the electorate.

It's looking like the business community that should be investing is concerned with the state of the world, which is becoming increasingly precarious, the deep political division in the US approaching an election cycle, and generally discouraging news from the bulk of the global economy suggesting a slowdown. But this is hardly definitive in terms of measurement.

Whatever the cause of causes this is resulting in a degree of uncertainty that is increasing liquidity preference, which is confirmed by the low yields and flat yield curve of US Treasuries and a strong dollar in the face of "fiscal profligacy." While some of the bond bull may be due to insufficient securities emission by the US government, that can be questioned since deficit spending must be offset by debt issuance, the fiscal deficit is high by historical comparison, and the Fed has reversed QE. There is a strong appetite for low risk places to park funds instead of an appetite to invest in expectation of profits down the road.

But there may be more, too. I have said previously that I think that the previous financial crisis was the first leg down, since the fundamental issues were not addressed then and continue. Nor was there any real, meaningful accountability in the sense of doing what is required to reform the system and excise the rot, which is still highly "profitable" in terms of extracting rent. And measures that were taken are already being rolled back. Does anyone think that this is a healthy system?

The world situation is also looking shaky, and the overwhelming sense is that there is no center of gravity. The US had provided a solid foundation in the aftermath of WWII, but that began to crumble away as long ago as Vietnam and the perceived need to close the gold window for international trade and go to a floating rate system instead of a fixed rate one. Now the pace is increasing. Even Mark Carney is suggesting that a new monetary order that is not dollar-centric is in the offing. And multipolarism is increasing geopolitically. The world seems to be in transition and the outcome is thus far unforeseeable.

There is an impending sense that the world is now in a Gramschi "interregnum," and it is unsettling.

"The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear." — English translation Selections from the Prison Notebooks, “Wave of Materialism” and “Crisis of Authority” (NY: International Publishers), (1971), pp. 275-276. Prison Notebooks Volume II, Notebook 3, 1930, (2011 edition) SS-34, Past and Present 32-33. Wikiquote

So while there is no good reason either to predict recession or to put a clock on it, the whiff is in the air and that could become a self-fulfilling prophecy. One indication of this is market volatility based on the latest news to come across the wire, or Bloomberg, as the case may be.

It's the whole ball of wax, and the wax seems to be melting.

Forbes — Pragmatic Economics

The Ticking Time Bomb Of Recession: Some Reasons To Worry
John T. Harvey | Professor of Economics, Texas Christian University

Michael Roberts — A profits recession?

Falling aggregate profit rate?

As James Montier, the post-Keynesian economist at GMO, the large asset fund manager, points out, real earnings growth in the corporate sector has been below the rate of real GDP growth even after the significant boost from the financial engineering from share buybacks. According to Montier, when you dig down into the market you find that a staggering 25-30 per cent of firms are actually making a loss.

In Montier’s view, “the US is witnessing the rise of the “dual economy” — where productivity growth is reasonable in some sectors, and totally absent in others. Even in the sectors with good productivity growth, real wages are lagging (wage suppression is occurring). All the employment growth we are seeing is coming from the low productivity sectors. On top of this, the paltry gains in income that are being made are all going to the top 10%. This is not what a booming economy should feel like.”...

Looks like yet another manifestation of the uneven lackluster recovery from the financial crisis that has favored mostly a few.

Michael Roberts Blog — blogging from a marxist economist
A profits recession?
Michael Roberts

I'm looking for recession and not finding it.

These are stats from my latest MMT Trader report. Are these recessionary signs? Warren Mosler is bearish as hell.

Auto loans rising at the fastest pace in 8 months.

Residential real estate loans rising at fastest pace in 3 weeks.

Bank "residual" (capital) at record highs and up 3 weeks straight and up 6 of the last 7 weeks. (Implies growing bank earnings.)

Bank assets at record levels.

Gasoline demand at 6-month high.

Distillate demand at 3-month high.

Federal tax deposits have been rising since January and are on track to completely erase the y-o-y negative gap. Going positive.

Corporation taxes rising, too. They bottomed vs last year in early February.

Social Security (largest spending item) growing at fastest pace so far this fiscal year.

"Other Withdrawals" (military and defense) growing at fastest pace since early February and has accelerated 63% since then.

Unemployment benefits down and falling  y-o-y.

Food Stamps down y-o-y. 

These are all coincident or leading statistics. Most of these CREATE the forward conditions of the economy rather than reflect what the economy is already doing like much of the data cited by other economists.

I don't know...I just don't see it.

Trump stimulus? Fuhgeddaboudit. A super duper deficit hawk is now his Budget Director.

Trump has been choosing deficit hawk after deficit hawk, casting MAJOR doubt on his stimulus plans, except of course for rich people and corporations. Everyone else is likely to get screwed.

The Donald just chose super hardline deficit hawk, Mickey Mulvaney (R-SC) as his budget director.

Here's Mulvaney:

Mulvaney, 49, was elected to Congress in 2010 in the wave that brought a cohort of younger, staunchly conservative members into the House. Mulvaney quickly staked out ground as one of Congress’s most outspoken fiscal hawks — playing a key role in the 2011 showdown between President Obama and House Republicans that ended in the passage of strict budget caps.

He has been an advocate for spending cuts, often taking on his own party to push for more aggressive curbs to government spending.

And Trump seems to be 100% behind this. Check it out.

“We are going to do great things for the American people with Mick Mulvaney leading the Office of Management and Budget,” Trump said in a statement. “Right now we are nearly $20 trillion in debt, but Mick is a very high-energy leader with deep convictions for how to responsibly manage our nation’s finances and save our country from drowning in red ink.

Recession time, people. Recession time. I am shorting stocks.

Deficit is up 25% over last year, as I forecast. Will the "deficit is too small crowd" now change their position?

The deficit is up 25% over last year. Just reported.

I already knew this and anyone who subscribes to my MMT Trader report knew this because I see the deficit on a daily basis from my analysis of the Daily Treasury Statement.

So, this is no surprise to me. In fact, I have been forecasting this and alerting you, dear readers, about this trend from time to time.

My question, however, is to Mosler and the people who parrot him on the deficit. He (and the others) have been wrong for three years forecasting a recession based on the shrinking deficit whereas I have been consistently and correctly pointing out that it's all about flows.

I follow fiscal flows, each. No one else does that. Flows have been very, very, strong.

So the question is, will Mosler now get bullish? His whole entire premise has evaporated. He's been dead wrong. Will there be any consistency to his view? I doubt it.

FRB Cleveland Does Fiscal Stimulus Work?

Conclusion

Overall, our results suggest that fiscal stimulus is effective even during recessions induced by consumer-debt overhang. An increase in government spending is associated with a fiscal multiplier above one, and the multiplier is higher in consumer-debt-ridden geographical areas. The higher multiplier in those areas might be attributed to a direct increase in household consumption and local economic slack. Our results imply that the ills of private debt can be cured by government spending that is financed by public debt. At least in the short term (two years are considered in this study), public debt is effective in stimulating income and employment even in areas of high consumer indebtedness.

FRB Cleveland
Does Fiscal Stimulus Work?

Yulyia Demyanyk, Elena Loutskina, Daniel Murphy

ht Mark Thoma at Economist's View

Brexit buy signal. Jim Rogers says this will be the worst recession in our lifetime.

This hysterical clown is making another "bold" prediction. He says that Brexit will lead to the worst recession in our lifetimes.

You just got your buy signal.

LIVE: Jim Rogers: “The bear case is the pound disappears” https://t.co/WVAVrr9UnQ pic.twitter.com/xBckP05H1J

— Yahoo Finance (@YahooFinance) June 27, 2016

Brad DeLong — Atif Mian and Amir Sufi: Who Bears the Cost of Recessions? The Role of House Prices and Household Debt

“We… show… differential shocks to household net worth coming from elevated household debt and the collapse in house prices play an underappreciated role…

WCEG — The Equitablog
Atif Mian and Amir Sufi: Who Bears the Cost of Recessions? The Role of House Prices and Household Debt
Brad DeLong

Jason Smith — Matthew Yglesias is still withholding the economic theory of everything

Smackdown.

Information Transfer Economics
Matthew Yglesias is still withholding the economic theory of everything
Jason Smith

Peter Dorman — The Recession Template, Except there Isn’t One

There are three different kinds of cycles, as helpfully laid out in an exemplary textbook I’m familiar with. One is the policy cycle, as described by Ritholtz. Yes, that one is flashing a steady green. The second is the investment/profit cycle, whose theoretical basis goes back to Marx, includes Samuelson’s accelerator model, and is driven by the interaction of business costs (including wages), demand, and new investment. The key indicator there is of course profit (and expected profit), and there are no clouds on that horizon at the moment. The third is the financial cycle [described by Hyman Minsky], of which 2008 was the most recent example. Instability of that sort results from credit growth that props up asset prices rather than increasing revenues or from mismatches between liabilities and revenues. In theory it’s possible to see this kind of trouble in advance, although the actual record is spotty. If we are in for a crunch within the coming year it will probably come from financial forces.

Econospeak
The Recession Template, Except there Isn’t One
Peter Dorman | Professor of Political Economy, The Evergreen State College

Here's what's single handedly keeping us out of recession

Social Security!

Here's why the economy won't go into recession. The expansion in the Social Security rolls will necessarily mean increasing levels of government spending. It might not be a boom, but it's a broadening, guaranteed, income flow to tens of millions. This is single handedly keeping us out of recession. 

And these idiots in Congress want to do away with it. BUT NOT TRUMP!!!!!!!!

I told you to buy the dips

You can listen to others who have been wrong for three years running, worried about the size of the deficit or, you can follow us here when we tell you about far more important flows.

I told you yesterday to buy the dips.

I told you there would be no recession.

I WILL TELL YOU when to get worried, but it's NOT NOW.

Keep buying the dips. Spending really accelerating now.

Federal Government spending is really accelerating now. We are $45 billion over last year and last year was the biggest increase in six years. There will NOT be a recession. You can look at the deficit all you want; you're wasting your time. The Fed will raise rates at least two more time this year.

The stock market is giving everyone easy opportunities to get in. There's been plenty of good, back and forth action. That won't always be the case. We'll go parabolic at some point.

Forex is also presenting great opportunities. If you don't trade forex, get my course.

No recession. Q4 GDP revised up. Flows tell it all, as we have been saying. Deficit based forecasts have been wrong, wrong, wrong.

How many times do we have to say it? Matt and I have been saying over and over and over that these deficit-based forecasts are stubborn and wrong and it's all about the flows. And we've been right.

With $4-trillion-plus and rising (year-over-year) there won't be recession. Slow growth, perhaps, and that's because of the drag from lower capex in the energy sector, however, it's being offset by higher consumption.

The deficit-based forecasters have been wrong for three years running. If, five years from now, the economy goes into recession because of some unrelated reason, are all of you going to say that the deficit-based forecasters "called" it?

Come on.

Spending up YUGE! Starting to really accelerate. Here we go go go!!!

After that late, Jan-early Feb hiccup (IRS glitch, paperwork, whatever), Federal Gov't spending is now really starting to take off. Check it out:

We are nearly $40 billion over last year already and it's accelerating. This month alone, tax refunds have now caught up and surpassed last Feb. (Thanks to our tax accountant, MNE reader, John, for keeping me patient.)

Forecasts:

No recession
Stocks to rally sharply
Economy to show increasing strength
Fed will raise rates at least two more times
Bonds down
Dollar DOWN as foreign exporters regain some pricing power
Gold up.

If you're looking at the deficit (i.e. how "small" it has become) then, bye, bye. You are going to be left in the dust!

Much more detailed updates, analysis and forecasts in my Fiscal Trend Trader Report. Subscribe here.

Recession a done deal though probably (hopefully) shallow

What the hell happened????

Stocks and the economy were starting to recover from their late Q4-2015, early Jan induced swoon, but then around mid January something happened.

The IRS compute glitch, Obamacare and further tax refund problems, Russian IRS hacking and fraud concerns, whatever, and flows have gotten knocked for a wallop.

We went from being $31 billion y-o-y in Federal spending on Jan 20 to now being -$5.2 billion under: a loss of over $36 billion in flows in a few weeks. People, businesses are going to feel that.

If the economy were growing at 4.0%, I'd say no big deal, but with growth at a meager 0.7% and sentiment as bad as it is, stocks crashing, that's about all she can take.

GDP is going negative for a quarter (hopefully), but possibly more.

We have lost all spending gains this fiscal year thanks to the slow pace of tax refunds. Pretty sure this tips economy into recession now.

We have lost all spending gains versus last year because of the slow pace of tax refunds. A reader by the name of John, kindly schooled me on the reason. John is a tax accountant. He said it's not due to the IRS computer glitch that I have been citing. Rather, it's due to increased filing requirements related to Obamacare.

The economy was barely growing with y-o-y spending gains of $25 billion. (Only up 0.7% annualized in Q4.)

We have lost $25 billion in a instant because of the tax refund situation. Another reader anecdotally told me how much his business relies on people spending those refunds.

Given the stock market setback and generally terrible state of sentiment and now this, I am calling recession.

John the accountant told me that refunds will get to where they need be by April, but that's going to be too late. The damage will have already be done. The best we can hope for is a very shallow recession.