Recession watch: May

[innonimatu]

Yeah, private property is the problem.

Yes, it is. The excessive debt which has been run up until now is someone's property. It can't be paid, but no government dares talking about canceling it either...

Productivity improvements and things like renewable energy, which displace costly imports with a one time investment, frees up income for other consumption.

Productivity improvements by themselves do not free up income. They reduce production costs (if not appropriated as profits), which will only reinforce the deflation which everyone seems to dread now, or allow an increase in production for the same costs. That does not address the problem of lack of demand. If prices become lower consumption will quantitatively increase, but employment will not recover and neither will profits. If productivity is captured as profits it'll be just more of the same - more profits to invest in what, exactly?

Productivity is irrelevant for this crisis. The issue is income distribution, increases in productivity are not and never were a requirement to resolve demand crisis.

Sadly, this is a highly legitimate question. Most recent recoveries have been driven by consumer spending and residential investment; for obvious reasons, those two sectors are not likely to rebound quickly this time around. The other big source of recovery, business investment, also looks weak with capacity utilization below 70%. Inventories are finally declining, but not quickly enough to justify large-scale expansion in investment.

It's tough to see where the recovery will come from.

There's also another issue with investment: just how useful has it been? I'd argue that most of those "green investments" are not really productive. Lets take as example "carbon sequestration". Investing in that is a loss! It doesn't return anything usable. A better environment? Perhaps, if it is made to work, but it won't be visibly improving anyone's lives, and it'll be a loss for business.
Or those investments in producing ethanol from corn, what happened? Are they all bankrupt already?

I think that I saw a link to this "report" somewhere on the forum already [edit: Princeps first mentioned it here], but it's worth mentioning again. It's about the how productivity has been measured, and questions the returns from some recent much-praised investments in improving productivity.
The value of the dot-coms was much exaggerated; consumer spending proved unsustainable at the high rates (~3%/year - not so high, really!) which everyone were getting used to; and residential investment was a gigantic speculative bubble. Either expectations have simply been too high and must be revised; or some other way to "grow" the economy must be fount outside conventional economic theory. The usual "let's inflate a new speculative bubble" strategy is spent.

Anyway, this thread is mostly about news and I only meant to comment one, I don't want to derail the thread. I'll abstain from commenting further.

 

[RedRalph]

From BBC

GM going bankrupt

General Motors' battle to avoid bankruptcy has suffered a blow as bondholders have rejected a key part of the carmaker's restructuring plan.

The board will now meet to discuss its "next steps" after a large number of investors refused to exchange their debt for company shares.

Meanwhile, the German government is set to begin a series of meetings later to consider bids for GM's European arm.

Four bidders are in the running for its Opel and Vauxhall operations.

German Chancellor Angela Merkel is set to meet GM representatives and US government officials at 2000BST on Wednesday night.

Although the ultimate decision rests with GM in Detroit, Germany's preference is crucial as the government is being asked to put up hefty loan guarantees for the winning bidder for GM Europe.

The possible buyers of Opel
GM has been trying to do a deal with bondholders, under which they would trade in $27bn in debt for a 10% stake in the recapitalised company.

The failure of the offer is a significant set back for the US car giant, which is trying to avoid having to seek bankruptcy protection ahead of a US-government imposed 1 June deadline.

The failure was not unexpected, though. The majority of bondholders had been against the deal from the start, believing that the stake being offered was too small.

The other key part of the restructuring, an agreement with unions, had been more successful. The powerful United Auto Workers union agreed to take a 20% stake in GM, down from the 39% in the original plan.

Bidding war

The German government had been expected to name its preferred bidder after a series of meetings which are predicted to stretch late into the night on Wednesday.

But a government spokesperson suggested it was "much more probable that talks will be continued with at least two investors after today's meeting".

That would be in line with the wishes of the UK government. A spokesperson for UK Business Secretary Lord Mandelson said GM wanted to keep talking with all bidders.

All had committed to maintain Vauxhall production in the UK, he added, where the carmaker employs 5000 people: 1200 at the Luton van plant, and 2000 at Ellesmere Port making Astras.

Derek Simpson, general secretary of the Unite union in the UK, fears the German government will support a bid which offers no protection to British workers.

Jobs at stake

Opel has its headquarters in Germany, and 25,000 of the firm's 50,000 workers are employed in the country.

The four bidders for GM Europe are Italy's Fiat, Canada's Magna, Belgium's RHJ and China's Beijing Automotive Industry Corporation (BAIC).

With an election looming, Berlin does not want to see too many job losses arising from the takeover.

Magna says it will lay off 2,500 workers in Germany, while Fiat says it will cut 10,000 jobs across Europe, including 2,000 in Germany.

BAIC, however, says it will not cut any jobs for at least two years. The German government is considering the bid from the Chinese carmaker, a spokesperson said, although it would not be present at Wednesday's meetings.

 

[Snorrius]

From BBC
GM going bankrupt

YES! "I knew it!" Now let's wait for my other predictions to be fulfilled.

 

[kronic]

German CPI falls to 0.0 % in the May 2008-May 2009 period.

 

[mrt144]

Yes, it is. The excessive debt which has been run up until now is someone's property. It can't be paid, but no government dares talking about canceling it either...

Debt exists independent of whether it is individual or sovereign.

 

[bender19]

The usual "let's inflate a new speculative bubble" strategy is spent.

Thats pretty much sums up the idea alternative energy or the green economy as a method of getting us out of this mess. This strategy is similar to an alcoholic or a drug addict after a massive week long bender waking up one morning feeling like death and thinking more drugs might help.

 

[knez]

I've just finished America’s Great Depression by Murray Rothbard

it's like history is repeating it self


first goes giant inflationary bubble
then that bubble crashes
then eager new know-it-all US president (Hoover/Obama) pushes government spending to the roof
a lot of that money is wasted on public works (i.e. going green)
certain industries are being nationalized and cartelized in the best fascist/socialist practice
protectionism arises around the world
eastern Europe owes to much money to western Europe and can't pay it back
central banks are bravely fighting deflation


interesting decade we are preparing for

 

[really]

http://www.rte.ie/news/2009/0527/house.html

The latest index from Permanent TSB and the ESRI has shown that house prices fell by almost 2% last month.

This brings prices back to levels not seen since the summer months in 2004.

It means that prices nationally have fallen by almost 5% in the first four months of this year.

AdvertisementThe average price paid for a house nationally in April 2009 was €248,640, compared with €261,573 in December and a peak of €311,078 in February 2007.

Houses in the first-time buyer category are falling at the fastest rate, down 7.9% already this year.

 

[Snorrius]

interesting decade we are preparing for

You forgot to mention World War as grand finale.

 

[Merkinball]

Productivity improvements and things like renewable energy, which displace costly imports with a one time investment, frees up income for other consumption.

You may have a point if renewable energy wasn't twice or three times as expensive as those costly imports.

If it was that simple, there would be no costly imports.

 

[Rashiminos]

http://www.usatoday.com/money/perfi/taxes/2009-05-26-irs-tax-revenue-down_N.htm

IRS tax revenue falls along with taxpayers' income
Updated 23h 2m ago | Comments 255 | Recommend 33

By John Waggoner, USA TODAY
Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says.

When the economy slumps, so does tax revenue, and this recession has been no different, says Kerry Lynch, senior fellow at the AIER and author of the study. "It illustrates how severe the recession has been."

For example, 6 million people lost jobs in the 12 months ended in April — and that means far fewer dollars from income taxes. Income tax revenue dropped 44% from a year ago.

"These are staggering numbers," Lynch says.

Big revenue losses mean that the U.S. budget deficit may be larger than predicted this year and in future years.
FIND MORE STORIES IN: Baby Boomer | Moody's

"It's one of the drivers of the ongoing expansion of the federal budget deficit," says John Lonski, chief economist for Moody's Investors Service. The Congressional Budget Office projects a $1.7 trillion budget deficit for fiscal year 2009.

The other deficit driver is government spending, which, the AIER's report says, is the main culprit for the federal budget deficit.

The White House thinks that tax revenue will increase in 2011, thanks in part to the stimulus package, says the report from AIER, an independent economic research institute. But it warns, "Even if that does happen, the administration also projects that government spending will be so much higher each year that large deficits will continue, and the national debt held by the public will double over the next 10 years."

The government may have a hard time trimming spending to reduce the deficit when the recession ends. The 77 million Baby Boomers— those born in 1946 through 1964 — will start tapping their federal retirement benefits soon, which means increased government outlays for Social Security and Medicare.

"It will be doubly difficult for federal government to reduce expenditures and narrow the deficit as rapidly as they did following previous recessions," Lonski says. At the end of the last major recession, in 1981, Boomers were in their 30s. Their incomes were expanding, as was their appetite for goods and services.

The Boomers now are in their 50s and 60s and unlikely to keep increasing incomes for long, which means that revenue from income taxes could flatten in the next few years. Also, Lonski says, they are more likely to save for retirement than spend — and consumer spending is a big driver of the economy.

"The American consumer led us out of previous recessions with some semblance of gusto," Lonski says. "They're too old to do it now."

No worries, we'll just borrow more.

 

[mrt144]

http://www.usatoday.com/money/perfi/taxes/2009-05-26-irs-tax-revenue-down_N.htm


No worries, we'll just borrow more.

Keeping watching those treasury yields...

 

[Integral]

US real GDP, first quarter 2009, first revision (preliminary)

Gross Domestic Product, 1st quarter 2009 (preliminary)
Corporate Profits, 1st quarter 2009 (preliminary)

Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- decreased at an annual rate of 5.7 percent in the first quarter of 2009, (that
is, from the fourth quarter to the first quarter), according to preliminary estimates released by the Bureau
of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent.

The GDP estimates released today are based on more complete source data than were available for
the advance estimates issued last month. In the advance estimates, the decrease in real GDP was 6.1
percent (see "Revisions" on page 3).

The decrease in real GDP in the first quarter primarily reflected negative contributions from
exports, equipment and software, private inventory investment, nonresidential structures, and residential
fixed investment that were partly offset by a positive contribution from personal consumption
expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, decreased.

The smaller decrease in real GDP in the first quarter than in the fourth reflected a larger decrease
in imports, an upturn in PCE for durable goods, and a smaller decrease in PCE for nondurable goods that
were partly offset by larger decreases in private inventory investment and in nonresidential structures
and a downturn in federal government spending.

Motor vehicle output subtracted 1.36 percentage points from the first-quarter change in real GDP
after subtracting 2.01 percentage points from the fourth-quarter change. Final sales of computers added
0.06 percentage point to the first-quarter change in real GDP after subtracting 0.02 percentage point
from the fourth-quarter change.

[...]

Corporate Profits

Profits from current production (corporate profits with inventory valuation and capital
consumption adjustments) increased $42.6 billion in the first quarter, in contrast to a decrease of $250.3
billion in the fourth quarter. Current-production cash flow (net cash flow with inventory valuation and
capital consumption adjustments) -- the internal funds available to corporations for investment --
increased $59.0 billion in the first quarter, in contrast to a decrease of $97.0 billion in the fourth.

Taxes on corporate income increased $31.6 billion in the first quarter, in contrast to a decrease of
$130.3 billion in the fourth. Profits after tax with inventory valuation and capital consumption
adjustments increased $11.1 billion in the first quarter, in contrast to a decrease of $120.1 billion in the
fourth. Dividends decreased $42.2 billion compared with a decrease of $32.8 billion; current-production
undistributed profits increased $53.3 billion, in contrast to a decrease of $87.4 billion.

Domestic profits of financial corporations increased $116.1 billion in the first quarter, in contrast
to a decrease of $178.7 billion in the fourth. Domestic profits of nonfinancial corporations decreased
$64.2 billion in the first quarter, compared with a decrease of $89.1 billion in the fourth. In the first
quarter, real gross value added of nonfinancial corporate business decreased, and profits per unit of real
value added decreased. The decrease in unit profits reflected increases in both the unit labor and
nonlabor costs corporations incurred.

The rest-of-the-world component of profits decreased $9.3 billion in the first quarter, in contrast to
an increase of $17.5 billion in the fourth. This measure is calculated as (1) receipts by U.S. residents of
earnings from their foreign affiliates plus dividends received by U.S. residents from unaffiliated foreign
corporations minus (2) payments by U.S. affiliates of earnings to their foreign parents plus dividends
paid by U.S. corporations to unaffiliated foreign residents. The first-quarter decrease was accounted for
by a larger decrease in receipts than in payments.

Profits before tax increased $152.1 billion in the first quarter, in contrast to a decrease of $499.2
billion in the fourth. The before-tax measure of profits does not reflect, as does profits from current
production, the capital consumption and inventory valuation adjustments. These adjustments convert
depreciation of fixed assets and inventory withdrawals reported on a tax-return, historical-cost basis to
the current-cost measures used in the national income and product accounts. The capital consumption
adjustment decreased $56.8 billion in the first quarter (from -$88.1 billion to -$144.9 billion), compared
with a decrease of $0.1 billion in the fourth. The inventory valuation adjustment decreased $52.8 billion
(from $158.1 billion to $105.3 billion), in contrast to an increase of $249.0 billion.

Full report is on the BEA's website.

 

[kronic]

Surprise fall in German unemployment: unemployment down to 8.2 % in May (from 8.6 % in April) (German definitions)

 

[PiMan]

I know this should technically go in some sort of June topic, but I was surprised to learn today that 40% of the world's AA rated banks are in Australia. We only have about a dozen banks all up.

World - You are doing pathetically.

 

[BSmith1068]

Who would have guessed a few months back that the Dow would be up over 200 points on the day that GM declared bankruptcy?

 

[Stolen Rutters]

Who would have guessed a few months back that the Dow would be up over 200 points on the day that GM declared bankruptcy?

That's not surprising at all. You knew GM would be replaced as one of the 30 companies on the Dow the day they declare. Makes sense actually. Pull one of the weakest companies out of a small stock index and you'll see a shift... the direction depends how the Dow declares the weighting of the old company as compared to the new one.

- edit -
Oops I spoke too soon. Apparently the delisting is "in process" and will not be effective until June 8th. Maybe money is flowing into companies in the index in anticipation? I have no idea why the index rose today, other than they must have priced down the bankruptcy already, and it's adjusting to the facts on the ground. Who knows?

Edit 2 - I finally found the MI unemployment numbers I like to track... Michigan's seasonally adjusted unemployment rate is 12.9 in April. May data won't be around for another couple weeks. http://www.milmi.org/

 

[Theige]

GM and Citigroup have both been dropped from the DOW, replaced by Cisco and Traveler's group.

Do they give any reasoning for Cisco and Traveler's?

That's a tech company, and a company whose main business is insurance. There are bigger, in terms of market cap and revenue, US tech companies out there (Apple, Google) and at least one conglomerate whose main business is insurance that I can think of (Berkshire Hathaway). I don't understand how they choose, seems pretty odd to me.

 

[BSmith1068]

That's not surprising at all. You knew GM would be replaced as one of the 30 companies on the Dow the day they declare. Makes sense actually. Pull one of the weakest companies out of a small stock index and you'll see a shift... the direction depends how the Dow declares the weighting of the old company as compared to the new one.

I don’t mean it in the sense of GM’s stock actually pulling down the DOW because it is/was part of the index, but rather the confidence in the markets would have been non-existent if GM declared – at least according to common wisdom a few months back. GM declaring bankruptcy would have meant the end of the economy as we knew it. I just find it highly ironic that on the day they actually did declare not only was it a non-issue for the markets, but the DOW had one of its better days in recent months.

(and yes – I know that the DOW is not the only (or even a good) indicator of overall economic performance)

 

[mrt144]

GM and Citigroup have both been dropped from the DOW, replaced by Cisco and Traveler's group.

Do they give any reasoning for Cisco and Traveler's?

That's a tech company, and a company whose main business is insurance. There are bigger, in terms of market cap and revenue, US tech companies out there (Apple, Google) and at least one conglomerate whose main business is insurance that I can think of (Berkshire Hathaway). I don't understand how they choose, seems pretty odd to me.

Apple and Google are very young (and Apple doesn't even have market share dominance in some of it's product markets) and priced too high to reflect on the price weighting mechanisms well.