The recession is destined to continue all through this year and into 2010. Next Friday's employment report for December is projected to decline an additional 500,000, with the official unemployment rate inevitatably rising from last month's 7.2 percent to a cyclical peak of between 10 and 11 percent, probably in 2010. Unfortunately, this official unemployment measure understates the economic pain of those forced by circumstances to take part-time employment or have become so discouraged at the absence of employment opportunities to no longer be counted as actively seeking employment. By such measures the unofficial unemployment rate is already at 13.5 percent. Judging by the rise to 588,000 in intial claims for unemployment benefits in the week of January 24, up from 585,000 the week before, and the large number of announced layoffs, both the worsening unemployment picture and weakening economy will persist for an extended period.
The steep 3.8% plunge in fourth quarter real GDP, versus a 0.5% third quarter decline, reflects a pronounced broadening as well as a deepening in the recession. As bad the decline was, it was not as steep as the 5% to even 7% drop that I and some others feared. But, then there is always the next quarterly report for the current first quarter.
Except for inventories and Federal government spending, virtually all major sectors of the economy were slip sliding away in the fourth quarter. And though inventories rose, the rise was undoubtedly unintended and unwanted and therefore certain to lead to further economic weakness as excessive inventories are trimmed. Without the pervere rise inventories,real GDP would have actually declined 5.1% in the fourth quarter and 1.3% in the third quarter.
The sharply weakening sectors contibuting to the 3.8% reported fourth quarter decline in real GDP include exports, personal consumption spending, and both residential and nonresidential fixed investment. Autos alone accounted for 2% of the 3.8% real GDP drop.
A 19.7% decline in real exports in the fourth quarter, versus a 3.0% rise in the third quarter, underscores the depth of the global recession. At the same time, a 15.7% fourth quarter decline in real imports, a deepening from the 3.5% third quarter decline, attests to the profound worsening of the US recession.
Total real nonresidential fixed investment in the US fell 19.1% in the fourth quarter, versus 1.7% in the third quarter. This the expected response to the broadly based economic weakening in US and foreign business, consumer spending and state and local government spending. Residential fixed investment,which has been in a prolonged decline, accelerated its rate of decent to 23.6% in the fourth quarter, from 16.0% in the third quarter.
Real personal consumption expenditures declined 3.5% in the fourth quarter, a sharp turnaround from a 3.8% third quarter rise. As might be expected, consumer spending in the typically postponable durable goods sector was down steeply, by 22.4% in the fourth quarter, extending the already sharp 14.8% third quarter drop. Of the 3.8% fourth quarter decline in real GDP, the drop in consumer spending accounted for 2.5 percentage points or almost two-thirds of the total.
Perhaps the most significant aspect of the GDP report was the inflation data. The overall GDP deflator, the broadest measure of GDP inflation, edged down 0.1%, crossing the threshold into deflation, a sharp deterioration from 3.9% in the third quarter
Consumers are rebuilding their saving out of disposable income, a typical recession response. In the fourth quarter savings rose close to 3% of disposable income, up from 1.2% in the preceding quarter and a marked increase from the less than zero savings in 2005.
Treasury bond yields rose further this week, on fears of inflation in the wake of the stimulus package and concern that the size of the budget deficit will force Treasury borrowing to outstrip domestic and foreign demand. Despite this development, I would not recommend shorting Treasuries, as some respected analysts recommend. The Fed this week reiterated its warning that it is considering the purchase of long-term Treasuries. Mounting signs of deepening deflation point to lower, not higher bond yields. The weakness of the economy, the prospect of new reasons for panic safe-haven buying of Treasuries some time ahead, including the almost certain failure of additional financial institutions, also point to eventual renewed declines in Treasury bond yields. Bank credit is continuing to tighten for large, medium and small businesses and commercial real estate, a portent of continuing severe economic problems and, over time, a plus for long-term Treasuries. The sharpest January decline in equity prices on record is certainly not a sustained offset to Treasury bonds. This past week gold was one of the few sectors to show price bouyancy. These are not the signs of even a glimmering of hope of recovery on a far distant horizon. Treasury bond yields will decline again and sharply, in at least a retest of their prior lows. That is also the historical cyclical pattern, not only in typical recessions, but well into the first stages of economic recovery. And this is no typical recession. It is, and will continue to be, far, far worse.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
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