V-shaped Recovery In Perspective

Gross Domestic Product SAAR , Bi l.$

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2500

Source: Bureau of Economic Analysis /Haver Analytics

Do me a favor: take a good long look at this graph: a good, long, look. This is GDP: the measure of an economy. I marked the official recessions in the shaded areas, so you can see visually what the impact of the previous recessions have been to the growth path of our GDP. People talk about how bad times were in each of these recessions, but the overall impact in the data is actually pretty small. Now take a look at the current recession and the dip. Now ask yourself this question: Do you think we bounce back to the trend line and keep growing along the same trendline? If so, how? That is what’s needed for that much touted V-shaped recovery to occur. Take a look again and try to come up with an answer. If you think it’s still possible, I’d be curious to know why.

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Government Consumption Expenditures & Gross Investment (SAAR, Bil.$) Net Exports of Goods and Services (SAAR, Bil.$) Gross Private Domestic Investment (SAAR, Bil.$) Personal Consumption Expenditures (SA, Bil.$) 3000

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-2500

Sources: BEA /Haver

Here I took the GDP measure and broke it out into its components: consumption, net exports, investment, & government. The first three components are measured on the right axis & government is measured on the left. While consumption has ramped up in this series to grow 4X, note that government has grown almost 12X in the same time period. Consumption may be the biggest component of GDP, but the one that has the greatest effect is investment. Investment in new capital goods drives efficiency, productivity, & a whole slew of other things that allows for the economy – and relative standards of living for all people – to rise. The downturn in investment may be the single biggest harbinger of bad things to come. Why? If investment is falling, it implies investment in capacity expansion is not needed. In other words, we’re at overcapacity right now. We have too much. Take a look at the next slide.

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(I / GDP)

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0.14

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0.10

Source: Haver Analytics

This is the percentage contribution of investment to GDP. It’s at its lowest point in the entire GDP time series stretching back to the Truman years, and it’s still cliff-diving.

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Private Residential Investment SAAR ,Bil.$

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Source: Bureau of Economic Analysis /Haver Analytics

The biggest reason we’re still cliff-diving is this chart: residential real estate. It’s classified here as an investment because like the other components of investment, real estate has a useful life that goes beyond one year. Consumption for the most part is for short-term purposes. For all of the talk about prices bottoming out and sales improving, this tells me that’s not happening in aggregate yet. We’re still coming back down from the peak of the mountain right now.

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Japan: Gross Domestic Product SAAR , Bi l.Yen

Gross Domestic Product SAAR , Bi l.$

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Sources: Cabinet Office, Bureau of Economic Analysis /Haver Analytics

Here, I wanted to do a comparison between the US and Japan. The Japanese Lost Decade in the 90s was a devastating period for its economy, but note what the graph shows – it was just a change in the growth path of their GDP. It didn’t reverse course, it didn’t implode. All it did was level off. Now look at the dip in our GDP growth. Does it look like we’re going to level off? Sure does to me. Also, you can see Japan did not have one super-long recession during this timeframe, but a series of recessions where growth slacked off. But growth was anemic. Does this sound like anything we’ve heard over the past 8 months? When people say recovery will be slow, this what they mean so take a careful look at this graph. They may not want to say it explicitly, but the V-shaped recovery is an absolute farce. Demographically, there are some striking similarities. Japan’s population started getting older 20 years ago with the number of pensioners increasing. We’re undergoing the same demographic shift here and if the Japanese experience shows us anything, it shows us pensioners/retirees don’t like to spend money. They need to save it because the costs of treating catastrophic illness or a prolonged hospital stay are immense when you’re on a fixed income. Given that we have a more obese nation than Japan does – and what that means for the cost of health coverage – what do you think that means for our pensioners? So it turns out we’ve seen this movie before. We know the plot and we know how it ends – and it’s not a feel-good story fit for the whole famn damily, either. The one difference Japan had was they had positive savings going into their Lost Decade. We do not. We overspent, overlevered, overeverything. Basically, we showed the Japanese they didn’t go far enough in paralyzing their economy & we could do a much bigger, much better job. And by golly, I think we can all agree: Mission Accomplished!

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