COMMENTARY: Well-known liberal economist, Dean Baker, recently wrote that those predicting a double dip recession are wrong. Beginning with an argument that those seeing a double dip coming today are the same crew who, back in 2007, were saying there would be no crisis or recession, Baker goes on to provide selective data in support of his argument that a double dip is not possible. In this reply to Baker, I address each of his data points and challenge his erroneous assumption conflating all those predicting double dip today (including yours truly) with those who denied recession coming back in 2007.
“No, Dean Baker, a Double Dip Recession is Quite Likely”, by Jack Rasmus, copyright August 2011
In a blog today, August 28, on Znet, liberal economist, Dean Baker, argued that Double-Dip Recession is Unlikely. In his piece Baker maintains that everyone who is now predicting double-dip are the same forecasters who, back in 2007, were erroneously predicting there would be no economic crisis or recession in 2008. Baker then makes his main point: There is no reason to believe that forecasters are any more knowledgeable about the economy today than they were four or five years ago.
But contrary to Bakers rhetorical point, not everyone forecasting a double dip today were predicting no crisis back in 2007.
Baker conveniently forgets that some of the most prescient economists who predicted the recession and financial collapse back in 2007 are also now predicting that a double dip in the coming months is increasingly likely. In other words, not everyone forecasting double dip today were the polyannas predicting no recession back in 2007. How about Nouriel Roubini, Dean? An economist who famously predicted the financial collapse and recession back in 2006-07, and who now believes double dip is more than 50% likely? I would add myself, Jack Rasmus, to that short list as someone who also publicly predicted the recession back in 2008, and has been predicting a double dip as increasingly likely ever since last April 2011. In fact, I predict its more than a 50% chance with the odds rising weekly.
Baker goes on to define a recession as meaning the economy is actually shrinking. Presumably he means that gross domestic product, GDP, the overall measure of the economy, must turn negative for a recession or double dip to happen. But if he means GDP must decline for a double dip to occur, he should reconsider. GDP is not the indicator by which a recession is defined, whether initially or in the case of double dip. In fact, there is no official definition of recession, including the popular but incorrect view of two consecutive negative quarters of GDP decline.
A recession is determined by the National Bureau of Economic Research (NBER) group of economists. They loosely consider a host of indicators to determine whether a recession has occurred. That includes industrial production, sales, exports, stock market shifts, employment and potentially other factors. So, the economy doesn’t necessarily have to shrink according to any single indicator, and that includes GDP. In fact, some indicators may actually still rise and a recession may still occur, so long as some (undefined) collective weight of other factors are in retreat.
To show a double dip is not on the horizon, Baker then looks at the condition of several economic indicators as they exist in the present. To support his view of no double dip coming, he argues that housing and car sales are already so low that it is hard to envision them falling further. That’s true. Housing is, and has been, in a veritable depression–not a recession–for four years now. All indicators–home prices, housing starts, mortgage loan applications, home sales, etc.–are 50%-75% off their peak. Housing did experience a very short and shallow upturn for one quarter in early 2010, but then it declined again. But all that means is that housing and construction in general, which make up about 9% of the economy, have already entered a double dip months ago. To say they cant fall further is not much of an argument against double dip. They’re already there.
Baker looks next at consumption, 70% of the economy, and notices that it at present is growing slowly and there’s no reason to see how it will not continue to do so. He adds that 117,000 jobs were created last month, a weak but nonetheless positive statistic revealing some growth.
But he should take a second look at the job statistics. As this writer pointed out in a blog entry last month, the 117,000 purported job gains were from only one of the two surveys conducted by the Labor Department. The other survey, the one Baker ignores, and the one that picks up small business and self-employed much better, showed a decline of 198,000 total jobs last month. Moreover, like Housing, the jobs market already experienced a double dip last summer 2010. It is now headed for a triple dip.
And so far as consumption is concerned, Baker should again look forward–not at the present–if he wants to predict or deny the prediction of double dip. He should look forward, to where conditions are headed if he wants to make a forecast. Too many economists today typically forecast the present, not the future. Its safer that way. However, in so doing, in playing it safe, they are repeatedly incorrect. They miss the true shifts and turning points in the economy. And were at such a turning point once again.
Baker is also wrong that consumer spending will continue at its slow but positive rate of growth. Consumer sentiment, measured by the University of Michigan index, has been in free-fall the past few months. As the latest index reported last Friday showed, it is now at its lowest point since November 2008, which was the month that consumption fell through the floor in its worst collapse since 1945. OK, Baker will no doubt reply that consumer sentiment is volatile and doesn’t always reflect how consumers will actually spend. In answer, this is often, but not always, true. When the conditions are overwhelmingly negative, consumer sentiment does predict consumer spending. And conditions in the US and globally are now converging toward an overwhelming common outlook of economic slowdown. Time will tell in the next few months if this writers perspective on that is correct, or if Bakers is more accurate.
Economists are often so enamored with numbers they cannot assess the psychology and behavior of consumers and investors very well, especially at the turning points in the economy in which we have now entered. Psychological viewpoints–whether consumer, business, or investor–are not easily quantified. And most mainstream economists ignore what cant be put in numbers–another reason why they forecast and predict so badly when important economic shifts occur.
In further support of his view of no double dip coming, Baker also cites business equipment and software spending, and notes that it has been growing at a rate of 5%-10% and is not likely to turn down sharply in the near future. But much of the business spending on equipment and software has been slowing rapidly over the past year. From 23% it fell to 14% to 8% and in the second quarter of this year to barely 5%. The manufacturing sector has been the big buyer of equipment and software. Manufacturing has been driven in turn largely by US exports, purchased by Asia and Europe. But last month manufacturing indexes in the US and around the world both fell by their largest percent in decades. In other words, the global economy is slowing rapidly everywhere. Not just the periphery economies of Europe, already in recession, but the main economies of France, Germany and UK, all now show virtually flat and stagnant growth. The big economic engines of Europe are all about to tip into recession themselves in the coming quarter, this writer predicts. Ditto for China, India and even Brazil, which are not in recession but whose economies are projected to slow by half. That means a sharp drop off in demand for US exports, which in turns means manufacturing in the US turns from the current flat to a future negative. And that means business spending on equipment and software will decline as well, continuing the already downward trend.
Again, one must look into the future to predict the future, not simply look at the present and crudely extrapolate forward to make a forecast. But that s the forecasting technique of mainstream economists, and apparently Baker as well.
Baker further underestimates how much the contraction underway in the government sector, both federal and state and local, will slow the US economy in the months to come. The government sector is responsible for about 20-22% of total US economic growth. Baker again looks at the present and sees only a 1% to 2% contraction today and he extrapolates that forward. He does not look beyond to see how the government sectors contraction will soon deepen further. Just look at the budget cutting that has occurred in recent months and will escalate in the coming months. There’s the $38 billion cut last spring by Congress, the $1 trillion cut in the August debt deal, and the guaranteed minimum additional $1.2 trillion in further cuts by the end of the year. That will add to the 1%-2% already occurring.
Indeed, this writer predicts the cuts due by December 23 will approach closer to $3 trillion, well beyond the August mandated $1.2 trillion, as Obama and the Republicans attempt to outdo each other in their competition to win the title of biggest deficit cutter.
That’s a total of $4 trillion plus cuts in government spending. Not all will occur the coming year, of course, but at least $200 billion will. Add to that another $50-$75 billion in projected state and local government cuts and the total is around $275 billion. Then throw in the government spending multiplier, which is about 1.5 times the original cuts, and the total cuts to spending impacting the economy next year could reach about $400 billion. That’s about double Bakers predicted 1.5% continuing government sector contraction.
Baker gives himself one small window of escape from his prediction of no double dip. He concludes by admitting double dip might occur if a collapse of the euro led to a Lehman-type financial freeze up.
As this writer predicted two years ago in a Z article, at least two sovereign defaults would occur in Europe and the euro will break up into a type of two tier currency. If Italy, or even Spain, are among those two it is almost certain one or more French or Swiss banks will become the next Lehman (an investment bank that precipitated the banking panic of September 2008 sending the global economy into recession within two months). And if the French banks implode, it will quickly spread to the US banking and financial sector. Credit will freeze up again across multiple markets and push the already slowing US economy, that grew less than 1% in the first half of this year, into a double dip. Contingency measures are already hurriedly underway in the US government, Federal Reserve, Treasury and among big US banks today to plan to contain this very scenario.
Baker cites this exception of a Euro crisis but then qualifies himself to argue such degree of blundering is difficult to envision. Well, its not really so difficult to envision. Just follow the European business press and the picture looks inevitable.
And envisioning is what forecasting and predicting is all about, isn’t it? Unless of course one is content, as most mainstream economists, and perhaps in this case Baker as well, to safely forecast the present instead of the future.
Jack Rasmus
August 28, 2011
Jack is the author of Epic Recession: Prelude to Global Depression, Pluto Press and Palgrave Macmillan, May 2010 (in which the double dip on the horizon was predicted); and the forthcoming Obama’s Economy: Recovery for the Few, January 2012, same publishers.
Gave up rapidly on an interview of Baker when he couldn’t foresee declines in sectors not already bottomed out. I had the impression that businesses were already seeing such declines. Thanks for your confirming analysis.
The NBER also released a survey this year that found that half of adults could not deal with a $2,000 emergency within 30 days, if one came up. They would have to borrow from friends or relatives, or sell something. Consumption fragility, to borrow a Jack Rasmus phrase.
[…] by some economists who foresee a second dip, including one of my other favorites, Jack Rasmus, who took exception: Baker conveniently forgets that some of the most prescient economists who predicted the recession […]
With the federal austerity budget for everything except the national security state (military, intelligence and homeland security) I don’t see how the country avoids a continued collapse of the economy. I prefer to call it a continued collapse because the recession did not end for most Americans. Only the wealthiest are seeing any growth in their resources and that is not from an expanding economy but from government policy that continues to funnel wealth to the top.
Kevin Zeese
ItsOurEconomy.US
I was scanning something else about this on another blog. Interesting, your perspective on it is diametrically contradicted to what I read earlier. I’m still mulling over the different points of view, but I am tipped heavily toward yours. And irrespective, that’s what is so super about advanced democracy and the marketplace of ideas on-line.
I think Baker is getting a worse wrap on this position than he should. I feel that his main point is that things are terrible right now and will get worse if we continue on the same path, but that we don’t need a second recession to know that.
Furthermore, focusing our political energy on debating the likelihood of another recession could have the effect of making the population feel like they dodged the bullet if it doesn’t materialize. All the while foreclosures will continue and unemployment will remain high.
He may have spoken with too much bravado, but remember that Baker is half polemicist; his mantra is that the mainstream left should not accept the conventional framing of issues.
You have offered a sensible, reasoned comment. But allow me to clarify why I wrote this response to Baker. He is a serious and closely watched commentator often offering a labor-oriented view. But he’s dead wrong on this. It is important to tell the absolute truth about the economy to folks nowadays, since they are getting so much obfuscation and outright lies about its condition and where it’s headed. To argue, as Baker does, that there will be no double dip creates confusion as to the true condition of the economy. One shouldn’t water down the seriousness of the economic situation today, simply because it ‘may’ get better in the future. And when Baker additionally tries to dump serious critics of the economy today in the same receptacle as the ‘know-nothing’ economists who apologized for the Bush regime right up to and through the crisis in 2007-08, he does a double disservice to the truth. To try and argue the economy today is not all that bad just gives a free rein to Republicans and the right to explain how bad it really is–and then to debunk the idea of any new stimulus and propose their austerity solutions. It abandons the field of economic analysis to the right wing crazies trying to resurrect Austrian classical economic nonsense as solutions–like Ron Paul and Perry and other economic analysis airheads. Left economists and intellectuals should be focusing today on formulating solutions to the crisis in detail and specifics; and to do this it is necessary to have an absolutely honest assessment of what is happening–regardless how negative the conditions may appear. Obama will soon come out with another limpid solution to the crisis that will not solve anything. Congress will this year cut spending, not by $1.2 or $1.5 trillion but closer to $3 trillion, I predict. There will be defaults in the Eurozone, causing eventually a banking crisis there, that will spread to the US banks, several of which are already becoming increasingly fragile (eg. Bof A, Citigroup). Japan is descending into recession fast, as has the peripheral economies of Europe and soon the main engines of France, UK, and even Germany. China, India and Brazil are slowing their economies. There is overwhelming evidence of a global double dip in the works. To deny it by focusing on select immediate economic indicators in the US, and not longer term directions, as Baker does, is to confuse folks.
Here’s a great example of how reality is out of touch with the definition of recession,
Poll: 8 in 10 say it’s a recession
http://www.politico.com/news/stories/0911/62539.html
. . . even though, by definition, the U.S. is not in a recession.
So far, it is looking like Baker is right again, and you are wrong.
Once again you, and Baker, are looking at short term economic indicators. You are forecasting the present, and not the future. You are no doubt referring to the questionable data on employment last month and today’s hyped housing numbers. Job numbers for the past six months are averaging less than 100,000. Last month’s 120,000 were 40,000 retail Xmas jobs–virtually all part time and temp that will disappear next January. The housing numbers are apartments building and are in response to what looks increasingly like a QE3 coming next spring, that will drop mortgage rates closer to 3%. Retail sales numbers recently are driven by banks’ issuance of credit cards once again and a drop in the household savings rate. These cannot and will not continue. Look at the longer picture: first, the Eurozone is headed into a deep recession. Most of it is already there. China is contracting sharply, heading for a hard landing; so is India, Brazil and other sectors of the global economy. That means global manufacturing is in for a contraction, and that sector of the US economy will perform poorly next year. As for consumption, household real income declined by nearly 4% last year and more of the same coming this year. The government sector will continue to contract in 2012, especially state and local. The problem with guys like you and Baker is that you cannot see beyond 2-4 weekss and you are mesmerized by the immediate data. You cannot forecast the turning points in the US and global economy with your limited models. The big picture is rapidly slowing global economy, Eurozone crisis and global contraction of bank lending, continual downward pressure on US household income (which ultimately determines consumption), and continuing deficit cutting and government spending contraction. When I predict a double dip, it has always been in the timeframe of late 2012-early 2013–or earlier if the Eurozone and or China contractions emerge significantly more severe by mid-year 2012. So, address those arguments if you wish, and not the day’s latest (often questionable) numbers. It’s that kind of short-term view that makes guys like you miss the 2007-08 crash, erroneously predict rapid recovery after 2009, and now fail to see what is coming further down the road.