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Predicting the US and Global Economy, 2013-14′ by Dr. Jack Rasmus

Posted in Uncategorized, tagged , , , , , on June 16, 2013| Leave a Comment »

Annually for the past three years this writer has made leading edge predictions about the trajectory of the US and global economies for the 12-18 months to come. The last previous set of predictions appeared in the January 2012 issue of ‘Z’ magazine. Eighteen months later, it appears most have materialized. The following briefly summarizes those prior predictions, and makes further predictions for the next 18 months, through December 2014:

I. Review of January 2012 Predictions

1. The forecast that the US would enter a double dip recession around late 2013 or 2014 is yet to be determined. However, the US and global economies both appear to be slowing significantly (see my blog piece ‘US GDP Longer Term Trend Analysis’), while China, the BRICS, and in particular Europe all are slowing even faster. Japan has engaged in a desperate and risky monetary stimulus that will fail in the longer term. Simultaneously, financial instability worldwide grows as asset bubbles peak and begin to deflate.

2. It was also predicted in the January 2012 issue that the US Federal Reserve would introduce a third version of its QE program. That prediction was realized, with the Fed introducing an open ended $85 billion a month liquidity injection.

3. A third previous prediction in January 2018 was that deficit cutting would begin again in ‘great earnest’ immediately following the November 2012 elections. That of course also happened, with fiscal cliff, sequestration, and all the rest.

4. In 2012 it was predicted Social security and Medicare spending would be cut a minimum $700 billion, based on what Obama had proposed in the summer of 2011, but backloaded into later years of the coming decade. That is yet to be determined, but appears likely as Obama’s 2012 budget again called for $700 billion in such cuts.

5. Two predictions in January 2012 did not prove accurate: that home prices would continue to fall and foreclosures rise. Single family home prices began to rise slowly in late 2012, albeit only one fourth of the original decline. More than 1.1 million new foreclosures were added to the roughly 14 million total to date in 2013

6. In the January 2012 predictions, it was forecast that US manufacturing and exports would slow in late 2012, which did, and the minimal job growth in manufacturing would level off and decline, which also has occurred.

7. Prior predictions forecast that jobs recovery would undergo a series of ‘false starts’ determined by seasonal and other statistical factors. The result would be little net reduction in total unemployment. This proved partially true: some jobs were created, but more workers than expected left the labor force entirely. The previous prediction of 24 million jobless compares to today’s official 21 million jobless. But the numbers are largely the same if one considers the 4-5 million ‘jobless’ who left the labor force altogether. As a related new prediction: There will be still be no sustained recovery of jobs over the coming year. Jobs will continue to ‘churn’, with high wage replaced with low wage, full time with part time/temp, current workers with jobs leaving the labor force and new entrants and lower pay taking their jobs, etc.

8. Past predictions were more accurate with regard to the global economy. It was predicted the Eurozone sovereign debt crisis would stabilize, then worsen again. The temporary stabilization occurred in the late summer of 2012. The worsening once again is pending. It was also predicted two or more Euro banks would fail. More than that failed in the periphery of the Eurozone alone, with others in Belgium, Netherlands and elsewhere.

9. It was predicted both France and Germany would enter recession in 2012 and the UK experience a double dip—all of which occurred.

10. It was predicted that global trade would slow and begin to contract in 2012—a prediction that also proved correct.
The following constitute this writer’s predictions for the US and global economies in the coming 18 months. (For a more detailed explanation of why these predictions, see the July issue of ‘Z’ magazine, and this writers article “Predicting the US and Global Economy”. This article will be posted on the writer’s website, http://www.kyklosproductions.com/articles, in late July. See also the writer’s weekly radio show on the Progressive Radio Network, ‘Alternative Visions’, archived on Wednesday, June 12, 2013, for an audio explanation of the bases for the predictions).

Economic Predictions: 2013-2014

1. The U.S. will enter a double dip recession around late 2013 or 2014, providing both of the following occur: that either U.S. policymakers continue deficit cutting and a more severe banking crisis erupts in Europe. Either event may be sufficient to precipitate recession. Both most certainly will.

2. The Fed will begin reducing its $85 billion a month liquidity injection significantly within the next 12 months. Monetary retraction will severely disrupt both stock and bond markets. A major stock market correction will ensue and may have already begun at this writing. The additional financial markets at greatest risk are corporate junk bonds, real estate investment trusts, and money market funds.

3. There will be yet another round of deficit cutting later in 2013 and it will be associated with a major revision of the U.S. tax code. That tax code change will include a big reduction in corporate tax rates, from the current 35 percent to somewhere around 28 percent, perhaps phased in over time. Multinational corporations will also get a sweet deal on their $1.9 trillion offshore cash hoard, paying less in the end than their legally required 35 percent rate. R&D tax credits and other depreciation acceleration tax cuts will also occur as part of the deal.

4. In the next round of deficit cutting, Social security and Medicare spending will be cut a minimum of $700 billion—already proposed in Obama’s 2014 budget—and perhaps much more.

5. The much-touted current housing recovery will stall and single home price increases will slow and perhaps even level off. (More than 1.1 million new foreclosures were added to the roughly 14 million total to date in 2013.) Housing will bounce along the bottom much like other sectors of the economy. Institutional speculators will continue to drive the market and once again convert it into a speculators dream, different in form from the subprime fiasco but similar in content.

6. Manufacturing and U.S. exports will slow still further, drifting in and out of negative growth as the global economy and world trade continues to contract further.

7. There will be still be no sustained recovery of jobs over the coming year (today’s official jobless is 21 million). High wage jobs will be replaced with low wage, full-time with part-time/temp, current workers with jobs leaving the labor force, and new lower paid entrants taking their jobs.

8. The current negotiations between the Obama administration and Pacific Rim countries to create a Trans Pacific Partnership (TPP)—NAFTA on steroids—will be concluded, but will not pass Senate approval until after 2014, or take effect until 2017.

9. With regard to the global economy, the Eurozone sovereign debt crisis will again worsen and the banking system grow more unstable. Austerity policy will focus more on direct attack on wages and benefits.

10. More economies in the Eurozone will slip into recession, including Denmark and perhaps Sweden. France’s recession will deepen. Germany will block the formation of a bona fide central bank in the Eurozone and the UK will vote to leave the European Union.

11. China growth rate will continue to drift lower and it will be forced to devalue its currency, the Yuan, as Japan and other currencies are driven lower at its expense by QE policies. A global currency war, now underway, will intensify.

12. Gobal trade will continue to decline.

13. Japan’s risky experiment with massive QE and modest fiscal stimulus will prove disastrous to the global economy, resulting in still more speculative excess and financial instability. Japan’s stock and asset markets will benefit in the short run, but not the rest of the economy in the longer run.

14. Capitalist economies worldwide will converge around QE monetary policies, more modest deficit spending cuts, and a more focused attack directly on workers wages and especially social benefits like pensions, healthcare services and the like—i.e. the U.S. formula. The consequence will be more income inequality worldwide and no noticeable positive impact on economic growth. The next financial crisis event may not come in the form of a crash of a particular market, but in the form of a grinding slow stagnation of markets in general. With general stagnation of the real economy, a slow drift into no growth scenarios is a distinct possibility.

Jack Rasmus
June 15, 2013

Jack is the author of ‘Obama’s Economy: Recovery for the Few’, Pluto Books, 2012, and host of the weekly radio show, Alternative Visions, on the Progressive Radio Network. His website is http://www.kyklosproductions.com; his blog: jackrasmus.com; and twitter handle #drjackrasmus.

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US GDP–On the Road to Double Dip?

Posted in Uncategorized, tagged , , , , , , , on January 30, 2013| 3 Comments »

US GDP data released on January 30, 2013 for the fourth quarter 2012 showed a decline in GDP of -0.1% for the last three months of 2012, thus raising the specter of the US economy, facing still further deficit spending cuts in 2013 amidst declining consumer confidence, may be on track for a possible double dip recession in 2013 or 2014 along with other economies in Europe, the UK, and Japan.

In the fourth quarter GDP numbers, government and business inventory spending led the decline. To the extent consumer spending played a positive role at all in the 4th quarter, it was largely driven by auto sales—stimulated by auto dealers offering buyers deep price discounts, virtually free credit with near 0% auto loan interest rates, as well new auto purchases in the northeast as a result of Hurricane Sandy’s destruction of existing auto stock. 2012 Holiday season retail sales data, in contrast, were otherwise not particularly notable and would have been much worse without the auto sales exception. How much longer auto companies can continue the deep price discounts and free credit remains a question going forward. Net export sales continued to sag in the last quarter, as the slowdown in world manufacturing and trade continued. And, as others have noted, an important source of past consumer spending and GDP growth—i.e. health care services—began to slow ominously at the end of 2012 as well, promising to continue that trend into 2013.

This weak scenario in the fourth quarter 2012, and the virtual absolute stop to US economic growth, was predicted on this writer’s and other public blogs in a piece entitled “US 3rd Quarter GDP: Short Term Myopia vs. Long Term Realities” last October 2012 (see jackrasmus.com, as well as in this writer’s April 2012 book, ‘Obama’s Economy: Recovery for the Few’).

Last October 2012, it was noted that the 3% growth rate in the preceding 3rd quarter, July-September 2012, period was artificially produced by record levels of one-quarter federal defense spending accounting for more than one third of total GDP growth in the quarter. That government spending surge was preceded by more than two years of federal government spending reductions, and thus the third quarter defense-government spending acceleration represented previously held back government spending, to be released right before the November 2012 elections. It was predicted in the above blog commentary on GDP 3rd quarter results that government spending therefore would decline sharply in the following fourth quarter—which it did. It was further noted business inventory spending was on a track to decline as well in the fourth quarter, and that US net exports, having turned negative in the third quarter, would continue to decline in the fourth quarter—all of which also occurred in the latest GDP report. The true US GDP growth trend for July-September was therefore not the 3% reported, but only around 1-1.5% for the third quarter when the appropriate adjustments are made. And that 1.5% or so been the average GDP rate for more than two years. Then the bottomed dropped out in the fourth quarter, as GDP collapsed to -0.1%.

So what’s going on? Is the fourth quarter GDP an aberration? A temporary one time event? Or a harbinger of a still further slowing US economy, moving more in line with global economic trends indicating a slow but steady further slowdown?

In the first quarter 2013, a number of negative developments in the fourth quarter will likely continue, along with new negative developments, together suggesting the first quarter 2013 GDP will at best look much like the fourth quarter—and could even prove worse.

First, more than $100 billion has been taken out of the economy with the end of the payroll tax cut last January 1. Second, consumer sentiment and spending is showing a definite sharp decline in the early months of 2013. Deficit cutting will intensify with a deal on the ‘sequestered’ $1.2 trillion agreement that will occur in March in Congress. Defense spending cuts projected will be reduced, but non-defense spending will occur and perhaps even rise. Consumer spending on autos, which has been a plus in 2012, cannot continue at the prior pace. Health care spending will likely continue to slow, as health insurance premiums of 10-20% continue to be imposed in the new year by price gouging health insurance companies looking to maximize their returns in 2013 in anticipation of Obamacare taking effect in 2014. Business spending that occurred in the fourth quarter to take advantage of tax laws will almost certainly slow in the first quarter. Industrial production and manufacturing will add little, if anything, to the economy and housing will contribute to growth through apartment construction. In short, the scenario is one of continued very slow growth.
It is not the deficit that faces a ‘cliff’; it is the US economy. As this writer has repeatedly written since last November, the ‘fiscal cliff’ was mostly an economic farce. Real forces were further slowing the real US economy. Those real forces are once again reasserting themselves. However, should Congress proceed with continued deep spending cuts in 2013, should the Euro economies, UK, and Japan continue to weaken, and should China-India-Brazil not succeed in reversing their economic slowdowns significantly—then the odds of a double dip in the US will rise still further in 2013-14, as this writer has repeatedly predicted.

The strategic question is ‘Why is the US economy so fragile and weak? Why has it been unable to generate a sustained economic recovery from ‘Epic’ recession since 2009? Why now, after five years since the onset of recession in late 2007, has the US economy stagnating and collapsed to virtually zero growth, once again? ‘
The answers to this are not all that difficult to understand. First, despite $13 trillion in free, no interest money given to banks, investors, and speculators by the US federal reserve for five years now, the banks still continue to dribble out lending to small-medium US businesses. No loans mean no investment mean no hiring mean no income growth for consumption, which is 70% of the economy. Similarly, large non-bank corporations continue to sit on more than $2 trillion in cash. Like the banks, they too refuse largely to invest in the US to create jobs, preferring hold the cash, or use it to buyback stock and pay shareholders more dividends, to invest it offshore, or to invest it in speculating with financial instruments like derivatives, foreign exchange, commodities futures, and the like.

At the same time, the bottom 80% of households, more than 110 million, are confronted with 5 years now of continuing real disposable income stagnation or decline. This income stagnation and decline translates into insufficient income to stimulate consumption spending, which makes up 71% of the US economy. What spending exists is fundamentally credit driven, not income driven. Thus car loans, student loans, credit cards, and installment loans rise and with it household ‘debt’.

The problem with the US economy therefore is fundamentally twofold: not only insufficient income but growing household debt. Together they result in consumption becoming increasingly ‘fragile’ (an income to debt ratio term), and therefore unable to play its historic role of generating a sustained economic recovery. Together, fiscal-monetary policies are rendered increasingly ‘inelastic’ in generating recovery as ‘multipliers’ collapse—to use economic jargon. The outcome of all this is ‘stop go’ recoveries, bumping along the bottom, or what this writer has called an ‘epic’ recession.

by Dr. Jack Rasmus, copyright 2013

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