Analysis: Wrong, gentlemen, wrong

Friday, 27 July 2001 16:17 (ET)

Analysis: Wrong, gentlemen, wrong By MARTIN HUTCHINSON, UPI Business & Economics Editor

WASHINGTON, July 27 (UPI) -- "If this is the bust, the boom was sure as hell worth it. You agree with that, right?" said Sen. Phil Gramm, R-Texas, to Fed Chairman Alan Greenspan at a hearing Wednesday. "Certainly," said Greenspan.

Wrong, gentlemen, wrong. This is only the very beginning of the bust, and by the end of it, nobody will think the boom was worth it.

Second quarter Gross Domestic Product, announced Friday, was up an anemic 0.7 percent. This, by itself is not a disaster, not even a "dictionary definition" recession, although if the second quarter figure is revised as much as the first quarter's was (which is likely -- June's durable goods figure was dreadful), it will be in negative territory by the time of the "final" figure in September.

What is of more concern, however, is that while real personal consumption expenditures increased by 2.1 percent in the quarter, real residential fixed investment increased 7.4 percent and real government expenditure increased by 1.6 percent (you can always rely on the Feds) non-residential fixed investment declined by 13.6 percent, compared with a modest 0.2 percent decline in the first quarter, and real exports declined 9.9 percent.

In other words, the productive parts of the economy, those tha provide jobs and sell goods abroad, are shrinking rapidly, while the unproductive parts, those that provide credit card bills, top-heavy mortgage debts, and, eventually, a budget deficit are still going very strong.

The Senate hearings on "predatory lenders" appear to have been well timed; when you've lost your job and savings but still have large credit card debts and a mortgage you can't pay, all lenders are predatory.

There's more bad news. As well as the second quarter figures, the Bureau of Economic Analysis on Friday announced downward revisions to GDP growth for 1998, 1999 and 2000, of 0.1 percent for 1998, 0.3 percent for 1999 and 0.7 percent for 2000. These revisions may sound moderate, but they go straight to the question of whether the much vaunted "productivity miracle" was real, because they revise output downward while keeping labor input the same, thus in 1999 and 2000's case revising the 2.8 percent and 4.2 percent productivity growth in the years to 2.5 percent and 3.5 percent.

As I set out in an earlier article, however, the productivity figures themselves are still inflated by a change made in 1996, putting business software in the statistics as a capital investment, and depreciating it over five years, rather than the 18-24 months that would be realistic. In a period of high software investment, as quintessentially was 1999-2000, this is very distortive, artificially inflating productivity by about 0.8 percent. Thus the "true" productivity growth figures for 1999 and 2000 should be 1.7 percent and 2.7 percent, pretty unimpressive for years at the top of a boom.

Further, 1999 and 2000 were periods of exceptionally high capital spending; thus a rise in labor productivity does not translate to a rise in total factor productivity, but partly to a rise in capital intensity. Even under the old figures, total factor productivity growth was no higher in 1992-1999 than it had been in the 1980s; the new figures would deflate the comparison still further, to a point where, in 1999-2000, total factor productivity may actually have declined, as investment capital was poured into uses that were unproductive even at the time, let alone in retrospect.

The productivity miracle was a myth, therefore, and thus the Greenspan justification for "irrationally exuberant" stock prices in 1997-2001 falls away. Here there is more bad news to come. Earnings on the S&P 500 stocks in the second quarter of 2001 fell by at least 18 percent, and the forecast after the warnings of the last couple of weeks is for a further fall of about 9 percent in the third quarter. Even while stock prices remain stagnant, therefore, the price-earnings ratio on the S&P 500 is escalating quarter by quarter.

One is a fool to forecast stock prices, particularly in the near term, but it would seem that the overwhelming balance of probability over the next year, probably beginning once the July-September tax cuts have been safely pocketed, is for a further massive drop in the stock market, to a level where stock valuations are around their historic mean, i.e. 5,000 for the Dow, 600-800 for Nasdaq and 600 for the S&P Index. This drop in turn will have a very substantial negative wealth effect, which will make the recession, probably not touching bottom until at earliest 2003 (and then recovering achingly slowly) a nasty one indeed.

No, senator, or chairman, it was not worth it. The boom was a bubble, but the bust will be real, and you ain't seen nothing yet.

There is an attempt under way by Clinton fans to write the economic history of the '90s as fast as possible, to cement popular opinion of it before the full price has to be paid. If the '90s can be portrayed as a carefree era of rapid growth, with no adverse consequences, then the pain we are about to endure can be blamed squarely on the present incumbents. The new book by Clinton Fed appointees Alan Blinder and Janet Yellen, "The Fabulous Decade," is the first attempt at this, but there will doubtless be more, a regular drumbeat rising to a crescendo in the media, as the perpetrators of the '90s follies realize that months, and then years, have passed since they left office, so that economic disaster is less and less their fault. By loudly proclaiming the "new economy" productivity miracle, and focusing on the actual '90s, not the equivocal record of 2000, they may succeed.

Ironically, by bringing in the tax cut so quickly, the Bush administration has ensured that its stimulative effects will only delay the recession rather than pulling us out of it, thus further muddying the intellectual waters and greatly aiding the Clintonian legend. Treasury Secretary O'Neill, too, wanders around making vaguely disconnected optimistic pronouncements, sounding like Herbert Hoover on Prozac, and confirming the impression that the Clinton economic legacy was sound, so whatever happens now is the fault of the Bushies.

As for Fed Chairman Greenspan, his drops in interest rates are doing no good, and will within the next few months be seen to have been quite futile, merely removing a possible weapon that could have been used to restart the economy once the bottom had been reached.

Thus there is no question that Greenspan's force-feeding of the money supply (with M3 now up 14.7 percent over the last 6 months) and his rapid-fire drops in interest rates, have merely postponed the inevitable recession and made the Clinton era's fingerprints on the economic unpleasantness less obvious. But then, in an earlier piece, written indeed before he began cutting, I pointed out that he is married to a staunchly Democratic Friend of Bill-and-Hillary, so that may have been the intention all along.

After all, a really nasty recession, combined with a whitewashing of the Clinton economic legacy, would make Hillary awfully hard to beat in 2004.

-- Copyright 2001 by United Press International.

http://www.vny.com/cf/news/upidetail.cfm?QID=206542

-- Martin Thompson (mthom1927@aol.com), July 28, 2001

Answers

Well, here's a new slant, and a good one, on our apparent plunge into recession.

-- RogerT (rogerT@c-zone.net), July 29, 2001.

It's a shock to think that our movement into recession will last into 2003. But, this article is put together so senseibly that it's hard to disbelieve.

-- LillyLP (LillyLP@aol.com), July 29, 2001.

I think everybody is jumping the gun here. The spend happy American consumers will pull us out of this. They have done it before and they will do it again.

-- Buck (bigbuck@trailways.net), July 29, 2001.

If he is right and the Dow falls to 5,000 and the NASDAQ to 600-800 all wealth effect will be gone, and we will have one hair-curling recession.

-- Chance (fruitloops@hotmail.com), July 29, 2001.

This sounds like the REAL DEAL TO ME. @ least from my perspective. I cannot see the OVERBURDENED DEBT RIDDEN Consumer with no Home Equity anymore & $25,000 grand in Credit Card debt @ 18+% interest. Unemployed or Under employed pulling us out of CRAP! Bankruptcies & Pay check to Paycheck Consumers are allready to POP & its not goint to take a Whole lots to make the HOUSE of Cards Collapse. I'm allready in Poverty So its not going to bother me near as much as these Yuppies that think nothing about spending $150 a Month @ Starbucks. And another $100 a Month on Cable TV.. While they can buy a Piece of GUM without there Visa Card. May the Economy rest in Piece! Geno-Ca

-- Geno-Ca (headturbo@hotmail.com), July 29, 2001.

The report on the miscalculation of productivity sent shivers down my spine. I was totally unaware of this. All along I thought we'd have a short mild recession , then our big advances in productivity, as supposedly happened during the late 90s, would pull us out of it and we would be off and roaring again.

Now all bets are off.

-- Billiver (billiver@aol.com), July 29, 2001.

How long does it take anyway, for consumers to run out of gas? Credit cards, mortgage stretching, and all other forms of living the future now are bound to catch up with we Americans--the great Extenders. You can only stretch a rubber band so far before it snaps.

-- Uncle Fred (dogboy45@bigfoot.com), July 29, 2001.

The credit card bubble continues to expand. We get four to six credit card offers a week, and lately at least half of them have offered 0 percent (yes, zero percent) promotional rates on transferred balances lasting well into 2002.

-- Cash (Cash@andcarry.com), July 30, 2001.

I'm getting all these frantic credit card offers, too -- even more than in the past.

They make me think of a Ponzi scheme nearing collapse...as the end draws near, it is critical for the next round of suckers (I mean, players) to get drawn in, or else there's no more money to be had.

The smell you notice in these mail offers is desperation, and it ain't pretty.

-- Andre Weltman (aweltman@state.pa.us), July 31, 2001.