Monday, December 3, 2012

Economic forecasting: stairsteps down, down, down

I don't generally do much with investment market type pieces unless they have something to say about the broader picture.  This one starts of with a chain of short term gloom (stock market is overvalued in relation to historical norms), swings into a mid-term pessimism (we are heading back into a recession even before we, or the Europeans, hit our fiscal cliffs), to long term (the Wester economy is past its growth peak even without peak oil, global warming, over population, et cetera).

Overlooking Overvaluation
John P. Hussman, Ph.D., Hussman Funds, 26 November 2012 (Hat tip: Mish)
Our estimates of prospective stock market return/risk, on a blended horizon from 2-weeks to 18-months, remains among the most negative that we’ve observed in a century of market data....
This is the short term bad news.

Here is the mid term bad news:
We continue to believe that the U.S. economy joined a global recession during the third quarter of this year. There is a fairly regular cycle of economic “surprises” in U.S. data that tends to run about 44 weeks – a figure that appears related to the tendency of economic forecasters to use standard “lookback” horizons to determine economic trends (see The Data Generating Process). As a result, the recession thesis has had to swim upstream, so to speak, during the positive portion of that cycle, which appeared to run through early November. Our expectation is that economic surprises are likely to be heavily to the downside as we move through the next 4-5 months.
While we don’t have many companions in our recession view, aside from ECRI, the coincident data has quietly become a companion of this view already. Industrial production actually peaked a few months ago, real sales have weakened, personal income has weakened, and despite some divergences among individual reports here and there, the new order, order backlog, and employment components of numerous regional and national Fed and Purchasing Managers surveys have also turned decidedly lower (see Stream of Anecdotes).
For the long term bad news the link to a column, which is based on a longer Jeremy Grantham report:
The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.
Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%...
Here are some of the reasons he cites for low future growth:
  • Population growth peaked in the 1970s, and man-hours worked will grow at around 0.2% per year.
  • Manufacturing productivity is high, but manufacturing is falling as a share of GDP. Currently it's around 9 percent of GDP. He expects it to fall to around 5 percent by 2040.
  • Service productivity is low and declining.
  • Resource costs are rising, and are likely to accelerate. "If resources increase their costs at 9% a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system."
  • Climate change will become increasingly unfavorable. He sees more floods and more damage to crops.
Note that the Grantham paper cited is siting this paper:

Is US economic growth over? Faltering innovation confronts the six headwinds (pdf)
Robert J Gordon, Northwestern University and CEPR, September 2012

With the timing of the three revolutions in place, we can now interpret history with a graph that links together many decades of dedicated research by economic historians to provide data on real output per capita through the ages. Figure1 displays the record back to the year 1300 and traces the “frontier” of per-capita real GDP for the leading nation. The blue line represents the UK tthrough 1906 (approximately the year when the US caught up) and the red line the US from then through 2007. Heroic efforts by British economic historians have established a rough estimate that the UK grew at 0.2% per year for the four centuries through 1700. The graph shows striking absence, the lack of progress; there was almost no economic growth for four centuries and probably for the previous millennium.
Blue line is Britain, the initial leading economy, being overtaken by the red line indicated United States.
Note, he is almost certainly wrong about the lack of progress.  Setting growth as a "per capita" measure in the Malthusian era prior to the industrial revolution has some serious problems.  Lots of farmers, with growing families, weighing down real progress at the much smaller top and middle parts of the economy.




PioneerPreppy said...

Mostly energy costs in my opinion. We have other energy available but retooling to it wills till drag the economy down.

russell1200 said...

Pioneer: I would extend that to say that it is population growth multiplied by per capita energy usage is one of the serious bottlenecks on our current economic situation.

But when you get to finances, you also have to look at the interplay of various cyclical and monetary interplays.