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VIDEOFirst Priority: Repair the Credit System
Only way to meet deflationary debt crisis.
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Let's start with some charts from my friend Simon Hunt, out of London. The following chart shows World Merchandise Export Values and World Industrial Production falling off a cliff. This is the worst such period since the end of World War II. And as the data we'll examine next indicates, it's likely to get worse. Simon notes that consumer spending is about 60% of world GDP, and it's not just in the US that spending is slowing down. Consumers all over the developed world are in shock, as assets such as stocks and houses, real estate, and commodities fall in value. Unemployment is rising.
The almost 2,000,000 jobs los in the US over the last 3 months is a catastrophe. China lost a reported 20,000,000 jobs in the last quarter, and migrant workers came back to the cities after Chinese New Year to find factories and jobs simply gone. Unemployment is rising rapidly in Europe, as the demand for goods has clearly been falling since last October.
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This means that inventories are too high -- not just in the US, but in factories all over the world -- and production is slowing down.
Look at the recent US trade deficit. Many market analysts rejoiced that it dropped to a 6-year low, just below $40 billion. But the internal numbers weren't as positive. Exports are dropping faster than imports, as seen below.
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"After growing in every quarter during the last 3 years, real goods exports fell 34.9% at an annual rate, the worst performance in more than three decades." (www.dismal.com) And a falling deficit means that US consumers have to save more to balance out less foreign buying of US debt. There's no free lunch.
Let's look at a little bit of insider economics trivia. The US government first estimated that GDP last quarter was a negative 3.8%. I wrote when that number first came out that it would be revised downward.
When the government makes its initial forecast of GDP 1 month following the end of a quarter, it has to estimate what exports and imports were for the last month of the quarter. There's simply no data. For the fourth quarter of 2008, they estimated that the trade deficit would be about $34.5 billion, in line with what most economists thought. As it turns out, each $1 billion represents about 0.1% of GDP. So being off about $5 billion from the actual total of $40 billion subtracts another 0.5% of GDP from the previous estimate of -3.8%, taking it to a -4.3%.
Further, the government makes estimates about inventories which also affect GDP. When final numbers on real inventories come in, it will also add to the negative GDP estimate. Expect GDP to be in the range of a negative 5% for the fourth quarter, and the current quarter is likely to be almost as weak.
In the US, the leading economic indicators (LEIs) continued to decline, but the leading indicators in the rest of the world were often much worse. (The chart below is again from Simon Hunt.) These are results from the OECD's analysis of the leading economic indicators for a variety of countries. Notice in particular how poorly Russia and China are doing! Also remember that the LEI is about how the economy is expected to be doing in 6 months, not what's going on right now. This argues that there's no real global turnaround in the picture before the end of the third quarter, at the earliest.
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