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Published by: richardck30 on Jul 31, 2010
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Are We There Yet?
 1 7/30/2010
Are We There Yet?Driving with No SpareA Muddle Through EconomyAbsent a Policy MistakeMaine and Turks, Etc.By John Mauldin
“… [this economic condition] has been brought about by policies which
the majority of economists recommended and even urged governments to pursue.We have indeed at the moment little cause for pride: as a profession we have
made a mess of things.”
Friedrich August von Hayek, Nobel Speech 2010 1974Those of us who have taken young children on long road trips to somewhere they
wanted to go are familiar with the plaintive question “Are We There Yet?” As a nationand indeed the developed world, it is not unreasonable to be asking “Are We There Yet?”
about the road to recovery. The NBER, those self-appointed economists who are theofficial keepers of the score sheet of recessions and recoveries, have yet to tell us we areout of recession. Yet the economy is growing. Kind of. Today we look at the most recentdata on second-quarter US GDP (which came out this morning), and even though it isbackward-
looking data, we’ll see what we can discern that might help us chart thedirection of the future. And then, if there is time, I’ll highlight what is a very serious and
growing problem for our state and local governments. There is a lot to cover and so, with
no “but firsts,” let’s dive in.
Are We There Yet?
The economy of the US grew at a weaker than expected 2.4% in the secondquarter, but the first quarter was revised back up to 3.7% on the strength of stronger-than-projected inventory rebuilding. But the recession years were revised downward rathersignificantly for this late in the cycle. We find now that the recession was worse than wethought, taking the economy down a total of 4.1% during the recession. As of today, weare not quite back to where we started, still down 1%. That means it is quite possible that
we could finish the year and still not be “there yet.” (To see a 1% rise in GDP we wouldneed to see a 2% annualized rise for the rest of the year. We’ll look at that possibil
ity in afew paragraphs.)
Let’s look at a few charts courtesy of the Dismal Scientist, at 
www.economy.com. First, recent GDP numbers:
Are We There Yet?
 2 7/30/2010If this were an average recovery, the economy would be growing at a 6% rate atthis point, which pretty much says it all about our current 2.4% number. Further, 2.5years after the beginning of a recession, we are typically already 8% higher than the priorhigh. This is a very tepid recovery, indeed.
 Now, let’s look at the ac
tual numbers.
There is a category called “Final Real Sales” you can create by subtracting the
inventories number from the real GDP number. That reveals that final real sales grew by1.3% last quarter. This is against what is normally a 4% number this far into a recovery.
Is it any wonder that small businesses are asking “When will we get there?”
 Next, look at the contribution from fixed residential investment. It has beennegative or flat for six of the previous seven quarters. This time it added 0.6% to last
quarter’s GDP. But the housing market is lousy. What gives?
 It seems that the housing tax credits induced home builders to increaseconstruction by an annualized 28% last quarter. That was in spite of there being 18.9
Are We There Yet?
 3 7/30/2010million homes vacant in the US (an all-time high), and the number of foreclosures risingby as much as 100% in some cities. (Hat tip: David Rosenberg)
enders are accelerating foreclosures as borrowers fall behind in mortgagepayments after the worst housing crash since the Great Depression. A record 269,962 UShomes were seized in the second quarter, according to RealtyTrac Inc. Foreclosuresprobably will top 1 million this year, the Irvine, California- based data company said in a
July 15 report.”
(Daily Reckoning)
 Ownership rates are falling and heading back to more traditional levels. Mortgagedelinquencies are rising as the unemployment level stays persistently high. It is my guessthat residential real estate will not contribute much if anything to GDP this quarter.What about inventories? That has been a strength the last few years, adding a lotto our national growth. But inventory-to-sales ratios are at an 8-month high, whichsuggests that businesses may back off from increasing inventories at the recent pace.Government spending? The bulk of the stimulus programs are going away in thelatter half of the year, especially those that benefited state and local governments.Governments are slated to cut back spending or raise taxes by almost 1% of GDP. Asmany as 500,000 government employees may lose their jobs.On a positive note, fixed nonresidential investments were the best they have been
in several years. Let’s hope that businesses keep it up!
A Muddle Through Economy
All that being said, if we take away housing and project slower inventory growthand less government spending, we could see the GDP number for this quarter fall to the1% range and stay there for the rest of the year. Even the normally bullish Economy.com
suggests that growth will be “sluggish” in the las
t half of the year. All in all, the verydefinition of a Muddle Through Economy.Until we start to see a real rise in employment, it is hard to get too enthusiastic.Everyone seems to be happy that initial claims have come down from their highs. Butthey
have gone sideways for almost a year. Let’s look at two charts. First, the last five
years of initial claims.

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