Political Calculations on recession in 2013

Ironman @ Political Calculations presented a measure which might indicate recession in 2013: the number of publicly-traded U.S. companies acting to cut their dividend payments each month.
A year ago, we presented a different measure showing a hightened probability of recession.
It seems that the change in populaiton is the reason for the companies to cut dividents.

Disappointing Bernanke

Federal Reserve Chairman Ben Shalom Bernanke made several important statements in testimony to Congress's Joint Economic Committee that the Fed. In essence, they show the  impotence of economic theory and thus economic authorities basing their policies on wrong understanding. Several examples:
1. “.. Recent revisions of government economic data show the recession as having been even deeper, and the recovery weaker, than previously estimated; indeed, by the second quarter of this year--the latest quarter for which official estimates are available--aggregate output in the United States still had not returned to the level that it had attained before the crisis.”

Any economics, financial or monetary policy should include some expected level of uncertainty in real time measurements such as real GDP and inflation (the GDP deflator). If it is always a surprise, how can one build a reasonable response and policy? One should never characterize an economy with one number without uncertainty. It contradicts scientific methodology.

2. “Slow economic growth has in turn led to slow rates of increase in jobs and household incomes.”

This statement presumes that there can be a situation when slow growth may lead to higher rates of increase in jobs and incomes. Actually, all these processes are equivalent and no one leads to another. They coexist.

3. “ Consumer behavior has both reflected and contributed to the slow pace of recovery.”

This statement is beyond any understanding. Consumers are treated as a black box without any rules how “garbage in” is converted into “garbage out”. This is a typical economic statement which explains every deviation in real economic growth as consumer behavior expressed in demand/supply shocks. Nobody knows what drives these shocks and why the economy runs away from the balance. In a way, this explanation creates a malice loop without start and end.

4. “Other sectors of the economy are also contributing to the slower-than-expected rate of expansion. The housing sector has been a significant driver of recovery from most recessions in the United States since World War II. This time, however, a number of factors--including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of "underwater" mortgages (on which homeowners owe more than their homes are worth)--have left the rate of new home construction at only about one-third of its average level in recent decades. “

This deserves a special attention. Here Ben unfolds reasons one layer down. The housing sector slumps due to a number of factors. These factors are obvious results of the overall economic slump. What raises again the question on the reasons of the economic slump itself, and this is not housing as one can judge.

5. “ Nonetheless, financial stresses persist.”

Thus, the current financial crisis is a process which does not depend on real economic growth and when it is over, the economy will rocket up. Does that mean that the financial crisis could be healed without economic growth, but as it is? I would expect that the financial crisis will end when real economic growth recovers. In my opinion, it will happen in 5 to 10 years.

6. “In view of the deterioration in the economic outlook over the summer and the subdued inflation picture over the medium run ...”

This is a mere declaration of the status quo. However, the inflation projection is right as we showed many years ago

Political Calculations on GDP in Q3

There is an interesting post by Ironman @ Political Calculations. The author predicts the possibility of recession in the third quarter of 2011. It is in line with our projections of real GDP per capita in the US for the next five years. This post also uses the term "inertia" which we consider  the key phenomenon in real economic growth.

Recession? In 2012-2013!

Is a new recession coming? This is currently one of hot questions in economic blogosphere. We expect it in 2012 and 2013. Our prediction is based on a quantitative growth model.

The first post in this blog was devoted to real GDP growth and its relation to the change in a specific age population. We have presented a number of growth models for various developed counties and validated them by new data. The original model  for the U.S. links the change rate of real GDP per capita, dlnG/dt, to the change in the number of 9-year-olds, dlnN9/dt, and the reciprocal value of the attained level of GDP per capita, A/G:

dlnG/dt= A/G + 0.5dlnN9/dt (1)

where A is an empirically derived constant. One can rewrite (1) relative to N9 and obtain the following equation in a discrete form:

N9(t) = N9(t-1)[2.0( dlnG - A/G) + 1] (2)

where dt=1 year.

Figure 1 presents the result of the N9 modeling between 1960 and 2005. The agreement between the measured and predicted N9 is excellent and we have shown that these time series are cointegrated. Our model has passed all rigorous econometric tests and can be used for GDP forecasts when the quality of population estimates is good enough.

Figure 1. Measured number of 9-year-olds in the U.S. and that predicted from real GDP per capita.

After 2003, the U.S. Census Bureau has been publishing extremely smoothed and thus biased population estimates, which are not appropriate for the purposes of real GDP prediction. This unfortunate situation might be resolved only after the 2010 census. We do not have quantitative estimates of the 9-year-old population yet but can use the age pyramid presented in Figure 2, which we borrowed from the U.S. Census Bureau.

At first glance, the 2008-2009 recession was induces by a negative value of dlnN9/dt, as one can judge from the number of 12- and 11-year olds. These people were 9-year-olds three and two years ago. One should not forget that younger cohorts accumulate more and more people with time due to intensive immigration and thus the numbers of people above 12 years of age are all biased up relative to the younger generations.

 

The number of 10- and 9-year-olds is slightly higher than in two older cohorts, and thus, we observe a period of positive real economic growth in 2010 and in 2011(the growth rate of real GDP per capita is about 1% per year lower than that of the overall GDP). However, the fall in N8 and N7 (male) almost guarantees a new recession in 2012-2013. Hence, a new recession is around the corner. We will present a more accurate quantitative estimate when the 2010 census data are available.