Delinquency update

Now it is reported that more than 5 million homeowners are delinquent on their mortgage payments.

How many of them do you think realize that working will only cost them?

Productivity Update = Really Bad News

As long as productivity continues to advance, this recession can remain mild or mediocre.

That's why the BLS release today (drastically revising its earlier estimates) is discouraging. It reported that productivity declined slightly.

The chart below (Fig 5 from my NBER working paper, revised with the new BLS data) compares productivity in this recession with previous ones. For the first three quarters, productivity was rising, making it quite unlike the 1970s and 1980s recession, and quite unlike the Great Depression of the 1930s.

In this situation, a slight decline is bad news because productivity ought to rise when employment falls. This is why I calculate a "productivity residual" -- what productivity would be if labor usage had been constant. The chart below (Fig 6 from my NBER working paper, revised with the new BLS data). The productivity residual change 2008 Q3-Q4 looks a lot like the 1970s and 1980s recession.



If the Q3-Q4 changes continue, this recession will look like no other since the 1930s in that both productivity and labor supply/labor distortions would be getting worse at the same time.

Update to NBER wp 14729

The BEA and BLS have revised the numbers that went into my NBER wp 14729, so I paste below versions of that paper's charts that reflect the latest numbers. Table 1's row of that paper needs to be revised to show +0.010 productivity residual change and +0.041 labor distortion change (previous estimates were +0.019 and 0.049, respectively).

It still looks like "labor distortions" explain the majority of Q4's employment decline, but now it looks an adverse "productivity shock" was pushing labor in the same direction.

Thus, if the Q3-Q4 changes persist, a lot (likely most) of this recession can be blamed on labor distortions, but (unlike the 2001 recession) some of the blame may have to be shared with adverse productivity growth.

9,000,000 doses of UI-steroids

I have been the most aggressive as to estimating the number of people who could have their mortgages modified, in November estimating roughly 1,000,0000.

Now the Obama administration says that as many as 9,000,000 households may have their mortgages modified.

In addition, it was reported today that one in five home mortgages are under water. Last fall, it was thought to be one in ten or one in twelve.

I do not see how employment can get much better this year if the Obama administration is going to magnify the problem.

[The Treasury has now unwittingly confirmed my calculations (originally here) of the terrible incentives of this program -- see their "Family C" example -- it shows how that family's reduced in come now is able to reduce its housing payments for the next five years.]

The Stock Market is Relevant

Professor Barro uses historical data on stock market crashes and depressions to predict the probability of a depression.

I agree with him that the stock market is relevant. In particular, the stock market drop of 2009 (sic) is particularly concerning to me in terms of what it anticipates in terms of economic growth going forward.

Professor Barro treats all stock market changes the same (more specifically, he assumes that the fundamentals driving the current crash are equal to the average of the fundamentals driving historical crashes). Given that we know some of the details of this recession, I don't think economic theory justifies his assumption. Some shocks, such as productivity shocks, should lower both economic growth and stock prices.

However, other shocks push economic growth and the stock market it opposite directions. One of those shocks is an increase in the supply of business investment, which I think is highly relevant in today's recession due to the fact that it began with the end of a housing boom that was competing so hard with business investment. For this reason, the crash of 2008 did not bother me.

The crash of 2009 is more worrisome, because it could well anticipate poor productivity in the future. So far productivity has been good in this recession, but 2009's stock market could well see that changing.

There is a third possibility: the 2009 crash is due to a shock like the anticipation of a dividend tax that directly harms stockholders but may have little effect on economic growth. I guess that's bad news itself: we would hope for option three!

What Does 6.2 Percent Mean?

Copyright, The New York Times Company

On Friday, the Bureau of Economic Analysis reported that gross domestic product fell at an annualized rate of 6.2 percent from the third to the fourth quarter of 2008. This was bad news, but some journalists have exaggerated the finding merely by misreading the report.

G.D.P. measures the total amount produced and spent in the nation during a particular time frame, like a year or a quarter of a year. Some say that G.D.P. “is the best barometer of the country’s economic fitness.”

The solid line on the chart below shows real G.D.P. for each of the four quarters of 2008. Adjusted for inflation, G.D.P. reached its peak of $3,513 billion in the second quarter (April-June). It was slightly lower in the third quarter ($3,508 billion). In the fourth quarter, it fell to $3,452 billion.

Thus, real G.D.P. in the fourth quarter was 1.6 percent less than it was in the third quarter. Why then is the headline “-6.2 percent”?

A quarter is a short period of time, and many readers are used to seeing changes expressed in percent per year. So the B.E.A. reports a negative 6.2 percent annualized, which means that real G.D.P. would be 6.2 percent lower if the quarter’s growth rate repeated itself three more times.

The chart’s dashed line illustrated the calculation. It assumes that G.D.P. will be 1.6 percent lower in the first quarter of 2009, another 1.6 percent lower than that in the second quarter of 2009, and yet another 1.6 percent lower in the third quarter of 2009. The accumulation of those changes is the negative 6.2 percent reported by the B.E.A.

This calculation is frequently misunderstood to mean that in the fourth quarter of 2008, G.D.P. was a full 6.2 percent lower than in the third quarter. For example, washingtonpost.com initially reported on Friday that G.D.P. shrank 6.2 percent in the quarter (the language seems to have been corrected for the print version), and an Associated Press report that appeared Monday also reported “an alarming economic contraction of 6.2 percent in the fourth quarter.”

A 1.6 percent drop is bad enough — let’s not quadruple it.

Mortgage Adjustments for the Unemployed

Citigroup announced its Homeowner Unemployment Assist program. Yet another reason why work pays less these days.

NONRESIDENTIAL Construction Spending Bad News

The Dept of Commerce says that (seasonally adjusted) NONRESIDENTIAL construction spending declined more in January than it did in the entire fourth quarter.

That is bad news because:

• nonresidential construction had been increasing during most of the recession
• the stock of nonresidential buildings in place is already pretty low, thanks to the housing boom.

We can do without housing construction for a while, but not without nonresidential building UNLESS our economy is due to shrink.

The economy did shrink 1.6% in Q4, I have not yet done the work required to determine whether

• the low construction spending in January is just an adjustment to the Q4 reality, or
• it reflects even worse expectations about the future, or
• it reflects the onset of a credit crunch.
  

Still No Payroll Collapse

At the end of September, both Democrat and Republican politicans tried to scare us into believing that payroll spending would collapse.

The chart below (including the BEA's release this morning) shows that payroll spending has barely hiccuped, let alone collapsed, in the four months since those alarms were issued.

Although something is clearly awry in this economy, it is hard to show that a credit crunch is that important, given that trillions of dollars continue to flow from business to households in the form of wages and other personal income items.

Consumption and Personal Income Rise in Jan

Regardless of whether you measure it real or nominal, per capita or aggregate.

January real personal income per capita was higher than in any month in U.S. history, with the exception of May 2008.

This is the second time in three months that real consumption spending has increased.

Even bigger news: the news media is actually reporting on this not-so-terrible data.