Friday, March 4, 2011

‘Animal spirits’ poised to go positive

See CalculatedRisk for news coverage.  The labor market is still on life support, half-dead. 

My interest is when the next collapse of confidence will occur in America.  In my view it is a necessary and sufficient condition for a recession.


Recall that my measure of animal spirits is

A = - (U – UMEAN)/sigma(U)

over a rolling 48-month span.

My forecast of the unemployment rate is judgmental.  It probably will not go up much between now and a presidential election, but any crossing to the low side of the adaptation level—so that things are better than we’re used to—will be a stretch, in my view.  And from there any increase in unemployment will quickly push animal spirits lower.  Also, there is a general awakening to the fact that the unemployment rate masks a lot of unemployment.  If the labor force hadn’t declined as steeply as it has recently, the unemployment rate would be 12 percent.  And to call work at subsistence wages “employment” is a bit of a stretch (Study: Most new jobs added in 2010 are low-paying). 

I am dealing with the distortions to the Treasury term structure due to ZIRP, and if anyone can send me monthly time series on Treasury debt from 1928 to 1952 I’d appreciate it.

Other times when animal spirits were in a weak approach to being positive like this are these:

  • Fall 1972, just before the Nixon reelection, and just before the economy spiraled into the deep ‘Seventies recession
  • Winter 1977, coming out of the ‘Seventies recession, with Jimmy Carter at the helm, trying to figure out how to whip inflation (which Carter did in 1979 after appointing Paul Volcker to the Fed)
  • September 1983, coming out of the steep ‘Eighties Carter-“Stay the Course” Reagan-Volcker double-dip recession, as Reagan was putting in the place the tax system that would help kill the American middle class (“Mourning in America”)
  • Spring and Summer 1993, as the economy was coming out of the Clinton recession of the early ‘Nineties, our first “jobless recovery,” as aggregate income and demand began to get skewed (and Clinton got busy assisting his buddy Bob Rubin in screwing the middle class by further deregulating Wall Street)
  • Winter and Spring 2004, in the jobless recovery from the Dot-Com bubble-burst-recession, as W. ramped up the wars to goose the economy, while further cutting taxes on the rich
  • And now….

On average, the next collapse of animal spirits was over four years away.  The shortest interval was from 1972 to the onset of the 1973-1975 recession, about a year.  We may have a longer cycle ahead of us—as wars grind away, commodities rally and fade and rally again, and the dragon inflation slowly awakens from its slumber—than my judgmental forecast allows.  This is not to say the economy will recover.  If we track the ‘Thirties in basic shape, we can remain in a depressed condition for the rest of the decade, before major war or revolution occurs.  But a collapse of confidence—and a new downturn—could begin in as little as a year, should the unemployment rate rise persistently.  Government budget cuts could accomplish this.  The collapse of animal spirits then causes multiplier effects through reduced MPCs and spending.  Increased interest rates would also cause massive fiscal stress (see ‘s current offering for a dismal meditation on this). 

The big difference, as and never tire of reminding us, is peak oil.  Unless a miraculous energy alternative is found, this “depression” is permanent.

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