As Government Shrinks, Private Sector Leads Recovery
By Barry Ritholtz - February 11th, 2012, 10:30AM
Another terrific set of charts from the Time’s Floyd Norris:
“The economic recovery that has followed the end of the 2007-9 recession may be properly named the private enterprise bounce. While the overall recovery is comparable to recoveries after the two previous recessions, this one has been pushed higher by rising private investment and hiring, and held back by cuts in government spending and hiring.”
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Source:
A Recovery With Business Stepping Out in Front
FLOYD NORRIS
NYT, February 10, 2012
http://www.nytimes.com/2012/02/11/business/economy/a-recovery-with-business-out-front.html
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February 11th, 2012 at 10:37 am
I think one chart might be left out…all of the spending by the Federal Reserve. Clearly, this helped spur private investment.
February 11th, 2012 at 10:48 am
Private sector, yay!
Here’s another sign of recovery (of what we don’t know), but recovery nonetheless:
“Meanwhile, in the U.S., Rosie the Riveter was still piecing together components out of layers of heavy steel plate. Finding itself suddenly at a disadvantage to the Soviets, the U.S. government decided to do something frankly Soviet in nature: it ordered the construction of a series of massive forges and directed industry in their production and use. The now-forgotten Heavy Press Program, inaugurated in 1950 and completed in 1957, would ultimately result in 10 forges built with taxpayer dollars: four presses (including the Fifty) and six extruders—giant toothpaste tubes squeezing out long, complex metal structures such as wing ribs and missile bodies.”
From: http://www.theatlantic.com/magazine/archive/2012/03/iron-giant/8886/
February 11th, 2012 at 10:49 am
Thx for posting Floyd’s charts, Barry. Interesting charts…but I see that the private sector hasn’t helped the housing problem, which is a biggie.
February 11th, 2012 at 10:52 am
This is really odd. It almost looks like a memo went out in the past week asking everyone in finance and financial reporting to mention that ‘things are getting better’.
Not that I disagree. When the markets were crashing last fall I said much the same thing and felt like I was an outlier.
But in a day when Republicans and Democrats (mostly Republicans) distribute talking points for the media with regularity and everyone says the same things at the same time on every channel, this coincidental emphasis in the financial media about economic improvement, all using the same tone, stands out. To me in comes across as an industry sales pitch to diminish fear in investing due to recent volatility and European uncertainty.
Even without Greece, markets looked a little toppy. If they kept rising at the same rate, S&P2000 by December was possible. Things don’t look that good.
February 11th, 2012 at 10:56 am
Unfortunately, most jobs in the private sector are Wal-Mart/Burger King type jobs that compare poorly with slavery (at least slaves are guaranteed food, shelter, and work). How are we going to rebuild the middle class when states are cutting an entire month off the school year, colleges are capping enrollment and course offerings, and infrastructure is literally collapsing around our ears?
Remember–the goal of Tea Party ideology is not to have a permanent Depression. It’s to turn the bulk of the American people into a permanent slave-class for the benefit of the ultra rich.
February 11th, 2012 at 11:03 am
@frank: “It’s to turn the bulk of the American people into a permanent slave-class for the benefit of the ultra rich.”
Seriously? SERIOUSLY?!?!? Straw-men only get you the TinMan and Lion.
What part of “The federal government spends too much on unconstitutional corporate cronyism and needs to get the EFF out of my life” don’t you understand?
I suggest you take your Huffington/TPM/DD/Kos talking points elsewhere.
Ignoramus.
February 11th, 2012 at 11:12 am
… but just imagine if BOTH the government AND private sectors were expanding … given the depths of the hole we are in, isn’t that really what is required to achieve escape velocity?
The trick is moderating the gas pedal as we crest the rim … but that’s a long, LONG way from where we are today …
February 11th, 2012 at 11:26 am
Government spending is down? OMG, the Keynesians must be going cray…how can anything work without heavy handed non-productive government spending?….lol.
February 11th, 2012 at 12:11 pm
Mr Ritholtz,
Pardon me if I ask, “What economic recovery”? Is government spending really negative? Is the private sector really leading the American economy upward and onward? I suppose that the petroleum three month rolling averave turning sharply lower is a sign of recovery. Is our increased debt ceiling really due to less government spending? Has employment really increased greatly? With the overhang in real estate defaults still growing, abeit more slowly, why should we believe that there is a recovery? Sure, we have seen consumer debt slightly higher but consumer spending was actually down a slight bit. Car dealer inventories are much higher now than in December. Since the 1970s, I have tended to not believe everything the NYT tells me, including Krugman. The article has the stink of week old fish about it.
February 11th, 2012 at 12:43 pm
We are running federal deficits of 8% GDP and getting 2% GDP growth and I am suppose to believe the recovery is being led by private investment?
February 11th, 2012 at 12:45 pm
I know, Barry, that in part this blog serves to help you get a gauge on sentiment which is an important component of your investing strategy. With the comments here and on recent previous posts, I can’t help but feel more bullish… at least on equities.
As far as the economy, it’s clear that it’s improving for now. The info on government spending flies in the face of GOP talking points about this Administration, however, if the economy does begin a self-sustaining recovery with reduced government spending then maybe it flies in the face of those feeling it needed increased government stimulus. Just shows perhaps how our biases make it hard to make objective reads of what’s going on.
February 11th, 2012 at 12:45 pm
I know, Barry, that in part this blog serves to help you get a gauge on sentiment which is an important component of your investing strategy. With the comments here and on recent previous posts, I can’t help but feel more bullish… at least on equities.
As far as the economy, it’s clear that it’s improving for now. The info on government spending flies in the face of GOP talking points about this Administration, however, if the economy does begin a self-sustaining recovery with reduced government spending then maybe it flies in the face of those feeling it needed increased government stimulus. Just shows perhaps how our biases make it hard to make objective reads of what’s going on.
February 11th, 2012 at 12:47 pm
Government is cutting back and laying off. The deficits that are being run are a strong stimulus, but they show up as private sector spending because the deficits are not caused by increases in the size of government. In fact, government itself is clearly shrinking.
Once construction spending starts to increase we will be in a pretty good position.
February 11th, 2012 at 12:57 pm
carleric —thats what you dont get. If not for all the cut in the government jobs, we would have had 6% UE now.
Kind of weird isnt it, government grew during the Repub years and were cut down at the exact wrong time during a recession.
If the right was not blinded by religion, I would have expected rational policy arguments. But the motivation of most repubs are something they never talk in public.
February 11th, 2012 at 12:58 pm
“Government spending is down? OMG, the Keynesians must be going cray…how can anything work without heavy handed non-productive government spending?….lol.”
Yeah, stupid Keynesians! At this rate, we’ll be back to full employment in 8-10 years! Why don’t they just sit back and let this private sector recovery just trickle on down.
February 11th, 2012 at 12:58 pm
just ask yourself….the repubs dont suppor ron paul, why? because he believes in a real religious freedom. real seperation of church and state. not the one wanted by the evangelicals.
February 11th, 2012 at 1:01 pm
apollo_creed… still better why dont we just let the private sector do everything. how about we outsource the defense. how about outsourcing the police work. stupid repubs want a trillion to be spent on defense so that we can get cheap oil but they dont want to pay for it.
February 11th, 2012 at 1:18 pm
I guess that explains why we are having one of the weakest recoveries since the Great Depression.
We have government that hires people in the boom times and fires them during the bust! It is bizzaro Keynesianism….pro-cyclical and stupid..THANK YOU TEA PARTY!..and O the surrender artist!
February 11th, 2012 at 1:19 pm
Yellow Lights are Flashing on my computer. The Government spending one needs illumination. Bail outs and Stimulus Bills used government spending, and the charts do not show that. I have a hard time believing that government spending is flat to negative in comparative terms. Yes, teachers, civil servants are being fired and laid off, but the government put a lot of fiscal stimulus out there in 2008-2009 under W and O. I wonder if an accounting gimmick is being used here in the definitions. This one may be true, but the yellow light of potential propaganda has come on.
February 11th, 2012 at 1:23 pm
“I know, Barry, that in part this blog serves to help you get a gauge on sentiment which is an important component of your investing strategy…. ”
I’d think that would be sort of questionable, as it’s sentiment of people self-selecting for not only interest in his views, but eager to participate and be acknowledged, even if abusively. Sort of like married people being happy because unhappy people all remain single…
Who is Richard Benson, author of your drama groundhog QOTD?
February 11th, 2012 at 1:36 pm
When I think of private investment, I think of entities putting money to work in terms of finding new locations to operate (market expansion), finding new ways of doing things (productivity increases) or expanding capacity. On all of these metrics we’ve not seen the robust increases that the “Private Investment (Except Residential)” chart would imply. Productivity increases have been OK during the past three years, but we have seen better before. If we were seeing a major increase in production capacity, we should likely have seen a major hit in capacity utilization during the latter stages of this recovery, not during its initial phase. Has private investment expanded locations of operation that significantly that it could account for the charted increase? Just where has that investment occurred geographically? Domestically, about the only places one has heard of any major investment are in the gas shale locations discussed on the investment programs of this world. Otherwise, are some folks claiming that investments in foreign locations which are accounted on domestic corporations’ books count as domestic investment?
February 11th, 2012 at 1:52 pm
I got ya some GDP stats for ya ..
a) walking to the bar*, a recycle bin missed by the man yesterday, full of pint water bottles
b) daily paper 3.1oz of data (riiiight) 9.3oz inserts
* fyi- Coors outta a KEG in a washable glass .. take that prudent class of _
psst – I could go on – but why bother – I know there is a reason that above is what it is – butbutbutbut**
** dang spilled another 300+ bytes
February 11th, 2012 at 2:26 pm
Clearly the socialism conspiracy is succeeding, comrades.
February 11th, 2012 at 3:50 pm
The “Federal” stimulus is actually still going on………for 2012. in 2013 is when federal austerity begins. It is why Obama has the deficit going below a trillion. Federal transfer programs are set to normalize and a chunk of the Bush Tax cuts are to expire.
Note, why the private economy has grown about at trend speed in the recovery, that isn’t really that impressive.
We will see if it can handle it a year from now.
February 11th, 2012 at 4:34 pm
Government shrinking…
WTF…?
The last time the government “shrunk” from one year to the next was about 60 years ago.
February 11th, 2012 at 5:19 pm
I disagree with franklin411 a little. Manufacturing is hiring. My company is hiring, and while these are not union jobs at silly wages, they are nicely better than minimum wage. I agree with the indentured servitude concept and do feel that the government needs to restructure most especially including nationalized healthcare, higher taxes on higher incomes and yes some changes to SS, Medicare and defense. I further suspect that some of the “disaffected” labor force will remain out of the market unless incomes rise. So we might see labor pull inflation sooner than expected. We are actually having trouble getting decent applicants, despite the unemployment rate, v.v. five years ago.
February 11th, 2012 at 6:32 pm
With all the regulatory overkill companies are corced and coerced to wade through, it is a tribute to American private enterprise exceptionalism that prospects are looking up.
With gridlock in Washington, let’s hope for less Obama extremist Czars and Soviet-style regulatory commisars after 11/2012. Our private sector will explode with growth in response (without subsidies).
February 11th, 2012 at 7:17 pm
9 pages color Fall 2010 copy .. Ted Turner media mogul #1 with 2M+ acres http://208.106.193.21/documents/property_pdfs/Top100Landowners.pdf
me somewhere at the bottom of our list in America @ 50x150feet – with 3 tvs that display CNN & TNT :-)
February 11th, 2012 at 7:21 pm
The selection of data sets can always lead to misguided analysis. By adding additional data sets, we may get a different picture of what’s happening to our economy.
I’d add the following data sets:
TOTAL DEBT SERVICE RATIO ( Debt Service to Disposal Income) Source: Federal Reserve Board
1Q91 12.05
4Q01 13.11
2Q09 13.11
2Q11 11.09
On the surface, this shows an encouraging trend. However, when we add another data set, CPI and Average Hourly Wage (too tired to re-access the data), it shows that average hourly earnings increase during the past year only covers half of the CPI increase.
We also should factor into the analysis that despite the ‘Encouraging Private-Sector Employment’ increases, there are just over 5.2 Million fewer Private-Sector jobs than there were only 4-years ago.
While the reasons for the
February 11th, 2012 at 8:42 pm
Did everyone suddenly decide to get a job and go shopping after Xmas?
I don’t trust proffered numbers anymore. Call me gun shy. Then again, maybe I’m just totally negative and bearish (although I don’t feel like a pessimist).
Something doesn’t seem right, as we’re still piling on debt, hiding losses, and dishonestly accounting for damn near everything.
“. . . this one [recession] has been pushed higher by rising private investment and hiring, and held back by cuts in government spending and hiring.”
I used The Google to find out exactly what constitutes “Private Investment” in this article, and the best I could find, quickly, at the sources cited was:
“Gross private domestic investment is initially projected by the MA model for private investment in equipment and software (PIES), nonresidential and residential structures, and business inventories. The PIES categories are estimated in greater detail using a system of regression equations that set GDP, capital stock, and the cost of capital as explanatory variables. In all, projections are made for 28 categories of private investment in equipment and software. The estimates are then aggregated to the level of the macro model control and adjusted as necessary to ensure consistency between the macro model aggregate and the detailed estimates. Much like PCE, detailed data from the BEA Benchmark and annual I-O tables are used to breakout investment category estimates to detailed commodity sectors”
Well, any freekin’ moran can understand it when you couch it in those terms.
Now that we have established that the economy is steaming along under the stewardship of the Captains of Private Wealth — who are investing in the future (ex. residential structures), and not pillaging their corporate balance sheets and shareholders for all they’re worth, I don’t think strong private sector employment has driven squat. Hell, I don’t think we’re even out of recession (we might not be in Kansas, anymore, either).
While I’m not a Shadow Government Statistics subscriber, this (the SGS alternate), would seem to be a more honest reflection of the current reality:
http://www.shadowstats.com/alternate_data/unemployment-charts
and,
http://blog.american.com/2011/12/the-unemployment-chart-the-obama-white-house-doesnt-want-you-to-see/
_________________
drewburn:
I don’t know anything about “silly” union wages, but I do know that heavily unionized Germany — who, BTW, is getting ready to foreclose on the rest of Europe — pays its workers better than we do, has less debt, and more and better social services:
http://www.forbes.com/sites/frederickallen/2011/12/21/germany-builds-twice-as-many-cars-as-the-u-s-while-paying-its-auto-workers-twice-as-much/
and,
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/30/AR2010063004199.html
In the US, “nicely better than minimum wage ,” ($7.25 per hour/$15,080/yr.), might still leave a person homeless, in most cases. It also comes to mind that if only unqualified folks are applying for jobs with your firm, the pay must really be low for the skill/experience/education level required. Is the compensation the same as it was 5 years ago? Were there many more undocumented workers back then? Has revenue gone up? As your company is currently trying, unsuccessfully, to hire, I assume that the current employees are at maximum productivity. If so, are the workers being compensated as required, i.e., overtime pay? Seems to me, that if the company is paying overtime, they could up the base pay of new hires to a point that the candidate pool would improve. OTOH, if they’re not paying overtime AND they’re looking to expand, they’re lining their pockets. Unionization isn’t always a bad idea.
February 11th, 2012 at 8:56 pm
“The last time the government “shrunk” from one year to the next was about 60 years ago.”
Umm, no.
First, government has varied depending upon events in time and who’s in office. In the past forty years at least that pretty much means it has shrunk under Democratic administrations and grown under Republican.
Pres. Clinton had the smallest government, not Reagan nor Bush
Big Government? Obama Has 273,000 Fewer Federal Employees Than Reagan
However this depends to some degree on how you want to define government as this analysis demonstrates.
Fact Sheet on the New True Size of Government
And looked at one way, government clearly grew enormously during the Great Depression because of all the programs it created and hired people to implement and then grew even larger in WW II as millions went to battle and to work in defense.
The world-view of small-government activism is simply not up to the task of analyzing this above the bumper sticker level. What must be constructed is a not a vision of government big or small but one of government that is right-sized for the task we citizens wish it to perform.
February 11th, 2012 at 8:58 pm
The author(s) appears to conveniently chose Q2 2009 to make their point. Per FRED data, link below, Govt spending pre downturn was running at $2.8T-$3.0T in Q12007-Q12008 and went to $3.5T by Q2 2009. It was $3.7 in Q3 2011. The ramp up already happened by the time the chart began. Bear Sterns collapsed in March 08, Lehman in Sept 08. $3.5/$3.0 is an 11.67%, $3.7/$3.0 is a 23% increase and off the chart range!
http://research.stlouisfed.org/fred2/data/FGEXPND.txt
February 11th, 2012 at 10:25 pm
http://data.bls.gov/timeseries/LNS11300000
http://research.stlouisfed.org/fred2/series/LNU02300000?cid=32445
http://research.stlouisfed.org/fred2/series/CPIAUCSL/
http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm
Fun with charts/data, looks like a recovery to me!
February 12th, 2012 at 12:34 am
JohnH43 nailed it. The charts would look much different if they began in early 2008.
Here’s an even broader perspective of government spending to GDP: http://www.ritholtz.com/blog/2011/07/government-spending-as-a-percentage-of-gdp-2/
February 12th, 2012 at 8:13 am
Government shrinks while Private Sector grows? Prepare for some politicians saying, “See? We’ve been saying that if you get government out of the way, the private sector will grow! And, that’s exactly what is happening!!”
Another spurious correlation?
~~~
BR: The alternative explanation is that all of this growth is the result of the Fed (ie, the central bank is a branch of government) pumping out massive amounts of liquidity — printing.
One should also consider the counterfactual — How much better might the economy be doing if the government was fiscally stimulating the economy while the Fed stimulated monetarily?
I don’t know, but its a fair question.
February 12th, 2012 at 12:38 pm
Doesn’t a deficit that’s 8.7% of GDP constitute “fiscal stimulus?”
The government did not “shrink” in FY 2011. Spending growth once again outpaced inflation. The deficit shrank in proportion to GDP, though not in real terms, but this was the result of revenue increases, not smaller government.
From page 11 of the GAO’s 2011 Financial Report of the U.S. Government:
“Federal spending grew and tax receipts increased in FY 2011, which resulted in the Federal unified budget deficit remaining essentially flat at $1.3 trillion. However, the deficit narrowed as a share of GDP to 8.7 percent from 9.0 percent in FY 2010.”
February 12th, 2012 at 7:08 pm
“JohnH43 nailed it. The charts would look much different if they began in early 2008.”
Indeed he did on that point.
Here is a complementary piece from FTA ( http://ftalphaville.ft.com/blog/2012/01/30/856251/the-missing-gdp-2/ ), with pertainent sections quoted below:
“But to focus on the public sector… For all the talk of deficits and spending, you can see above that the federal government hasn’t contributed any more or less during this recovery than the average for previous recoveries.
This isn’t entirely a fair comparison, as the counting here starts in the third quarter of 2009 (the first quarter of the recovery) and therefore excludes the huge chunk of stimulus that hit in the second quarter of 2009.
Even so,… after the initial stimulative boost, fiscal policy began to steadily contribute less and less to growth until finally becoming a drag for most of last year and part of the prior year. That’s why the federal contribution to growth is roughly a wash during the recovery.
Meanwhile, the trend in state and local government spending is … downward ….
federal fiscal policy is likely to be a drag even if the payroll tax cut and unemployment benefits are extended. That’s before getting into the issues that will confront the government once the election is over.
We won’t make any normative arguments here, but whatever your ideological stripes it shouldn’t be controversial to note that these kinds of fiscal headwinds have been, and will continue to be, unhelpful to accelerating growth. Or as James Hamilton frequently writes, the thing about fiscal contraction is that it’s contractionary.”
It would be remissive if we didn’t also point out a few nuggets from Invictus’ recent posting here on TBP (http://www.ritholtz.com/blog/2012/01/gdp-less-than-meets-the-eye/ )
“With my primary concern always being a focus on creating jobs, I took a quick historical look at the components of GDP to see what line item correlates most closely to private sector jobs (USPRIV at the St. Louis Fed). Here is what I found,… Gross Private Domestic Investment/Fixed Investment/Nonresidential … which represents roughly 10 percent of GDP…correlates most closely to private sector jobs …. The correlation is 0.777. The bad news is that, as a percent contribution to overall GDP, this metric just printed its worst number in the past 8 quarters, or since the recovery was getting established”
And then this little beauty:
“I have to point out here that I chafe when I read about where we’re “supposed” to be economically four years after a normal recession’s inception or two-and-a-half years into a normal recovery. There was simply nothing normal about the recession that began at the end of 2007, and to compare this recovery to recoveries from anything other than the Great Depression is to commit a tremendous disservice. I see economists do this all the time, all of whom know better. It is just not a fair, apples-to-apples comparison. Barry has written about this, but I felt compelled to add my two cents.”
Now, go re-read that Norris money-shot quote provided above again.
February 13th, 2012 at 2:30 am
Mr Wheatstraw — I think I know how you feel. I don’t feel uniquely downcast or pessimistic and I don’t have any short bets on the country; I also never bought and buried any gold or MREs. I had just hoped from the outset of all this ugliness, something more momentous would have resulted — starting with some truly brave, game-changing policy designed to put America back on its hind legs. Instead of that, we got a giant area rug thrown over the various holes riddling the American middle class,.
Ah well…maybe next time.