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From The Times

May 6, 2008

Steinbeck’s grapes lack wrath this time around

Gerard Baker: American View

Whatever happened to the Great Depression? Not the real one from 70 years ago, the lost decade of unimagined misery and Steinbeckian angst, the worst period in the history of modern capitalism. I mean the replay we were promised this year. The one we were told was the inevitable counterpart to the greatest financial crisis since a couple of medieval Italians first sat down on a Florentine bench and invented the word “bank”.

I don’t know about you but I feel a bit cheated. There we all were, led to believe by so many commentators that the sub-prime crisis was going to force the United States into a new era of dust bowls and breadlines, a slump that would call into question the very functioning of the capitalist system in the world’s largest economy. Carried away on the surging wave of their own economically dubious verbosity, the pundits even speculated that this unavoidable calamity might presage some 1930s-style global political cataclysm to match.

Well, it’s early days, to be fair, but so far the Great Depression 2008 is shaping up to be a Great Disappointment. Not so much The Grapes of Wrath as Raisins of Mild Inconvenience. Last week the Commerce Department reported that the US economy – battered by the credit crunch, pummelled by a housing market collapse and generally devastated by the wild stampede of animal spirits – actually grew in the first three months of the year.

The rate of expansion – 0.6 per cent – was weak for sure, and it followed a previous quarter of identically weak growth at the end of 2007, but as Depressions go it was singularly unGreat. In the 1930s, you’ll recall, GDP fell by more than 25 per cent. Even the periodic mild recessions we’ve had in the past 20 years at least resulted in some declines in economic activity.

Lest you object – perhaps fairly – that the GDP data are way too backward-looking to be of any use, last week we also got the news that the labour market, the canary in the coalmine of economic data, is actually improving. The US economy lost 20,000 jobs in April, while the unemployment rate ticked down a little to 5 per cent. You don’t have to compare this performance to the Great Depression to think it looks, as downturns go, really quite uplifting. It is, in fact, the gentlest start to a period of labour market weakness since the 1960s.

For comparison, in the first four months of the 2001 recession (which was, by the way, the mildest one in postwar history) employment fell at an average monthly rate of 105,000. In the first four months of this current downturn, the average monthly job losses have been 62,000.

You won’t need me to remind you that in the other Great Depression unemployment rose to an estimated 30 per cent. Worse still for today’s Steinbeck wannabes, as my colleague Anatole Kaletsky noted yesterday, it is starting to look as though world financial markets might be past the worst of the crisis that started all this.

Financial conditions are cautiously returning to something approaching normal. Barometers of distress have shown a distinct turn for the better. Take, for example, the so-called TED spread, a pretty good proxy for the state of financial anxiety. It represents the difference between three-month Libor interest rates and the yield on three-month US Treasury bills. In other words, it measures how risky banks think lending to each other for relatively short periods is compared with the riskless alternative of lending to the Government.

Last Friday the spread fell to its lowest level since the end of February, shortly before the collapse of Bear Stearns. Now, at about 125 basis points, it is still elevated relative to periods of clear normality: the historic norm is between 25 and 50 points. But it’s way down from where it was in March, December and August, when it exceeded 200 points.

So should we be putting out the bunting, declaring victory over the Depression, offering prayers of thanks that we have avoided another Munich or Dunkirk? Not quite. The depression scenario was always overdone, of course, but it is still not clear that the US will actually escape as lightly as this. The principal challenge remains the health of the American consumer.

House prices are still falling and there is plenty of evidence that many Americans, suddenly scared about the value of their house as a nest egg, are retrenching. Even with the Government’s tax rebate cheques dropping on to doormats, caution seems to be the watchword. That also raises the troubling possibility that a period now of shrinking demand could feed back into renewed weakness in the financial system, just as it is starting to heal.

Still, the picture is starting to look quite encouraging. Even if the US has a recession this year, the chances that it will turn into a full-blown slump are not high. Another disappointment for the hyperactive scribbling masses. But rather welcome news for everybody else.

gerard.baker@thetimes.co.uk

The "mortgage crise" of 2008 is minor compared to the financial crisis of the '80s. Prior to 2003, an unemployment rate of 5% was considered unattainable - we would always be above 5% and usually way above. Now unemployment rates are hitting 5% and it is the end of capitalism. Right!

Sid1138, Lee, USA

The final nail in the US economy's coffin is Medicare costs, the hot potato no politician will touch. Combine the actuarial predictions for Medicare and the "cost" of a devalued US$ in a global economy, and you have a perfect economic storm the likes of which the US has never seen. Just wait.

Robert, Asheville, USA

All politics is local, and so are all real estate markets. Here in the Boston area we had our bubble in the late '80's, followed by the inevitable crash. Lesson learned. The latest "disaster" resulted in a price drop of about 3% year over year for Middlesex county.

Mitch, Boston, USA

Wow. It is suprising to see everyone mad that things are not doom and gloom for America. I guess people hate what they can't have.

Matt, Washington, DC,

" Another disappointment for the hyperactive scribbling masses. But rather welcome news for everybody else."

Oil prices at $120 and rising, GS forecasting an oil superspike to $200 and riots in the streets - welcome news for whom?
You must be joking!!!!

Alfred, Jersey City, USA

Eh -

As a poor Yank, I have to say the whole bunch of econo doom-and-gloom is the same level of fraud as the enviro doom-and-gloom.

The cheapest barometer of economic health here is to sit in a restaurant and observe whether it's full - and they usually are.

apb, Mokena, IL, USA

The housing slump has not affected most of Virginia. My home went up 9% in value over the past 12 months allowing me to put in a 30 ft round in ground pool in my back yard. In an election year bad economic news is bound to be overstated.

Jeff L, Richmond, VA, USA

Yes, the U.S. economy grew 0.6 percent last quarter, but real inflation was about 4.5% for that quarter alone.

Real inflation, including food and energy costs, is about 18% annually in the U.S.

The inflation figures in the U.S. that are published by the gov't are intentionally false.

david N., AUSTIN, TX , US

Working poor and struggling middle class Americans are suffering, and that isn't anything to laugh about. One can only hope that those in the affluent are forced to suffer (the writer of this piece most especially) unimaginably, and then we'd have something to snicker over.

Jenny, Grand Rapids, MI, US

Living near Colorado Springs I do wish the purported housing slump would strike here and slow down the galloping growth of that town, which threatens to engulf my little 5 acre wooded tract to the north of it.

In 1950 it was a cow town of fewer than 50,000, now it's over 500,000 & nearly booming

Dave Livingston, El Paso County, Colorado, USA

The truth of the matter is that it is impossible to tell the true state of the economy.

We live in a false economy. The CPI does not account food or fuel in its formula.

Health care cost are calculated differently for those with and those without insurance.

Without the basics being factored in.

Chris, Playa del Rey, USA

To be haappy that unemployment is only 5% is to miss the fact that the US Gov't does not count as unemployed those who have been out of work longer than 1 year, or who have not filed for unemployment benefits. The reality is that unemployment might be much higher than anyone in the gov't will admit.

Buckley, Chicago, USA

Cue the doom-mongers to pipe up...

Tom, Reading,

Frank - to answer your question, they're leftists who believe talking down the economy helps democrats in this election year. That the economy has been growing in the last 2 quarters won’t stop them either. Last year of Clinton's admin was much worse off yet they even denied we were in a recession.

Mark, Alexandria, VA, USA

Well, there you have it. Any numbers that don't indicate that the Great Depression has already started simply aren't accurate - because they don't indicate that the GD has started. Any numbers that do indicate the GD has started are accurate - because they prove that the GD has started. Get it?

Dave H, Culver City, CA, USA

I actually live in Southern California, right in the middle of the housing crisis. I agree with Gerald. I work for the title insurance industry. We are seeing more sales. As prices drop it creates another opportunity for buyers. The economy is every bit as politicized as any other type of news.

Deane Pradzinski, Highland, CA, USA

There do seem to be a lot of people who actually WANT a recession. Is this because they hate the USA or are they just masochists? Or are they people whose houses have fallen in value and therefore wish ruin for everybody else?

Frank Upton, Solihull,

It seems most of the commenators here are virtually rooting for the worst case. Accusations of data manipulation and warnings of "just you wait and see".

I live in one of the areas hardest hit by the US housing crunch. It fascinating to see UK citizens telling me I don't know how bad I have it.

Stephen, Miami, USA

It seems some of these commentators disagreeing with Gerrard's cheer leading of the American economy would themselves rather cheer it's demise.

My advice, never bet against the American economy.

gladRocks, Houston, TX, USA

I hope no one starts a spending spree after reading this article. The greatest depression in history is often punctuated by many rallies but these periods of euphoria tend to be short-lived.

Charles, Hong Kong,

Satpreet said "we will know better 5 years from now..." Well in 5 years from now I will know which horse I should wagered on in the 2009 Kentucky Derby, or if buying a house at today's prices was a bargain. If only the media could predict 5 years hence, I could stop playing the lottories.

CPNorton, Fairfax,

Methinks you have seen nothing yet.

Peter K, Vancouver BC., Canada

Yes I agree, change this picture of Gerard Baker.

Anthony Casey, La Coruna, Spain

Gerard, you might well be proved right in the long run, but I wouldn't put much faith in the BLS job statistics.

http://globaleconomicanalysis.blogspot.com/2008/05/april-jobs-another-report-from-bizarro.html

Munin, Edinburgh,

Good comment. It contrasts with the doom and gloom merchants writing editorials in the Daily Telegraph, who fired a colleague who begged to disagree. My money is on Gerard being right. It's the press who have talked up this 'crisis' to the point of absurdity, but the real world is winning out.

David, London, UK

The irony is that this slight improvement in sentiment may actually make things worse. A sharp downturn would be a catalyst for economic reform and a quick recovery. As things stand, reform is unlikely and we are in for a slow recovery - more Japan in 1990 than the Great Depression.

Ellyssa, London,

Can't you use a different picture of Gerard Baker. He always looks like Phil Mitchell from EastEnders which puts me off bothering to read his article.

Grant, Walford,

Gerard - it's easy to pretend you have GDP growth if you lie about the inflation figures.

Smoke and mirrors, dear boy. I thought any Tomnoddy worth half his salt would have worked out the Big Lie by now. Or is that what you're selling?

Voland, Caen, France

For an American View, try reading some of the American newpapers before writing an inaccurate, minimalizing depiction of what is happening in the USA. Here is an article from the Philadelphia Inquirer for example:

http://www.philly.com/philly/news/homepage/18479604.html

hoffmfel/PhD Student, Birmingham UK, USA

Such a comment is best reserved in retrospect, not when the event is unfolding. I believe we are still in the beginning , we will know better 5 years from now and not by weakly fluctuations of data In the annals of financial crisis, you are not the first one to call its over, well before their end

satpreet, Gainesville,

it is interesting how journalists have jumped on the band wagon to support the "economy".
does gerald know that in some parts of the world they are already shooting at the hungry people?there is nothing to feed them with!!!
does he take notice of $120 high food prices or high mortgages?

ebbi britt, valencia,

There seems to be a concerted effort among certain British commentators to act as unofficial cheerleaders for the US economy. Go team, Go! Well, fair enough. However the American media does not share Gerard's attitude. And as ever tucked away at the bottom of this article are the real worries.

john Walter, Bonn, Germany

Time for you all to reread the history of the Depression. The intial 1929 crash was a minor blip; the real bottom wasn't reached until 1932. Wait until the impact of Option ARM resets hits the middle classes in 2009, before you declare victory.

Quincunx, Boise,

House prices still falling with no bottom in sight - "the picture is starting to look quite encouraging".

Tim, Shanghai,

Oil remains historically high, and credit is much harder to obtain. Whatever else, that depresses economic activity. Agreed, a Great Depression has been averted - but you're telling the audience to stay in their seats when the theatre is, if not afire, smelling distinctly smoky.

Noel Falconer MEcon, Couiza, France

The jobs figures were manipulated by the "birth/deaths" model which stated that net start-up company job creation was 247k. Twice the amount as April last year! Withholding tax is way down which is an undistortable real view of salaries being paid. GDP up was entirely due to increased inventories

John, Cambs,

Our Gerald is not a very clever man I fear.

david addison, christchurch, new zealand

Oils moving above $120 a barrel now and is showing no signs of retrenchment, and it takes at least two years for a shock to one part of Das Kapitoil to feed into the other parts. You see this ship won't sink overnight, not until the end that is. It is the oil and nothing but the oil, ducky!

kevin, Lincoln, UK

When it comes to the ultra-liberal press in Britain and Europe .....which is where i read MOST of the articles about the "coming American depression"....I think it had more to do with "wishful-thinking " than anything tangible! LOL! Sorry guys....no depression here!

Shenson, Raleigh, N.C./ USA

Well, as you say: "it’s early days".

Irrational as it sounds, it's probably going to be the other side of 2012 before I lose this sense of foreboding!

Steve, Cardiff, UK

Let's see if you eat your words later this year

Ian, Frederick, USA