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Recession Likely in 2011

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September 16, 2010 – Comments (6)

U.S. Economy "Gradually Deteriorating," Levy Says: Recession Likely in 2011 Posted Sep 16, 2010 04:04pm EDT by Aaron Task Related: ^DJI, ^GSPC, SPY, DIA, TBT, XHB, RTHShareretweetEmailPrintThursday brought another round of economic data to fuel the raging debate about whether the U.S. economy is on the mend, heading for a double-dip or still in recession.

If you step back from the day-to-day (and minute-by-minute) focus on the latest data, "the state of the economy is...gradually deteriorating," says David Levy, chairman of the Jerome Levy Forecasting Center. "We had a very weak recovery and we are more likely than not going to have another recession in 2011."

Levy, who puts the odds of a true double-dip at 60%, says recent talk of a recovery - which not coincidentally corresponded with a quick rally in the stock market - is wrong for the following reasons:

-- Housing is "clearly deteriorating again" after the first-time homeowner tax credit. (Indeed, RealtyTrac reports U.S. foreclosures rose 25% in August vs. a year ago to the highest level since the housing bubble burst.)-- Non-residential construction is declining. -- Inventory investment is becoming "overdone," he says, noting ISM surveys showing delivery delays because of overstocked warehouses.-- Consumer spending is stagnant. Levy attributes the recent uptick in retail sales to purchases by "mostly high income people who had held off during the crisis."

With 25 million un- and under-employed Americans and 1 in 7 living in poverty, the U.S. economy is even more dependent on spending by the wealthiest; that's a big reason Levy things it's wrong to let the Bush tax cuts expire for families making over $250,000 annually.

Austerity Will 'Backfire'

By the same token, the economists says conservatives are wrong to focus on the deficit and push for austerity measures.

"Clearly the symptoms of the economic problems [are] being confused more and more with the disease," he says. "The deficit didn't cause our economic weakness. It was a collapse in private investment, asset deflation [and] debt problems that caused weakness and a falloff in [government] revenues."

With tax receipts down and the government spending more to offset the deleveraging of the private sector - and on social safety nets like unemployment - the deficit has soared.

Judging by the most recent TIC data, projections for trillion-dollar annual deficits for the next decade have not caused foreigners to flee from U.S. assets, including Treasuries, as the mega-bears have long predicted.

But if we listen to the doomsayers and "try to do the Herbert Hoover route and cut the deficit further then it will backfire," says Levy, who is bearish for reasons other than the deficit.

6 Comments – Post Your Own

#1) On September 16, 2010 at 5:54 PM, mtf00l (50.17) wrote:

Let me know who to right to to receive my no limit TBTF cash card?!

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#2) On September 16, 2010 at 6:01 PM, mtf00l (50.17) wrote:

Let me know who to "write" to to receive my no limit TBTF cash card?!  Then I can go to school and learn how to spell!!!

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#3) On September 17, 2010 at 11:37 AM, DarthMaul09 (29.75) wrote:

WSJ OPINION
JUNE 6, 2010
Tax Hikes and the 2011 Economic Collapse  

Today's corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market.

By ARTHUR LAFFER

People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.

It shouldn't surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.

Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it's also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.

People can also change the timing of when they earn and receive their income in response to government policies. According to a 2004 U.S. Treasury report, "high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992—over $15 billion—in order to avoid the effects of the anticipated increase in the top rate from 31% to 39.6%. At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994."

Just remember what happened to auto sales when the cash for clunkers program ended. Or how about new housing sales when the $8,000 tax credit ended? It isn't rocket surgery, as the Ivy League professor said.

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush's tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.

Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession.

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn't take effect until Jan. 1, 1983. Reagan's delayed tax cuts were the mirror image of President Barack Obama's delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don't work until they take effect. Mr. Obama's experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.

In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts. After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future. Given what's going to happen to tax rates, this conversion seems like a no-brainer.

The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet.

----------------------------------

Even though I think Laffer is only correct about 50% of the time, I think he may be right this time.

 

 

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#4) On September 17, 2010 at 11:53 AM, Seansonfire (35.24) wrote:

Aaron Task's Three fold argument is that:

1. Housing Sucks and will Continue to Decline

2. Construction Sucks because Housing Sucks

3. Consumer Spending is Down

#1 and #2 are true and housing does suck and will continue to decline because prices were and still are way out of wack compared to the underlying incomes that people that are leaving in them are making. 

#3 is not actually true.  Look at the most recent Consumer Sentiment numbers and retail sales numbers and you will see that consumer spending is actually returning to levels around 2005-2006, where they are sustainable, also the saving rate has started to stablize around 5%.  To compare consumer spending with 2008 numbers is crazy as that period was unsustainable. 

I agree #1 and #2 are two, but that doesn't mean we are destined from a recession, as the losses caused by this decline won't for the most part effect the masses (ie Financial System). 

In the end housing will not cause another recession, and consumer spending will slowing regain itself as we move into the new year.

 If his argument was about Unemployement that might hold more water but too bad it was a poorly thought out argument.

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#5) On September 17, 2010 at 1:26 PM, davejh23 (< 20) wrote:

Darth - Very interesting article.  I don't know if he's right, but it's certainly something to consider.  Analysts still have very rosy projections for FY'11 earnings.  What if earnings come in 20% below estimates instead of 20% above FY'10 numbers as many are now projecting?  The S&P is only about 8% below the April highs when there was zero talk of a double dip and some analysts had FY'11 S&P EPS estimates near $100.  The market will crash below March 2009 lows if FY'11 S&P EPS is closer to $60-$70...not that the S&P should fall below 666 based on earnings in that range, but people will panic again and many will never invest in the stock market again.  I wouldn't bet on that happening, but it's something to keep in mind.

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#6) On September 20, 2010 at 12:12 AM, topsecret10 (< 20) wrote:

We are still In a recession,and In fact we could go Into a full blown depression In 2011. The news media just keeps spinning,and our government just keeps spending. Want to know who Is the leading vendor (sales) at all of the California Fairs ?  The people selling SAFES,GUN SAFES, and VAULTS !!!  People are quietly pulling their money out of banks,and putting their cash,gold silver,and firearms In their homes....,   TS

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