Gross Domestic Product: 40 Percent of the United States GDP comes from 5 States; California, Texas, New York, Florida, and Illinois.
Our gross domestic product contracted in the third quarter of 2008 and is contracting in the forth quarter. There is very little doubt surrounding that. The National Bureau of Economic Research put the start date of our current recession at December of 2007. Simply looking at the employment patterns and trends it appears that this recession will be the worst on record since World War II. Another reason why this recession will be so painful is that 40 percent of our national GDP comes from 5 states, many that are in painful contractions.
The United States received 40 percent of its GDP from California, Texas, New York, Florida, and Illinois. California accounts for over 12 percent of national GDP and currently has a state unemployment rate of 8.2%, the third highest in the nation. If we dig deep and look at the California housing market, it is abysmal and shows no signs of bouncing back. This weekend 60 Minutes talked about the Alt-A and option ARM crisis that will hit us in the upcoming years. The 2 states with the largest concentration of these loans are California and Florida.
First, let us take a look at each individual state GDP on a map:
*Click for sharper image
Looking at the map this way, it is easy to see why a few states can cause such widespread pain. Even states that avoided the housing bubble to a large extent are feeling the repercussions of what is going on. If we are to include the top 10 states in terms of GDP, we will then account for 55% of total U.S. GDP. That is why arguments that look at states as silos only hold true if the recession is minor or isolated. This is no isolated recession. The tentacles of the problems run deep and are very widespread. Let us now shift and look at unemployment on this map:
3 out of the top 5 GDP states have unemployment rates above the 6.7% national rate. California, the biggest GDP contributor has an unemployment rate of 8.2%. The only state of the five that seems stable is Texas. New York is quickly jumping higher because of the job losses now hitting New York City this year. The number should change rapidly. Ironically, the only stable state Texas is the single state of the five that had very little influence this decade with the housing bubble. States like California and Florida which depended more on the housing market are feeling even deeper pain.
The next map should give you an idea why many of these states are on the verge of bankruptcy:
This above graph tells the story. A state like California is so enormously dependent on taxes. All you need to do is take a look at California and you’ll understand the magnitude of the problem:
A state like California with over $100 billion in expenses does not have the flexibility to adjust a budget on the fly. In fact, these budgets are planned nearly a year in advance. This budget was planned before the California housing market fell over 40% statewide. That is another reason why severe market volatility is not good for the health of the economy because it throws a wrench into future planning. But the more troubling sign is look at the 2 largest revenue sources for California. The personal income tax makes up 44.7% of revenue and sales tax makes up 27%. Together, these 2 volatile areas make up 71.7% of revenue to the state. Well, if you refer to the above employment chart you can begin to see how this all starts to tie in. With less employment, the personal income tax revenues will fall. With that, you will also see the sales tax decrease because in recessionary times, people spend less and certainly those with no employment will not be buying.
In conclusion, the fact that many of these states still have profound problems in their housing markets almost assures us that this will be no minor recession. 5 states account for 40 percent of the U.S. GDP and some of the states have the worst housing bubbles which are still deflating signals to us that U.S. GDP is set to decline for the near future.
If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!Recessions: The Last 5 Recessions and Measuring how long we will have job losses. This will be the worst recession since World War II.
Forecasting is a tricky road to walk on in the investing world. That is why trying to predict future job losses is more of an educated guess. In fact, the National Bureau of Economic Research (NBER) only recently stated that we were in fact in a recession. I have put out an estimate that by the end of 2009 we will see the U-6 unemployment number shoot up to 19%.
Today, we are going to look at the previous five recessions with our current recession included. We will look at various charts and data and try to figure out what kind of recession this will resemble.
Market volatility is never a good sign but this normally occurs before we see any major job losses. In fact, up until September we did not see any significant job loss numbers. The vast majority of economist in late 2007 were saying we wouldn’t be in a recession. Then in early 2008 they said it would be a minor recession like the brief one in 2001. Now, it has turned out to be the worst recession since World War II. If we simply looked at 10 indicators of market distress this would have been apparent over a year ago.
First, let us look at the previous five recessions and their monthly job losses:
Click for a sharper image.
What I have done is matched up the last five recessions with their start month according to the NBER. What you’ll notice, is up until the 9th month, job losses were occurring but at no significant level in this current recession. The last 3 months the pace has drastically picked up.
Some analysis. Already you can see that with the early 1990s recession and the 2001 recession, job losses were abating and the trend was moving upward and adding jobs. We have already diverged from that model so it is clear this recession will be more severe than those two.
You’ll also notice that the 2 back to back recessions of the early 1980s saw a quick downturn, sharp up turn, and then a down turn once again. What we can learn from the early 1980s recession is that it is possible to go from a brief recession back to recovery, and back to recession quickly. In fact, you can see that for 36 months the employment situation was extremely volatile. Already our model of job losses does not match that model.
The next recession is the recession that started in November of 1973. As you can see from the chart, it initially started out with job losses picking up pace and then suddenly in month 12, the number just fell off a cliff. Yet a quick recovery did occur here as well. So far our current recession resembles this the most. Yet this would assume we would have a quick uptake in jobs within 6 to 9 months. Now this may be possible since we already know there will be a massive stimulus come 2009. Yet the question is can government job growth keep up with private sector job losses? In fact, recent estimates of jobs added is in the ballpark of 2.5 million. Well this year we have already lost 1.9 million. One more month like November and that 2.5 million is simply enough to replace what has been lost so far.
It is also the case that this recession may actually be worse. Keep in mind the above graph is raw numbers of jobs lost per month. We have grown in population over time so the graph is just to give you an idea how long recessions can go and their typical pattern. Yet I would argue this recession is worse than any of these. We would have to go back to the 1950s to get a better sense of what to expect. But even then, we did not have such a global market downturn where $50 trillion in wealth has vanished in 1 year.
Let us look at another indicator of job losses to give us an idea how things can play out during this downturn. We are going to look at year over year percent losses:
This chart is telling. Combining these two charts we can derive the following information:
(a) We are in the early stages of a severe recession
(b) We may only be at the half way point in terms of job losses if we have a recession like that in the early 1980s or 1973.
If you look at the above chart with monthly job losses, we already know this will be more severe that the early 90s or 2001. That is certain. Even our year over year job loss numbers are on par with the previous two recessions already. Interestingly the early 1980s recession and the 1973 recession both had a peak yearly job loss decline of -2.7%. If that is the case, we can expect to see more job losses for months to come.
We are also dealing with deflation here which is something not seen in decades. Keep in mind that the early 1980s recession and that of 1973 had inflation as their archenemy. We are nowhere near inflation right now. Housing is going down. Energy has collapsed. Wages are stagnant or declining. This is deflation. Let us look at the CPI over this timeframe:
This is clearly a different beast here. As you can see, the 1973 recession and the early 1980s recession both had high inflation rates. We do not have that today. In fact, over the past few months with the energy bubble bursting the rate is collapsing clearly signaling deflation:
So what can we conclude? This recession will be worse than any discussed here. This will turn out feeling like a minor depression. We already have a 12.5% unemployment rate measured by the U-6 BLS number. We will reach 19% by the end of the year. We are in the early stages of a long and drawn out recession. The actions taken so far of injecting liquidity into banks and nationalizing various institutions tells us we are going down the Japan model of facing a lost decade. What does that mean? A long and poor employment climate with anemic GDP growth.
Let us hope that this is only a severe recession and not a depression.
