METROS | Real GDP 2012 Growth 2.5%

Bureau of Economic Analysis map out today shows healthy real-GDP growth in metro areas in 2012. The average of all U.S. metros was 2.5 percent.

Urban economists, politicians and economic consultants watch regional data closely for competitive reasons.

Growth rates provide clues as to the success or failure of regional economic and tax policies.

Metro growth was especially strong (dark and light blue) in in Texas, the Midwest and Northwest, and was weak (brown and beige) in much of upstate New York and New England, Southwest and western Florida.

Growth in the NYC area, which includes Long Island and Northern New Jersey, is middle of the road, about 2 percent.

The map shows the uneven nature of economic growth in the United States. Decline and growth may be close neighbors. California was mixed. Also Florida - some parts, notably Greater Miami, grew rapidly while other metro areas in the state's northwest declined, while mid-Florida grew moderately.

GDP data are a better measure of a local economy than job numbers (unemployment, payroll job growth), but they take much longer to see the light of day. Job numbers for large metro areas are published by the Bureau of Labor Statistics within a month after they are collected. The good news this year is that the BEA is back to getting out the metro GDP data within nine months after the end of the year for which they are reporting. They had slipped to taking more than 12 months. Data delayed are data denied.

For the whole story and a high-resolution map, go to the release on the BEA website.

Recovery Not Done - Neg GDP Growth 4Q12

One use of the quarterly GDP growth figures is a check on how hot the economy is.

Watching the GDP figures is like a cook's tasting the soup periodically to see how hot it is.  

The Bureau of Economic Analysis came out with its "Advance" estimate of fourth-quarter 2012 growth and it is slightly negative, minus 0.1 percent. Not too hot.

The figure for 2012 comes to 2.2 percent real GDP growth, in line with the last two years after the horrendous drop in 2008-2009 (see the chart above that I created easily from the helpful BEA Excel spreadsheet on its website - http://www.bea.gov/national/index.htm#gdp).

The negative figure is surely a surprise to most economists. Maybe not Paul Krugman, who has been arguing that the deficit-reduction talk is way premature and we must keep stimulating the economy until the evil effects of the meltdown in 2008 are fully played out.

But the BEA emphasizes in its press release this morning - which I tweeted as @cityeconomist - that the Advance estimate is based on early and incomplete data - the message is that it may well be revised up to a positive figure next month, but meanwhile Dr. Krugman has the opportunity to tell the GOP members of Congress: "I told you so."

On the other hand, world GDP has been slowing down (http://www.economist.com/blogs/graphicdetail/2013/01/focus-world-gdp) and this could be a drag on U.S. growth.

PEACE | What Happened to Our Dividend?

When the Berlin Wall came down in 1989 and the Soviet Union disintegrated, many of us looked forward to a Peace Dividend, a reduction in military spending that would allow more U.S. Government spending on public needs like health care or education, or tax cuts, or a combination.

We got the tax cuts but the Peace Dividend has melted away. Spending on the ongoing wars in Iraq and Afghanistan have replaced spending on the Cold War, and U.S. military spending is still at the level it was in 1990.

In FY 2008, the federal budget shows $751.6 billion for defense. This is made up of four elements: (1) DoD spending (line 051) of $583.1 billion, (2) Nuclear weapons in the Department of Energy budget, $24.2 billion, (3) Veterans Administration, $86.6 billion and (4) borrowing cost of unfunded military expenditure, $57.7 billion.

However, the Bureau of Economic Analysis (BEA), in the Department of Commerce, shows a higher number for national defense consumption and gross investment expenditure, $734.8 billion. If we again add in Veterans Affairs ($86.6 billion) and interest on military-related borrowing (which BEA figures is $163.0 billion), the total is $984.4 billion, nearly $1 trillion. So how does this compare with 1990?

MilEx as Share of GDP. One measure of the change between 1990 and 2008 is military spending as a share of GDP. The media tend to report the 2008 figure as 4.1 percent. This is the lower line in the first chart below, which I reproduce by permission from Professor Jurgen Brauer of the James M. Hull College of Business at Augusta State University in Augusta, Ga.
Prof. Brauer argues:

But that uses the DoD budget number without the DOE’s nuclear weapons complex, without the VA, and without the interest cost for military-related debt.

If the BEA’s numbers for defense spending are used, as in the top line in the chart, the ratio is 6.9 percent of GDP. By the U.S. government’s own accounts, military expenditure is two-thirds higher than the usual media report.

MilEx as Share of Federal Spending. The second chart shows military expenditure as a percentage of the overall federal budget.
The lower line in this chart ends at 19.9 percent for 2008, about 20 cents of the federal dollar. But Prof. Brauer argues that this is not the right number to use, because the federal budget

is loaded down with transfer payments, that is, monies that come in and go out simply because federal law mandates that they be handled through the feds. Examples are social security contributions that pay for grandpa’s monthly check or money that residents of Oklahoma pay in federal taxes that then go back to Oklahoma to fund schools or build highways there.

When transfer payments are removed, the budget for federal functions is only $1,440.6 billion, of which BEA's $984.4 billion in military expenditure is 68.3 percent, as shown on the top line on the chart. That’s not 20 cents on the federal dollar but 70 cents.

Spending on defense has come down since the 1960s. But compared with 1990 the Peace Dividend has disappeared.

Enough "Blood on the Streets"?

How low can the market go? In 1815, Nathan Rothschild said that the time to buy stocks was "when there is blood on the streets". Are we there yet?

The Great Depression lasted a decade but the Dow industrial index fell 89 percent from its high of 381 on September 3, 1929 to its low of 41 on July 8, 1932. The economy remained sour for the rest of the decade but the stock market picked up.

For the enthralling story of what happened during those years, I recommend chapters 17-20 of Liaquat Ahamed’s timely Lords of Finance: The Bankers Who Broke the World. I had the pleasure of listening to Liaquat talk at a recent evening event in New York City. He modestly disclaimed knowledge of the financial disasters that were going to happen and simply said that the Time magazine cover showing Robert Rubin, Larry Summers and Alan Greenspan with the caption “Committee to Save the World” suggested to him the idea for his book. The title reminded him of the name given to the top bankers working on global financial problems after World War I, “The Most Exclusive Club in the World.” The book studies the origins of the Great Depression that is clearly told by taking the different perspectives of the four leading actors of the period, the Lords of Finance -- Montagu Norman in the UK, Benjamin Strong at the New York Fed, Hjalmar Schacht in Germany and Emile Moreau in France.

Yesterday’s stock-market drop brings us to a cumulative decline that can only be compared with the 1930s. Fearful of today’s jobs report, investors drove the major U.S. stock averages down 4-7 percent. Jack McHugh has tallied from StockCharts.com how far down this took the markets from their peaks.

I think we can all agree that what ails our economy and markets is worse than anything since that awful time [the Great Depression], and the worst punishment Mr. Market has meted out since the 1930’s was a drop in the S&P 500 of just less than 50% (1974 & 2002).

The cumulative drop from their peaks (October 11, 2007 so far is:
Dow Jones Industrial Average — All Time High: 14,198. March 5 - Down 53.6% to 6594.
Standard & Poor’s 500 — All Time High: 1576. March 5 - Down 56.7% to 683.
Russell 2000 — All Time High: 856.50. March 5 - Down 59.2% to 349.45.
KBW Bank Index (BKX) — All Time High: 121.16. March 5 - Down 84.3% to 18.97.

Barry Ritholtz’s blog provides this list of Blue Clip penny and under-$10 stocks:
AIG (39 cents – less than it costs to mail a letter). Citigroup (98 cents). E*Trade (66 cents). Fannie Mae (39 cents). Freddie Mac (39 cents). Unisys (37 cents). Ford ($1.83). GM ($1.83). Las Vegas Sands ($1.97). MGM ($1.99). CIT ($2). Kodak ($2.50). Bank of America ($3.15). New York Times ($4.00). News Corp ($6.15). Xerox ($4.36). International Paper ($4.22). Alcoa ($5.55). GE ($6.75). Dow Chemical ($6.56). Wells Fargo ($7.95). Dell ($8.50).

In terms of timing, the Dow peaked before FDR came to office – before he was even elected. So the fears are lingering longer than they did then.

In what ways are markets and economies possibly worse off than in 1932?
- Expectations are higher because billions of people in the developing countries who were anticipating joining the global economy are seeing their hopes dashed. The 1930s effects were severe but were concentrated on the industrialized countries. The potential for instability in some countries is great and the proliferation of weapons makes this scarier than it would have been in the 1930s.

- The size of the credit overhang is much larger. The gold standard, for all of its faults in extending the distress in the 1929-33 period, kept a lid on the growth of credit. Today’s system has no natural limit to credit growth. Credit-market exposures today exceed GDP – in the United States by 50 percent, estimates Liaquat, in the UK by four times, and in Iceland by eight times GDP.

- In the world’s second-largest economy, Japan, the stock market has fallen 81 percent from its peak at the end of 1989. This 20-year decline raises questions about how quickly the world's current mess can be cleaned up.