The Regional Pattern of the Recession

Paul Krugman:

Southern discomfort: Southern discomfort Heartrending story in the Times about the woes of South Carolina. In fact, unemployment rates in the Southeast have risen more than in the United States as a whole; there’s a sort of Slump Belt extending from the industrial Midwest down to the Carolinas. Why is this happening? The Slump Belt does sort of look like the “auto corridor”; maybe what we’re seeing is the geographical location of cyclically sensitive manufacturing industries. Anyway, it’s striking that the worst of the crisis is hitting states that largely didn’t experience a housing bubble...

This is news to me. I had been confidently expecting the dollar to fall and manufacturing to pick up and lead the economy out of the recession. Time to rethink what is going on.

Comments

[SA]

Manufacturing is only 12% of GDP. It's not going to lead the economy out of recession.

[Red Pill]

Dr. Delong,
My training is in engineering. A couple of years ago I got curious about economics and finance. It saved me a lot of money. You have too much confidence in the equations you occasionally jot down. The mathematics provides a veneer of rigor. However, the core assumptions used to build these economic models are woefully wrong. You are not practicing a science, but are adhering to a religion. The different academic economic perspectives even bicker like religious sects. I know you have read a lot of history. Put away the equations, reflect on financial/economic history, walk around town a bit, talk to bankers, retailers, first time home buyers (like me, but not yet!), and then use common sense. It's in simple numbers; numbers like price/rent ratios, debt/income ratios, etc. Too much debt, too little income. There has been decades now of terrible malinvestment. And now like a forest fire that ignites in a wood where fire has been suppressed for decades, this recession/depression will be a conflagration.

[Nathan Kaufman]

http://finance.yahoo.com/q/bc?s=NCC&t=5y&l=on&z=m&q=l&c=

site above should take you to a graph of price of stock in National City (symbol: NCC) over a trailing 5 year period

[AP]

Next you could study "how not to write like a jerk".

[Nicholas Beaudrot]

The GBP is way down. Treasury yields are effectively zero. Flight to safety by the global elite during a global slowdown?

[MattYoung]

Paul is worried about his "missing from the map" theory happening in real time. If a material change creates a new constraint, then certain geographies will coagulate around more efficient trade, and make economies of scale before other geographies adapt.

[bakho]

A sizable chunk of US mfg is auto and appliance related. The Big 3 have been cutting back on production for a while which has been hammering the parts mfg. For a while, Big Energy was sucking all the new auto money out of the economy with high gas prices. Now that gas prices are lower, there is not money to lend and people are holding off on buying in hopes of buying something new that is more efficient. Even Toyota is losing money.

At some point there will be pent up demand for new autos, but it will be a while. We do export truck trailers and heavy equipment, but the demand for that equipment is depressed world wide.

As for the dollar, don't people need lots more dollars (than what exist) to pay off the massive bets made by Big Finance?

[Aaron Weber]

Flight to safety leads people to Treasurys, which props up the dollar, which keeps US exports too pricey to help the manufacturing sector.

[Rusty]

Manufacture what?

The factories are closed, the equipment has been sold off. Restarting multiple manufacturing sectors is highly unlikely.

Clothes? No. Shoes? No. Toys? No. Auto parts? Declining.
Ladders? No. Tools? No. Kitchen goods and utensils? No. Small appliances? No. All gone.

And Caterpillar (Tractor) Inc., crown jewel of the export sector, just took an axe to white collar salaries and blue collar employment.

[Neal]

The problem, this time, as in the past few recessions, is that more jobs are sent offshore in the pursuit of profitability. This happens both in manufacturing and the "non-contact" service sector jobs.

It is the reason why each "recovery" has been progressively more anemic with respect to job recovery and income gains.

The housing boom was the perfect mix of "contact" and "non-contact" service sector jobs, construction and manufacturing jobs. All paid for by the rise in real estate.

Can "green" save the economy?

Certainly not in it's present form.

Certainly not with its old "standard of living".

In this case, South Carolina is not far enough "offshore" to escape the damage.

[ryanwc]

I think gas prices led this recession. At least in Chicago, it was suburban builders, and particularly far suburban builders, who were hit first and have been hit hardest. There is still building going on in the city today. The guy who replied on Krugman's page saying the South Carolina avoided the price bubble by more building has it exactly wrong - they WERE building, but they weren't building anything people would buy in an economy where $4/gallon was possible. It's not just that no one wants to move. It's that people have become afraid of moving where the extra driving might cost a lot.

If you don't think high gas prices have changed the mind-set, think of the vitriol against Detroit right now, inexplicable by any rational standard. I see lots of people writing how Detroit makes cars nobody wants, may never be profitable again. 2 years ago, Detroit were still wildly popular. 2 years ago.

Now some of the vitriol is coming from elites who make a fetish of sleeker, faster, and suddenly find their private pleasure IS a public virtue after all, dancing a dance of righteous indignation. But a lot of it is the anger of the jaded, anger that $1.50 gas hasn't been able to soothe.

[kharris]

Telling us what you expected, and that you were wrong in expecting it, helps us calibrate our level of reliance on your judgements about the real economy ("the equity premium is too high and represents a great opportunity for the Social Security system). It does not, however, help us to think through the issues you raise if you don't tell us what your assumptions were. Three leap to mind. One is that the dollar's path is predictable in the short term, even though there is little evidence that is so. Another is that changes in fx rates are mostly driven by changes in interest rates. If there is no evidence that fx rates are predictable in the short term, then that applies to predictions based on changes in interest rates. The third assumption that comes to mind is that relative growth rates drive fx rates and the US would be far worse than other major fx blocks. This comes up against the same "can't forecast fx in the short term" problem. Lots of folks anticipated that decoupling would, after all those near misses, finally happen, so don't feel bad if that was your assumption.

[KenHoughton]

What you missed--though kharris is correct as far as he goes--is that there never was a recovery in most of that belt. (No housing bubble, because no income increases. Housing prices have generally gone one way--down, as there is no one with money to buy. Exceptions in the bigger cities--Charlotte, Nashville, Knoxville--are the exception that proves the rule, and many of those last two are people buying second ["retirement"] homes.*)

If you spent the six "non-recession" years (10/2001-12/2007) trending water in a deepening pool, that severe buildup of lactose in your legs is going to be a big problem when the next "negative wave" comes along.

You have the data; you just forgot to put the Dummy Variable/IVE in for "experienced a housing bubble."

Not likely to be a mistake made next time.

*The Charlotte rule is from those who deluded themselves that having a concentration of "assets"--NCNBrenamed and WalkAllOverYa--meant the same thing as having a variety of employers and therefore a growing presence in the market.

[nquixote]

The failure of our economy to rebalance toward manufactured goods exports couldn't have anything to do with China's yuan policy, could it?

No, it couldn't, because if it could, then intellectual honesty would compel us to say that it could, and that would anger the Celestial Empire. And remember that angering the Celestial Empire is the very last thing we would ever, ever want to do.

[Red Pill]

Heh, no walk then? Well, I believe Aristotle warned way back when about undue precision in our ideas about the world. Hubris and White Towerism in the economics profession has caused a lot of harm.

I will try not to write like a jerk, but watching this mess obviously unfold since 2005 has been stressful and faith shaking.

[Tangurena]

A lot of businesses are having trouble getting credit to float their operations. Many run on lines of credit, the larger ones, like GM and Ford, float short term bonds. The bond market is hosed because the rating companies chose to take bribes to make everything AAA. As a result, no one can trust any rating from Moody, Standard and Poors, nor from Fitch. That's the cause of "flight to quality" because the only AAA ratings that people can trust anymore are Treasurys - or else they have to do their own due diligence.

The only manufacturing that's going to be doing well is going to be the smaller operations that had their own cash to fund operations. Anyone who depended on credit to bridge the gap between ordering parts and getting paid by the retailer/customer is going to be squeezed with the frozen credit market. And the ones that used their own cash are typically very small - because the refusal to use credit is a limiting factor. So you're looking for "mom and pop" type companies. Many of whom were pushed aside during the boom years.

The structure of the larger retail chains force every smaller manufacturer to get large, get overseas, or get out of business. Walmart is the exemplar of this - requiring annual price decreases as well as tight integration into suppliers ERP systems. The combination of required decreases and their fingers into your company's computer system means that they know exactly how much stuff costs, and they squeeze what little profit out of your company and into their's. To meet the volume and price standards requires going offshore. And they're so large that virtually every company that decides to let Walmart come onboard as a customer ends up depending on them so much that they will perish if they lost Walmart. There are very few companies that say "no" and Toro is the only one that comes to mind.

We as a country have painted ourselves into a corner, and it is going to be very, very painful getting back to any semblance of prosperity.