Explaining Southern California's economy

Jeff Gundlach shows why US economic growth has become very expensive

The U.S. has added a huge amount of debt since the financial crisis, but it hasn't yielded higher levels of growth.

Southern California is home to a trio of important bond funds: PIMCO, TCW, and DoubleLine Capital. All of these have executives who routinely comment on the global financial system, although PIMCO and DoubleLine usually get most of the attention.

At Newport Beach based PIMCO, which manages $1.8 trillion, co-Chief Investment Officer Mohamed A. El-Erian acts as a sort of wise man for both his firm and for a variety of blue-chip news outlets (and the co-CIO and founder Bill Gross is a regular on CNBC and other financial broadcast outlets). 

Bond fund managers tend to be very macroeconomic and global in their outlook. They can see wheels within wheels and large-scale patterns because bonds are how countries, states, cities, and companies all fund themselves. If something is going right, bond markets can tell you. And if things are going to go wrong, bond markets can send the signals. Just ask Greece. Or California, which has one of the lowest credit ratings of any of U.S. state.


Why the US economy is stuck at 2 percent growth

A year later, and the slow-growth economy that was predicted in 2011 has definitely arrived. Orange County is somewhat defying the trend, however.

The U.S. Commerce Department just released data on U.S. economic growth in the third quarter. The nation's gross domestic product (GDP) was 2 percent, a significant improvement over the second quarter's 1.3 percent.

Conveniently, I was at the Orange County Business Council's 18th annual economic forecast Thursday and heard two California State University Fullerton economists grapple with the implications of what it means to be "2 percenters" when it comes to GDP growth.

Anil Puri and Mira Farka will be familiar to readers of the DeBord Report. I've covered their presentations on several occasions and attended last year's forecast. At that time, I suggested that Puri and Farka were basically forecasting a slow-growth, high-unemployment economy for 2012 — which is pretty much what we got. I call this "stuckflation," a reference to the infamous "stagflation" of the 1970s, with the main differences being that we do not currently have the high interest rates and high inflation of the Carter era.


The gruesome tale of declining U.S. economic growth

Scott Olson/Getty Images

Workers build a Jeep Compass at the Chrysler assembly plant in Belvidere, Ill. U.S. growth continues to contract despite a good performance by the auto industry.

There were plenty of reasons to be optimistic about the U.S. economy at the tail end of last year. On balance, the year had been pretty miserable, growth-wise, up to that point: gross domestic product grew less than two percent. But the fourth quarter came in at double that, a surprising 4 percent. The stage was set for some real if not spectacular economic recovery in 2012.

The first quarter initially looked good, as we started to add 200,000-plus jobs. But when the GDP numbers started to roll in, we could see a repeat of an old pattern: the year begins with promise, only to hit headwinds by spring. In 2011, in was the Japanese earthquake and tsunami, a spike in oil costs, and the debt-ceiling battle and ensuing U.S. credit downgrade by S&P that smothered progress. This year, it's been ongoing troubles in Europe, plus a hot summer and drought that damaged agriculture, which had been one of the unsung stars of the recovery.


Visual Aid: The chart that tells you all you need to know about the 'recovery'


Calculated Risk

In previous downturns, we've regained jobs at a quick pace. But since 1990, a new pattern has shown up.

Thanks to Joe Weisenthal and Calculated Risk for providing the chart above that tells the tale of our postwar recessions — and shows how the "recovery" we're currently "in" has stacked up against previous bouncebacks.

Note the key visual distinction between job losses and additions in the recessions and recoveries of 1990, 2001, and 2007; and all the previous recessions and recoveries. 1990 and 2001 may not have been as severe as some of the dips that preceded them, but the pace of recovery was slower. Pre-1990 job downturns were typically followed by quick spikes back to pre-recession peaks. 

2007 is obviously the Big Boy. We plunged below the previous nadir, set in 1948 — and are currently suffering through the same sluggish recovery pattern that we saw in '90 and '01. However, in those recessions, we never fell below a 2 percent employment loss, so creeping back wasn't as onerous. 


Can we really get excited about 0.2 percent better GDP growth?

Northwest Connecticut Hit Hard By Economic Slowdown

Spencer Platt/Getty Images

A closed factory sits in Waterbury, Connecticut. The government has revised up U.S. GDP growth numbers for the second quarter, but GDP continues to be weak.

Under the circumstances, we should take it. The Commerce Department just revised up second quarter U.S. GDP growth to 1.7 percent from 1.5 percent.

If you're keeping score at home, this means that in the second quarter of 2012, the U.S. economy grew at a rate that matches expansion in the whole of 2011 — a rate that was considered abysmal at the end of last year, in the context of a fourth quarter in 2011 that saw GDP growth of 4.1 percent.

I like to keep an eye on GDP as it relates to unemployment, which is currently at 8.3 nationally, higher in California and L.A. Growth at 1.7 percent — or anything under 2 percent, really — isn't enough to make much of a dent there. In order to get nearly 13 million unemployed Americans back to work, we need to add 350-400,000 new jobs each month. We're doing less than 100,000 these days, after starting the year at about 200,000-per-month pace.