Dissecting the U.S. GDP Slowdown & Prospects for Recovery in 2012
Last Friday, May 4, the U.S. labor department released its jobs numbers for April, confirming a prediction made by this writer this past winter that employment creation would once again slow this spring—for the third time in as many years. An analysis of the jobs numbers will be addressed in another article to follow. For present purposes, however, the jobs numbers for April confirm the first quarter’s U.S. GDP slowdown—to a 2.2% growth rate for the US economy for January-March 2012 from the fourth quarter 2011’s GDP growth rate of 3.0%--shows clear signs of continuing into this spring.
The first quarter 2012 GDP slowdown was also predicted late last year by this writer. To it is added a further prediction that the slowing of the US economy from the 2.2% rate in the first three months of this year will continue into the present (second) quarter of 2012. The growth rate could slow to possibly as low as 1.5%.
The continuing slowdown of the US economy is evident not only from GDP and jobs data, but from a host of other indicators that also began to emerge this past April: business spending, durable goods orders, construction activity, services spending, slowing wage growth, and various other key indicators.
The hot air trial balloon floated by the press and pundits this past winter—that the US economy was finally, after a third try in as many years, about to take off on a sustained growth path in 2012—is once again about to deflate. The US economy remains mired in the stop-go trajectory that has characterized it since early 2009: short shallow rebounds punctuated by brief relapses and slowdowns—a condition and prediction this writer raised nearly three years ago with the publication of the work, Epic Recession, and reiterated last November with a latest work, Obama’s Economy: Recovery for the Few’, just published this April.
The corollary false prediction by press and pundits this past winter was the US economy was not only on a sustained growth path but that the US was about to lead the global economy to sustained recovery as well. Forget the obvious facts at the time of the emerging recession in Europe or the rapid slowing of the Chinese, Brazilian and Indian economies. Europe, it was predicted, would experience a historically mild downturn. And the Chinese, Brazilian and Indian economies would experience a ‘soft landing’. Now it appears the Eurozone is headed for a deeper, more serious recession and the Chinese and other BRICS economies are headed for a ‘hard landing’ rather than soft.
Events and conditions unfolding the last nine months are showing China and the BRICS economies have proven unable to ‘decouple’ from the current Euro economic crisis. So too will the US economy prove unable to grow while the Eurozone descends into a serious contraction and the BRICS slow faster than anticipated. ‘Decoupling’ of any economy from the global, dominant trends is ultimately impossible—whether China, the U.S. or whatever.
The Over-Estimated Fourth Quarter 2011 Data
The fourth quarter 2012 GDP number of 3.0% was hyped at the time as a predictor of future accelerating recovery, but a closer inspection of the 3% clearly showed it was built upon temporary factors that could not be sustained—as this writer pointed out in a previous article:
Briefly revisiting those factors showed the following limitation of that 3%. First, a full two thirds of the 3%, or 1.8% of it, was due to business inventory building. This inventory investment was a recouping of third quarter 2011 collapse in inventories. So two thirds of the activity represented delayed prior quarter growth. Second, non-inventory business spending growth in the fourth quarter as 5.2%, but it reflected end of year investment claims of tax cuts that were going to end. Consumption spending was also up. But it was driven by auto sales made possible by auto companies’ year end deep discounting and nearly free credit to borrowers. In other words, by debt. Credit card debt spending also rose significantly, as banks began throwing cards at customers reminiscent of pre-2007 practices. Not least, non-credit based consumer spending was driven by spending fueled by household dissavings.
A more fundamental, healthy consumer spending trend required real income gains for the bottom 80% households. But that was conspicuously missing. Throughout 2011 wages, the most critical source of household income for the bottom 80%, rose only 1.8% while prices rose 3.5%--continuing the trend of a 10% decline in household income over the decade.
Also on the negative side, government spending at all levels continued to decline in the fourth quarter: Federal spending fell by –6.9% and state and local government by –2.2%, serving as major drags on the economy in the quarter as they had all year long. It is not surprising that these factors—temporary in character—did not continue into the first quarter of 2012 at the same level.
1st Quarter GDP Data: Further Slowing To Continue
So how did each of these above elements behind the preceding quarter’s 3% growth perform, thus resulting in the decline to 2.2% for January-March 2012?
As predicted, inventories slowed significantly: from contributing two-thirds of the prior quarter’s growth to only 0.59% of the 2.2%, or about a fourth of the latest quarter’s growth. And that contribution will continue to decline in future quarters.
Business spending fell by –2.1% after the prior quarter’s rise of 5.2%. Commercial building plummeted by –12% and the important equipment and software segment fell to only 1.7%. The only improvement was residential housing. But that was mostly apartment building and driven by highly untypical warm weather conditions. As far as consumer spending was concerned, the conditions worsened as well. Nearly 50% of all consumer spending was paid for out of dissaving, as the savings rate fell from 4.5% to 3.9% in just one quarter. That kind of spending was, and remains, of course unsustainable. Auto sales, a major support of spending in the fourth quarter, began to fade by April 2012 as well. Meanwhile, both federal and state-local government continued their downward trajectory in the first quarter 2012, declining by another –5.6% and –1.2% respectively. Finally, a new negative element began to appear: manufacturing exports grew more slowly than imports, resulting in an additional decline in GDP that will likely continue into the second quarter as well.
What this overall six month scenario shows is that the US economy is not only NOT on an ascending growth path and recovery in the current election year, but is rather clearly on a descent in terms of economic growth. The factors that produced a very modest fourth quarter 3% GDP growth clearly weakened across the board in the first quarter 2012. They will mostly continue to weaken into the second.
Meanwhile, the Obama administration’s primary reliance on Manufacturing and exports to drive the US economy toward recovery are beginning to weaken. With the slowing global economy in Europe and even China and elsewhere, exports will not drive manufacturing any more than manufacturing is capable of driving the US economy. Manufacturing represents barely more than a tenth of the US economy and accounts for only 11.8 million out of 154 million jobs. Manufacturing jobs and manufacturing share of the economy, moreover, has not grown at all for the past decade. Since putting General Electric Corp’s CEO, Jeff Immelt, in charge of his manufacturing and jobs recovery programs two years ago, Obama has given Immelt and his ilk everything they’ve asked for: new free trade agreements, new tax cuts, backing off of foreign profits tax reform, patent protections, and whatever. In return, manufacturing has added less than 15,000 jobs a month on average since mid-2010 and most of those jobs at half pay and no benefits. That is, up until this past month, when the manufacturing jobs creation began to slow significantly. But that’s a topic for a subsequent analysis that follows.
Jack Rasmus is the author of the April 2012 book, OBAMA’s ECONOMY: RECOVERY FOR THE FEW, Pluto Books and Palgrave-Macmillan, available now in bookstores, online, and from the writer’s website at discount at: www.kyklosproductions.com. His blog is jackrasmus.com.