U.S. GDP and the Global Economic Slowdown
Economic data reported in recent weeks show the global economy is slowing rapidly across all segments. Nearly the entire European Union, including its core economies of Germany, France, and the United Kingdom are all now clearly mired in recession. The Euro southern periphery is in a bona fide depression. Japan has entered its third recession since 2008. China, India, and Brazilian growth rates have fallen by half. And the US in the fourth quarter 2012 has come to a virtual economic standstill, the second time in two years in which a quarterly GDP recorded virtually no growth.
One consequence of the now clearly emerging new crisis is the global economy finds itself on a ‘tipping point’ and on the verge of a renewed ‘currency war’ that was temporary averted in 2010-11. Competitive currency devaluations are a sure sign of a qualitatively deteriorated economic state of affairs. During the global depression of the 1930s ‘devaluation by fiat’ played a key role in deepening and ensuring the duration of the depression. In 2010-11 the then incipient drift toward currency war took the form of driving down wages to gain a cost advantage for export sales. Today the driver is global quantitative easing, QE, policies that have been implemented and are intensifying by central banks around the world, from the US Federal Reserve, the Bank of England, the European Central Bank, Bank of China, and most recently, the Bank of Japan.
Capitalist policy makers globally have bought into the false idea that monetary policy—i.e. injecting massive amounts of liquidity into their respective banking systems—will stimulate recovery. Historically this has never worked, and it has not been working as well since 2008. Injecting money into banks, shadow banks, and speculators have resulted only in creating incipient bubbles in the stock markets, junk bond markets, and other financial securities. The real economies have benefited little if any from this form of stimulus.
Believing QE is the answer to recovery, the same policy makers have opted for a severe contractionary fiscal policy in the form of ‘austerity’ programs—massive cuts in public spending, mass layoffs and privatization in the public sector, and tax hikes on the middle class to offset the anticipated inflationary effects of the QE and money stimulus—inflation which has not appeared as deflationary forces continue to grow as the real economies of their countries continue to slow and stagnate. The dual strategy of capitalists politicians across the globe—of QE and money injections into the banks and financial system combined with austerity for the rest—has clearly failed and will continue to fail even more visibly.
Meantime, the global economy continues inexorably to slow, drifting toward the ‘double dip’ recession this writer has predicted on various occasions in the recent past, in my 2010 and 2012 published books (Epic Recession: Prelude to Global Depression, 2010, and Obama’s Economy: Recovery for the Few, 2012) and numerous articles in ‘Z’ magazine and elsewhere.
The locus of the debate on the near-term economic future in the US economy is now concentrated on whether the recent 4th quarter US GDP , which fell to -0.1%, is just an aberration and will be reversed in the first half of 2013 or whether it is a harbinger of a further slowdown. This writer’s view is that it is the latter, as has been predicted in a series of analyses of US GDP over the past five quarters, from the last quarter of 2011 through the last quarter of 2012’s recent GDP data.
Data now coming in for the US show that consumer spending on the holidays was noticeably weak except for auto sales driven by discounts. It is now weaker in 2013, as payroll taxes have risen, health insurance companies are gouging households with premium increases of 10-20%, gasoline prices are rising rapidly once more, and real disposable household income for 80% of families continues to decline. On the business spending side, business inventory accumulation is slowing rapidly, small business confidence is falling, forecasts of business operating revenue show a major slowing, productivity is collapsing, and export sales will decline as the currency war drives up the value of the US dollar in global markets. The remaining ‘engine’ of GDP, government spending, is also in reverse as the debates on ‘fiscal cliff: Parts 2 and 3’ and federal spending cuts continue and the states and cities continue to reduce spending and raise taxes. Nevertheless, polyannish mainstream economists continue to predict a rapid recovery from the 4th quarter GDP collapse into 2013—as they have erroneously for four years now.
What follows is this writer’s analyses of the details of GDP results for the past 15 months, that were published on his blog, jackrasmus.com, and other public blogs. The reports are in reverse chronological order, with the latest 4th Quarter 2012 US GDP first, followed by consecutive past quarters, concluding with the analysis of the 4th quarter 2011 GDP.
Readers interested should continue to follow the blog, jackrasmus.com, for regular updates on the US and global economy, as well as the writer’s weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network, 2pm eastern time, out of New York. Announcements of forthcoming articles, blog entries and shows on the US and global economy are provided via the writer’s twitter account at #drjackrasmus.
“4th Quarter 2012 US GDP:
On the Road to Double Dip?”
Dr. Jack Rasmus
Copyright February 2013
US GDP data released on January 30, 2013 for the fourth quarter 2012 showed a decline in GDP of -0.1% for the last three months of 2012, thus raising the specter of the US economy, facing still further deficit spending cuts in 2013 amidst declining consumer confidence, may be on track for a possible double dip recession in 2013 or 2014 along with other economies in Europe, the UK, and Japan.
In the fourth quarter GDP numbers, government and business inventory spending led the decline. To the extent consumer spending played a positive role at all in the 4th quarter, it was largely driven by auto sales—stimulated by auto dealers offering buyers deep price discounts, virtually free credit with near 0% auto loan interest rates, as well new auto purchases in the northeast as a result of Hurricane Sandy’s destruction of existing auto stock. 2012 Holiday season retail sales data, in contrast, were otherwise not particularly notable and would have been much worse without the auto sales exception. How much longer auto companies can continue the deep price discounts and free credit remains a question going forward. Net export sales continued to sag in the last quarter, as the slowdown in world manufacturing and trade continued. And, as others have noted, an important source of past consumer spending and GDP growth—i.e. health care services—began to slow ominously at the end of 2012 as well, promising to continue that trend into 2013.
This weak scenario in the fourth quarter 2012, and the virtual absolute stop to US economic growth, was predicted on this writer’s and other public blogs in a piece entitled “US 3rd Quarter GDP: Short Term Myopia vs. Long Term Realities” last October 2012 (see jackrasmus.com, as well as in this writer’s April 2012 book, ‘Obama’s Economy: Recovery for the Few’).
Last October 2012, it was noted that the 3% growth rate in the preceding 3rd quarter, July-September 2012, period was artificially produced by record levels of one-quarter federal defense spending accounting for more than one third of total GDP growth in the quarter. That government spending surge was preceded by more than two years of federal government spending reductions, and thus the third quarter defense-government spending acceleration represented previously held back government spending, to be released right before the November 2012 elections. It was predicted in the above blog commentary on GDP 3rd quarter results that government spending therefore would decline sharply in the following fourth quarter—which it did. It was further noted business inventory spending was on a track to decline as well in the fourth quarter, and that US net exports, having turned negative in the third quarter, would continue to decline in the fourth quarter—all of which also occurred in the latest GDP report. The true US GDP growth trend for July-September was therefore not the 3% reported, but only around 1-1.5% for the third quarter when the appropriated adjustments are made. And that 1.5% or so been the average GDP rate for more than two years. Then the bottomed dropped out in the fourth quarter, as GDP collapsed to -0.1%.
So what’s going on? Is the fourth quarter GDP an aberration? A temporary one time event? Or a harbinger of a still further slowing US economy, moving more in line with global economic trends indicating a slow but steady further slowdown?
In the first quarter 2013, a number of negative developments in the fourth quarter will likely continue, along with new negative developments, together suggesting the first quarter 2013 GDP will at best look much like the fourth quarter—and could even prove worse.
First, more than $100 billion has been taken out of the economy with the end of the payroll tax cut last January 1. Second, consumer sentiment and spending is showing a definite sharp decline in the early months of 2013. Deficit cutting will intensify with a deal on the ‘sequestered’ $1.2 trillion agreement that will occur in March in Congress. Defense spending cuts projected will be reduced, but non-defense spending will occur and perhaps even rise. Consumer spending on autos, which has been a plus in 2012, cannot continue at the prior pace. Health care spending will likely continue to slow, as health insurance premiums of 10-20% continue to be imposed in the new year by price gouging health insurance companies looking to maximize their returns in 2013 in anticipation of Obamacare taking effect in 2014. Business spending that occurred in the fourth quarter to take advantage of tax laws will almost certainly slow in the first quarter. Industrial production and manufacturing will add little, if anything, to the economy and housing will contribute to growth through apartment construction only. In short, the scenario is one of continued very slow growth.
It is not the deficit that faces a ‘cliff’; it is the US economy. As this writer has repeatedly written since last November, the ‘fiscal cliff’ was mostly an economic farce. Real forces were further slowing the real US economy. Those real forces are once again reasserting themselves. However, should Congress proceed with continued deep spending cuts in 2013, should the Euro economies, UK, and Japan continue to weaken, and should China-India-Brazil not succeed in reversing their economic slowdowns significantly—then the odds of a double dip in the US will rise still further in 2013-14, as this writer has repeatedly predicted.
The strategic question is ‘Why is the US economy so fragile and weak? Why has it been unable to generate a sustained economic recovery from ‘Epic’ recession since 2009? Why now, after five years since the onset of recession in late 2007, has the US economy stagnating and collapsed to virtually zero growth, once again? ‘
The answers to this are not all that difficult to understand. First, despite $13 trillion in free, no interest money given to banks, investors, and speculators by the US federal reserve for five years now, the banks still continue to dribble out lending to small-medium US businesses. No loans mean no investment mean no hiring mean no income growth for consumption, which is 70% of the economy. Similarly, large non-bank corporations continue to sit on more than $2 trillion in cash. Like the banks, they too refuse largely to invest in the US to create jobs, preferring hold the cash, or use it to buyback stock and pay shareholders more dividends, to invest it offshore, or to invest it in speculating with financial instruments like derivatives, foreign exchange, commodities futures, and the like.
At the same time, the bottom 80% of households, more than 110 million, are confronted with 5 years now of continuing real disposable income stagnation or decline. This income stagnation and decline translates into insufficient income to stimulate consumption spending, which makes up 71% of the US economy. What spending exists is fundamentally credit driven, not income driven. Thus car loans, student loans, credit cards, and installment loans rise and with it household ‘debt’.
The problem with the US economy therefore is fundamentally twofold: not only insufficient income but growing household debt. Together they result in consumption becoming increasingly ‘fragile’ (an income to debt ratio term), and therefore unable to play its historic role of generating a sustained economic recovery. Together, fiscal-monetary policies are rendered increasingly ‘inelastic’ in generating recovery as ‘multipliers’ collapse—to use economic jargon. The outcome of all this is ‘stop go’ recoveries, bumping along the bottom, or what this writer has called an ‘epic’ recession.
“U.S. 3rd Quarter 2012 GDP:
Short Term Myopia vs. Long Term Realities”
Dr. Jack Rasmus
Copyright October 2012
The third quarter (July-Sept.) U.S. GDP figures released last Friday, October 26, estimated the US economy grew by 2%. That compares to an average growth for the first nine months of 2012 of an historic low of 1.7%. The 2% reflects, at best, a continued stagnation of the economy and, in all likelihood, an actual continuing decline for the economy over a longer run.
Here’s why: to begin with, the 2% is an initial ‘advance’ estimate. Advanced estimates recently have tended to be reduced significantly in the 2nd and 3rd revisions. To recall, the previous 2nd quarter GDP also initially came in at 1.5% but was then reduced to 1.3%. It is quite likely therefore the third quarter’s 2% will be revised downward 0.1-0.2%, which will put it almost exactly at the past year’s 1.7% average.
Secondly, every four years just before national elections politicians typically turn on the spending spigots in the third quarter to get a brief boost just before the national election. And so it was this past third quarter. The Federal government in particular accelerated Defense spending. It appears this was done by deliberately holding back defense allocations in the previous quarters in order to have an especially large impact just before the national elections in the third quarter. Federal defense spending fell by-7.1% and -0.4% in the first and second quarters of this year. In other words, it appears defense spending was slowed in the first half of the year in order to get the bigger third quarter boost just before the elections. In fact, the third quarter’s big bulge in spending –attributable virtually all to defense—was the first time in two and a half years that government spending did not decline in every consecutive quarter! The two and half years of decline in federal spending, combined with the big declines in the same the first two quarters of 2012, suggests the third quarter’s inordinate surge in defense spending was consciously planned. Federal spending in the third quarter thus amounted to a a huge third, 0.7%, of the 2.0% reported GDP growth last quarter. It is highly unlikely any such additional surge in defense, or government spending in general, will follow this fourth quarter or subsequently in 2013. So this 0.7% is a one time event and the 2% (or revised lower) third quarter GDP number is actually less than 1.5% when the one time surge is backed out of the trend. That would mean the US economy continued to slow last quarter when considered in the context of a longer term trend.
The second big contributor to the third quarter’s 2% initial growth was consumer spending. It reportedly contributed 1.4% of the 2% total for the third quarter GDP. But one needs to look at the composition of such spending in order to determine if it too will be sustained, or whether temporary forces are at work here as well.
Consumer spending is being driven not by fundamentals of real household disposable income growth, but by temporary factors as well. This past year much of consumer spending has been driven by the top 10% wealthiest households, whose spending in turn is driven largely by stock market returns. And stocks have done extremely well in 2012, boosted in particular by the Federal Reserve’s early 2012 ‘operation twist’ quantitative easing program, and over this summer by investors’ anticipation that ‘quantitative easing 3.0’ would follow, which did. Federal Reserve QE is directly correlated with surges in stock prices, as banks and investors take advantage of the free Fed money and lend it to professional investors who in turn drive up stock prices by speculating. That brings more money into the stock markets, driving up stock prices and returns to wealthier households. Returns on corporate bonds have also boosted wealthy household earnings. It is not surprising then that the top 10% households, doing very well, are in turn driving much of consumer spending, or at least inordinately so. The remaining 90% households appear to be spending in the third quart—but not based on real income gains. Their spending is being driven by a surge in credit card issuance by banks, and usage, on the one hand, and by spending down savings on the other. Savings rates have fallen over this past summer. High on the spending list for the bottom 90% appears to continue to be auto sales, as auto companies, with bloated over production and inventories and still not fully recovered from the recent recession, compete more intensely with each other. Much of auto sales are due to deep discounting and purchase deals amounting to no interest loans stretched out over 60 months and more. But this kind of discounted sales, combined with credit and dissaving based spending cannot continue. Nor may even the stock market driven consumption of the top 10% households. In short, a scenario of declining consumer spending is likely, and this writer predicts it will begin in the present fourth quarter 2012 period once the national elections are over and the unnatural optimism of the US consumer hits a wall of reality immediately after the elections.
A third, much less important, contributor to the 2% GDP initial number is housing. Much is made of a nascent housing recovery. But there is little evidence of such. Housing will continue to ‘bump along the bottom’ for months to come, and likely for years. What indications of housing growth that has appeared last quarter is mostly ‘multifamily’ units, i.e. apartment building, as the 12 million homeowners foreclosed over the crisis are forced to rent.
Offsetting these ‘one time’ and weak factors behind the 2% GDP number are several serious negative areas in the economy that show every sign of getting worse.
After growing at a nearly 20% annual rate in the fourth quarter of 2011, business investment has declined precipitously every quarter. Spending on equipment and software in the third quarter collapsed to zero, and business spending on buildings turned a negative -4.4% last quarter. These figures represent a clear 12 month rapid decelerating trend. Fourth quarter will be no doubt negative again. Some pundits argue this is the business community registered its uncertainty and concern over the ‘fiscal cliff’ coming January 1, 2013. This writer disagrees. It is due to two factors: first, the rapid slowdown of the global economy now underway which is beginning to impact the US economy with a lag. That slowdown, moreover, shows all the signs of continuing. Second, it is due to an emerging ‘capital strike’ sending a message to Congress that business and investor tax cuts must be continued ‘or else’. Continuing, and deepening business tax cuts, of course will make the ‘fiscal cliff’ worse. So it is not a question of concern about the deficits; it is a question of business insistence upon more and more tax cuts.
Another negative area for the economy to come is reductions underway in business inventory spending. Still another is the sharp drop off in US exports (and thus manufacturing activity) as the aforementioned global economic slowdown continues to deepen. In the third quarter, US exports turned negative for the first time in more than three years—for the first time since the spring of 2009 in the midst of the last recession quarter. Something very serious therefore is now beginning to take place in global trade, US exports and therefore US manufacturing activity not seen for more than three years.
To summarize, the ‘positives’ in the third quarter GDP numbers are extremely tenuous and temporary, while the negatives in terms of business real investment, exports, trade, and global economic slowdown all appear to have long term ‘traction’ and staying power. It will be interesting to see if those politicians elected in November 2012 are able to accurately access the long term trends of importance to the US economy, or whether they are myopically intent on ensuring a collapse of consumer and government spending in 2013 while guaranteeing the wealthy continue to get their historically generous tax cuts for another decade.
“2nd Quarter 2012 U. S. GDP:
Why U.S. Slowdown Will Continue”
Dr. Jack Rasmus
Copyright July 2012
On Friday, July 27, 2012 the US Department of Commerce released its report on Gross Domestic Product (GDP) results for the 2nd quarter for the US economy, with GDP revisions for the economy as well from 2009 through 2011.
Last winter the broad consensus among mainstream economists, politicians and the press was the US economy was finally on the way to recovery. Economic indicator after indicator was flashing green, they argued, proving recovery was in full swing. GDP for the 4th quarter 2011 recorded a moderately healthy 4% growth rate and was predicted by widespread sectors of the media would continue. But GDP numbers just released on July 27, 2012 show that 4% growth dropped precipitously by half, to only 2%. And in the latest report issued last week, 2nd quarter 2012 GDP continued to fall further to only 1.5%.
GDP for the first half of this year therefore has averaged about 1.7%--which is about the same 1.7% GDP growth for all of 2011. The US economy, in other words, is not growing any faster this year than it did last year. It is essentially stagnant, unable to generate a sustained recovery despite $3 trillion in spending and tax cuts over the past three and a half years. This scenario will at best continue, and may alternatively even worsen in the coming months; and if not worsen this year, certainly so in 2013.
This rapid slowing of the US economy in 2012 was predicted by this writer early last December 2011, in a general economic forecast for 2012-13 that appeared in the January 1 issue of Z magazine. Contrary to the 4th quarter 4% GDP trend, in December 2011 this writer contrarily predicted “the first quarter of 2012 will record a significant slowing of GDP growth” and “the US economy will weaken further in the second quarter, 2012”.
The US economy has been essentially stagnant for at least the past two years, bumping along the bottom at a sub-par 2.5% GDP growth rate. The economy needs to grow in excess of 2.5% for net job creation to occur. Given the economy’s longer term 1.7% growth rate, it is not surprising net job growth the past three months has averaged barely 80,000 a month—i.e. well below the 125,000 or more needed just to absorb new entrants into the labor force. So we are in fact losing jobs again this year, 2012, despite what the official unemployment rate says.
Readers should note this 1.7% sub-par GDP growth the past 18 months has occurred despite the $802 billion tax cut passed by Congress in December 2010, virtually all of which was tax cuts for businesses and higher income household investors. In fact, it was more than $802 billion if further tax cuts for small businesses over the past 18 months are also factored into the total. Perhaps as much as $900 billion in pro-business/investor tax cuts have been passed, which have had minimal to zero impact on the economy and job creation. So much for that myth, and conservative-corporate ideology constantly pushed by politicians and the press, that ‘tax cuts create jobs’. Readers should keep that factual absence of any positive relationship between tax cuts and jobs and economy in mind, when more tax cuts for corporations and the wealthy are proposed by both parties once again as part of the year end deal coming immediately after the November elections. Expect both sides, Republicans and Democrats alike, to agree on reducing the top bracket tax rate on personal and corporate income both, from current 35% to at least 28% (the old Reagan years rate).
1st Quarter GDP: Temporary Growth Factors Disappear
While the hype about economic recovery was in full swing last winter, this writer pointed out in various publications that the 4th quarter GDP numbers were based almost totally on one-off developments that would disappear by mid-year 2012. At least half of the 4th quarter’s 4% growth rate was due to business inventory spending, making up at year end for the collapse of the same in the preceding 3rd quarter. Auto sales driving consumer spending was also noted as a temporary effect, given they were based on deep discounting and temporary demand that would not continue. Business spending that surged in the 4th quarter was also identified as temporary, as it was driven by year end claiming of tax credits, while manufacturing export gains in late 2011 would soon dissipate, it was predicted, as the global economy and trade slowdown eventually reached the U.S. in 2012.
The halving of GDP growth by the 1st quarter 2012 was due in part, as predicted, to the slowing of auto sales. The previously predicted slowing of business inventory spending occurred, while the 4th quarter’s business investing also disappeared as predicted. In addition to the dissipating temporary factors, new developments added to the 1st quarter’s GDP decline: Consumer spending slowed, as escalating gasoline prices began once again (for a third year in a row) taking their toll on consumers and as auto sales growth began to show signs of weakening. The global slowing of manufacturing also finally began to penetrate US economy by 2012, as US exports grew more slowly than imports and thus depressing GDP still further. Finally, the 30 month long decline in government spending, especially at the state and local government level, continued unabated into 2012.
In late April this writer predicted that the 2% first quarter 2012 GDP would continue to decline still further. In a piece in Truthout.org on May 8, it was predicted the 1st quarter GDP “decline will likely continue further in the months immediately ahead, to possibly as low as 1.5% the second quarter, April-June 2012.” (In a piece in Znet on May 6 it was predicted for the second quarter 2012 that “The growth rate could slow to possibly as low as 1.5%”).
2nd Quarter GDP’s Continuing Downtrend
The same factors that have been driving the 4% GDP to 2% in the January-March 2012 period have driven it lower still, to the recent 1.5%.
In the most recent 2nd quarter 2012, both consumer and business spending showed even further weakening—while government spending continued to contract for the 33rd consecutive month and the contribution to GDP by exports fell further as well.
Consumer spending on goods declined from its 5.4% rate in the 4th quarter to only 0.7% this past quarter. Durable goods spending in particular fell off a cliff last quarter, as auto sales not only slowed dramatically, as in the 1st quarter, but now in the 2nd actually turned negative. But perhaps the most dramatic indicator is the fall off in retail sales in general. Retail sales April-June fell in each of the three months. That is the first time for a three consecutive month decline since the deep collapse of 2008! Even services consumption recorded its slowest and lowest growth in two years!
What consumer spending did occur in the 2nd quarter was driven by sharply rising credit card debt as well as household auto and education debt, credit cards growing by 11.2% and auto-student loans by 8%. In other words, to the extent consumer spending is occurring at all it is not due to rising household real disposable income—which is actually falling—but due to households taking on more debt. So much for the mainstream argument that consumer spending is slowing because households are working off debt (i.e. so-called deleveraging). That may be true for the wealthiest 10% households with income growth from stocks and bonds, but not for the bottom 90%, i.e. the more than 100 million rest of us. But consumer spending increasingly dependent on credit cards and other borrowing portends poorly for further spending down the road. It is not sustainable and will result in yet a further slowing of consumer spending and consequently economic growth.
Consumer spending is not the only major trouble spot in the 2nd quarter that promises to continue into the 3rd and beyond. Business spending also showed new signs of trouble in new places as well as the old last quarter. Business spending on plant expansion, which shows up as business ‘structures’ spending, collapsed last quarter from prior double digit levels in the 4th quarte—from 33.9% to only 0.9% in the last three months. That plummeting structures spending will eventually translate into a slowing of new job creation going forward as well. Businesses that don’t expand don’t add jobs. Slowing business spending was also evident in new orders placed for manufactured goods that turned negative for each of the past three. Watch next for the other business spending sector, on equipment and software, soon to flattened out in the future as well.
A third sector of the economy that contributed to growth in 2011, but has also reversed now as well, is exports. New orders for US exports have declined the past two months in a row, the first back to back fall since 2009. That confirms that any contribution of exports and manufacturing to GDP is now clearly over. It never really contributed that much in the first place, despite all the Obama administration hype in 2010-11 that manufacturing and more free trade would ‘lead the way’ to sustained US economic recovery. It was all hype to reward multinational technology and other companies—big contributors to Democratic election coffers—while diverting attention away from the obvious failures to generate sustained recovery after the three Obama ‘recovery programs’ introduced in 2009, 2010, and 2011.
Not least there’s the continued poor performance of the government sector in the 2nd quarter. It has continued to decline every quarter since the 3rd quarter of 2009, or 33 consecutive months now. That spending decline at the state and local government level has been the case despite more than $300 billion in federal stimulus subsidies to the states since June 2009 and hundreds of billions more in unemployment insurance payments by the federal government to the states. Why state-local government spending has declined every quarter since mid-2009 despite the massive subsidies is an anomaly yet to be explained. Like corporations hoarding their tax cuts, and banks hoarding their bailouts, both refusing to use the money to lend and create jobs—perhaps the states and local governments also hoarded their subsidies. Perhaps that’s why the Obama administration quickly shifted its promise that its stimulus package would create jobs, to a message that it would, if not create, at least ‘save jobs’.
In answer to the obvious further deteriorating in the 2nd quarter in both consumer, business, and government spending, the press and media in recent weeks have tried to grab at straws and hype a ‘recovery underway in the housing sector’. But this line has been based on the slimmest of evidence: the indicator that home builders’ new construction has risen. But the media hype in recent weeks regarding housing has conveniently ignored various other indicators recently showing continued housing sector stagnation: For example, new home sales declined by 8.4% in June, the largest fall since early 2011. Mortgage loan applications and new building permits also fell, while median home prices recorded a –3.2% decline compared to a year earlier. That amounts to nothing near a housing recovery. To the extent home building has risen, it has been largely limited to multi-family units—i.e. to apartment building. That’s not surprising, given the 12 million plus homeowners who have been foreclosed since the recession began and need some place to live. But housing sector indicators as a whole still show that sector languishing well below half of what it was pre-2007 and with little indication of any kind of sustained growth or recovery. As in the case of net job creation, without a housing recovery leading the way there is no sustained general US economic recovery.
In all the 11 prior recessions since 1947 in the U.S., state and local government spending increases, net job creation in the private sector equivalent to 350,000 jobs per month for six consecutive months, and housing sector recovery have all been necessary to ‘lead the way’ out of recession. But for the past four years none of the above has been the case. There have been no effective jobs program, housing-foreclosures solution program, or state-local government spending program. That tripartite failure is at the heart of the failed economic recovery of the Obama first term.
“Dissecting 1st Quarter 2012 GDP”
Dr. Jack Rasmus
Copyright May 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.
“4th Quarter 2011 GDP and Other Year-End Statistics”
Copyright January 2012
On Friday, January 27, 2012 the first advanced reporting of fourth quarter 2011 GDP statistics were released. It showed a ‘first’ estimate of GDP growth of 2.8%. That follows a third quarter GDP number of 1.3%, and a first half 2011 of only 0.8%. At first glance it would appear economic growth is on the rise, supporting the claims of politicos and pundits that recovery is on the way (once again). But a closer look shows just the opposite.
A normal historical growth rate for the US economy is about 2.5%. But that’s a long run average pre-2007. 2.5% is also well below what is normal for a recovery from a recession at our current stage of two years post-recession lows in 2009. At this stage in past recession recoveries, the GDP growth rate is ‘normally’ 4% to 5%. For the entire year of 2011, actual GDP rose only 1.7%, easily less than half the normal for a recession recovery.
But even that 1.7% average for all of 2011 assumes the 2.8% last quarter was really 2.8%. It isn’t. It’s really around the same 1.0% rate that marked the first nine months of last year, 2011.
Here’s two reasons why it’s really in the 1%growth rate doldrums it’s been all last year: To begin with, the fourth quarter 2.8% number will likely be revised downward to 2.7 or even 2.6% in the next two revisions that typically follow the reporting of ‘advance’ first estimates of GDP reported on January 27. But let’s not count that reduction yet. Let’s start from the reported 2.8%.
The first problem with the fourth quarter estimate of 2.8% is that 1.94% of that total was due totally to business inventory buildup (which means it won’t last going into 2012). In the preceding third quarter 2011, inventory building by business collapsed to almost zero. The 1.94% therefore reflects recovery of some of the inventory buildup that didn’t occur in the third quarter 2011. So the 1.94% for last quarter 2011 is really about half that, or only around 1%. That means 1% should be deducted from the total 2.8% GDP growth in the fourth quarter. That means GDP really grew only 1.8%.
Here’s where the second problem comes in. The 2.8% is what is called ‘real’ GDP. That is, GDP that is adjusted for price inflation. The specific price index that is used to adjust for inflation for GDP is called the ‘GDP deflator’. If that deflator reports a low inflation rate, the real GDP growth is higher. The GDP deflator claimed that inflation in the fourth quarter of 2011 was only a mere 0.4%. That is unbelievable. The true inflation rate must be at minimum at least 1%. That’s 0.6% higher than that which was officially reported. That 0.6% higher should therefore be subtracted from the 1.8%. The real ‘real GDP’ should be around 1.2%--that is, just about the 1% rate of GDP growth that occurred throughout all of last year.
The US economy remained stuck in its stagnant, no to low growth condition in the fourth quarter, in other words.
There are a host of other problems with the government statistics in the fourth quarter as well. Another area of problem is reporting on jobs. The 200,000 job growth reported was not the true, actual data of actual jobs created. It is a statistic; that is, a manipulation of the actual jobs that is adjusted for seasonality assumptions, new business formation assumptions, and other ‘adjustments’. These adjustments tend to boost the real job numbers during the year end holiday season higher than the actual. As just one example, the seasonal adjustment for December 2011 reported 42,000 hires of ‘couriers and messengers’. These are workers hired by UPS, Fedex, etc. to accommodate temporary surges in parcel mailings. These are temp workers that then are typically laid off after the holidays. But the 42,000 reported was actually 86,000 messengers and couriers, most of whom will be laid off soon in 2012. Another related problem is the ‘seasonal adjustment’ of workers hired in retail, another temp-part time surge in the holiday season. The labor department gross underreported those numbers as well. Those workers too will be laid off in huge numbers come the first quarter of 2012.
A look at what really happened to the economy in November-December is what happened to retail sales. Despite the hype around a ‘record’ holiday season, the facts now coming out in January show that retail sales, year over year, rose only 0.1% in December, and most of that due to car sales. Minus auto sales, retail sales declined in December 2011 compared to the year earlier, the first such fall since May 2010. And that despite record price discounting by retail sales companies. Even that poor retail sales performance was driven by rising use of credit cards once again by consumers, or by their dipping into savings for holiday spending. The latter was not surprising, given that wages and salaries rose only 1.8% (and most of that at the high end) while prices rose double that at 3.5%. In other words, real wages and income continued to fall, as they have since 2009. Over the past decade household income has declined has been about 10%.
No wonder holiday sales were so poor. And fourth quarter GDP was really much less than reported. And why the first quarter 2012 will be, at best, no different than 2011—or possibly much worse should the Eurozone almost certainly experience a severe banking crisis this year. By the way, that’s also why the Federal Reserve also indicated last week it planned to keep interest rates at zero for an additional two years, through 2014. What does it know that we don’t? That the US economy will get weaker, perhaps much more so, and that US banks will have to be bailed out again if Europe tanks, and if that happens it means a double dip almost for certain.