Modest Growth – Very Modest
Under normal circumstances – who can remember when they were? – GDP growth of about 2% would be looked at as something of a failure, but for a long time now anything in the 2.0% to 2.5% range has been regarded as an optimistic target. Such are the consequences of a bloated financial sector.
This morning’s preliminary report on third quarter growth has GDP chugging along at an annual 2.0% rate, which is the par I have been suggesting we ought shoot for all year. This marks a decent jump up from the second quarter’s 1.3%, but is nothing to shout about.
The most significant contributor to the increase was personal consumption which edged up from 1.5% to 2% quarter to quarter. This fits well with the other data we have been seeing lately. Rising confidence, a slightly more secure labor market, and the end of falling home prices all seem to be having a positive effect. Retail sales have risen across the board and households appear to be willing to go out and spend.
Whether they will – or can – continue this will depend on more improvement in employment and a return to some semblance of wage growth. And therein lies the rub. Wages have stagnated for so long for the average family that I seriously doubt we can accelerate personal spending much above its current tawdry rate. The division of the spoils garnered by improved productivity have mostly gone to profits in the past few decades. That has led to a massive reduction in household spending potential, and consequently has reduced the upper limits on GDP growth. The tensions that arise from the skew towards profit at the expense of wages reverberate throughout the entire economy. It sits at the heart of our rising inequality; it leaks into politics in the form of plutocratic defense of privilege; it distorts capital allocation via the financial system’s self indulgence; it lowers the arc of future standards of living; and it encourages specious discussions of the ‘end of growth’, which is a very fertile literature at the moment.
More on that at another time.
Meanwhile elsewhere in today’s GDP report we learned that investment languished. Capital spending by businesses fell 1.3%, whereas real estate investment bounced up 14.4%. Government spending rose too, by 3.7%, reversing a recent tightening of the Federal purse strings. The jump was largely due to a reversal of the second quarter’s unexpected decline in defense spending. Below the Federal level, state and local governments continued their budget reductions and so continue to exert a drag on growth. Lastly, trade took a turn for the worse as the 0.2% decline in imports was swamped by a 1.6% drop in exports. Evidently the continued worldwide economic slowdown and inability to resolve problems is having a marked impact on US trade prospects.
What to make of all this?
The economy is stuck precisely where it has been for many quarters. It meanders about aimlessly subject to periodic shocks, none of which throws it back into recession but which are all sufficient to prevent a break out. The private sector appears to be taking a break from its de-leveraging, that shedding of private debt was a defining factor of the last three years, but whether the hiatus is permanent or temporary will depend on re-establishing more solid gains in wages. This is something I am deeply skeptical of. Total wages will increase as more people return to work, but wages per household for the vast majority look set to fester. Add in the ludicrous and totally unnecessary focus on the Federal deficit and the supposed uncertainty that it creates, and we have a recipe for more of the same. Indeed I expect the fourth quarter to show a slow down. The odds of lower growth are higher than those for an acceleration.
Especially given the intellectual failure of our elite and its total disregard of the facts in its current obsession on austerity.
