GDP: Crawl, But No Stop
Today’s much hyped release of the revised GDP figures for the second quarter delivered as promised: the economy is moving at a snails pace, but it hasn’t yet stopped.
The revision shows growth of a paltry 1.6%, which is down both from the original estimate of 2.4%, and the now final number for the first quarter of 3.7%. Our fears that the underlying economy is weak without the support of the stimulus have been completely vindicated. Likewise fears of a double dip recession have grown, but we are still not there. Just.
The numbers don’t need much analysis:
Consumption contributed +1.4%
Investment contributed +2.1%
Inventory Adjustments contributed +0.6%
Trade deducted -3.4%
Government Spending contributed 0.9%
These raw figures mask some interesting details.
Private investment, particularly in machinery and equipment surged by 19.5% during the quarter. Even residential investment picked up, admittedly from a very low base, and grew 27.2%. This latter number seems enormous but we should remember that residential investment has collapsed over the last few years, so this rate of increase cannot be sustained and merely reflects the extraordinary depths of the recession, rather than reflecting a renewed vigor.
Consumption had a decent, but not great, quarter. Durable goods expenditures were the key, growing 6.9%. This makes it two quarters in a row of solid gains for durable goods, which is usually a sign of gathering strength for the economy as a whole.
The big shocker in the quarter was the radical change in the trade figures. Exports grew 9.1%, but were swamped by a 32.4% surge in imports. This truly horrible performance was driven the increase in consumer demand for electronics and other ‘hard’ goods, as well as a recovery in the demand for autos. The size of the shift in imports was so large that I cannot see it being repeated, so we should expect the third quarter to show a much lower negative impact from trade.
The government spending numbers are also interesting for what they don’t show: the steady reduction of spending at the state level abated temporarily and actually reversed slightly. So the 9.1% increase in Federal expenditures were not offset by a local government contraction as has been the case recently.
So what?
The economy is obviously going through a very weak period. We should be extremely cautious in our expectations for the next few months. Growth of around this same level is what I think is a reasonable projection, absent any major shocks. More to the point: I think there is sufficient strength – only just – for us to avoid a further slowdown into recession. Final demand is healthy at around 4.1%, and as long as the trade figures for the second quarter are an aberration rather than a new norm, we should eke out growth over the rest of this year.
The problem is that growth at these meager levels doesn’t feel healthy and will not generate an improvement in the job outlook. As a rough rule of thumb we need around 2.5% GDP growth for unemployment to stop growing, and about 3.5% for it to start to drop. We are nowhere near those levels and so there is a distinct chance that unemployment could tick up as the year progresses.
It is that possibility that undermines everything else. Higher unemployment could tip consumption back down and ruin business prospects. That would bring a halt to the current increase in investment and thus throw us into contraction.
So the entire focus of policy makers should be on jobs. That means spending government money.
The chances of that remain poor as the GOP obstructs and the Administration dithers.
Instead of action on jobs we hear far too much discussion in policy making circles about the need for a tightening in monetary policy. One Federal Reserve bank president – Kocherlakota from Minneapolis – has attracted the scorn of some economists by arguing that we need to raise interest rates in order to fend off deflation. But low interest rates are not a cause of deflation, but they may be a symptom of an ongoing disinflationary process. It is true that long term rates are lower now, and that a possible reason for that is the reduction of the so-called inflation premium embedded in them. But the causality runs the other way around. We raise short term interest rates in order to alter the economy’s path by slowing the demand for credit, and to signal an outlook for acceptable inflation at all levels of GDOP activity. In a period of high inflation this has the effect of reducing expected inflation and, thus, long term rates decline. So lower long term interest rates reflect, rather than cause, reduced inflation. That Kocherlakota got his Ph.D. from Chicago, hotbed of monetarist economics, merely adds to the confusion and merriment.
Meanwhile millions of Americans continue to struggle needlessly because our elites – political, business, and academic – are too embroiled in re-hashing discussions first held during the 1930’s. Keynes was right then and is right now. That some classical economists don’t like that, or that some Republicans want to score short term election points, is not a reason to keep people unemployed.
We could do better than this.
