Stagnation Watch: GDP Wobbles

I will comment shortly about the farce that is Washington, but there is an economy to be concerned about. Not that anyone in Washington seems to care. So we ought.

This morning’s GDP report is a little worse than I expected, and, as you know, I have fairly low expectations. Looking back over the first half of the year all I can say is that we lost whatever momentum we had and don’t appear to be particularly capable of picking up the pace. The stark fact is that we are losing ground steadily against our historic trend; we are losing skills while so many people stay unemployed; we are way under using our resources; and we are, therefore, digging our long term hole much deeper.

This would be depressing under normal circumstances, but in a period of catastrophic political division and voter extremism, it is dire. Not only are we re-living the 1930’s economically, but we seem intent on repeating the political mistakes as well.

America is assuredly nuts.

What was the report?

GDP grew at a very low 1.3%. That follows a revised first quarter of a mere 0.4%. That combination is pathetic. It is disgusting for an economy supposedly in recovery. Were it not for the debt ceiling impasse we would all be calling for the heads of whoever is in charge. They have certainly failed us all. Then again, the vaunted American system of checks and balances has ensured that no one is in charge, so we can expect passionate and empty words as our ameliorative response.

This is what stagnation feels like. Get used to it.

This is the breakdown, I am including the first quarter for reference:

• Personal Consumption added 0.07% to total GDP; [1.47% in Q1]
• Private Fixed Investment added 0.87%; [0.47% in Q1]
• Net Exports added 0.58%; [-0.34% in Q1]
• Government Spending was cut and thus reduced GDP by -0.22%; [-1.23% in Q1]

All these numbers have large shifts in them, so it’s worth looking at them one by one.

Obviously the drop in personal consumption sticks out. At this point in a recovery we should be seeing robust consumption. Clearly households are not participating in anything resembling a normal recovery, so we should abandon the concept. I think we all know the reason for the stuttering nature of consumption: stagnant wages, rotten employment, and home prices in the tank. There is no magic in the explanation. That toxic mix produces a very choppy attitude. Durable goods expenditures dropped dramatically in the second quarter accounting for much of the quarterly shift. A drop in auto sales led the way. In contrast, spending on services chugged along at the same pace – 0.8% – as the first quarter, so there is some residual spending on smaller ticket items going on. It seems, as we would expect, that households are being very cautious about making large or long term commitments. Plus, as long as housing remains near dormant expenditure on new refrigerators, air conditioners and other expensive home related items will also remain very slow.

Fixed investment by the private sector still rose. One story we should take away from this is that businesses are palpably not frozen in place by policy uncertainties. This is a story we hear steadily from media and right of center analysts, who are arguing that the Obama administration is somehow “anti-business”. Were that narrative correct we should detect it in these investment figures. No such hesitancy is there, though. A better narrative, and a more simple one, is that in the face of low demand, business is looking to boost productivity via capital investment. Business can thus avoid hiring, and the associated wage costs, while adding to profit by making the existing workforce produce more. The benefit of this explanation is that it fits both to the fact of rising investment spending and to the continued malaise in the job market.

The net exports number is largely driven by a sharp movement in imports, although exports performed well also. The drop in imports was driven more by price changes – the unwinding of the earlier spike in commodity prices – that by volume changes. We should not expect this trend to continue, and so net exports will have to be driven more by export growth than import decline in the future. The gyrations in international currency markets will have a big say in whether exports can keep up any momentum, and with the Euro zone experiencing its own self-inflicted crisis, unease in trade could be less of a positive factor than many were hoping.

Lastly, government spending is showing the impact of the huge cuts being made at the state and local levels. Federal spending actually rose in the second quarter on the back of both safety net and defense activity, but local retrenchment more than offset any positive effects that might have. With all the lunacy in Washington, and the associated intent of all involved in that farce to attack spending, we can expect the government spending line in the national accounts to become a drag on growth for some time to come.

So.

Overall these figures are bad. The economy remains very volatile. It growing, but at a pace well below its capacity. There are more negative signs accumulating; consumption, which remains our core activity, is weak and seems unable to generate much momentum; investment is also growing, but not powerfully; net exports are OK but could run out of steam; and we are about to slow things down dramatically by instituting austerity in the Federal budget.

All in all: a weak outlook. Stagnation. As I said: get used to it.