imports

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Economic Drift

We are at sea. Adrift. Going nowhere. Wallowing about with little direction. Not sinking. Not soaring. Just floating. Just.

Today’s GDP numbers validate the view that our economy is all of the above. The economy grew at a 1.9% rate rather than the previously announced 2.2% rate. The next few quarters look set to follow the same pattern. There is precious little drive to pull us forward, yet not much to torpedo us either. It is exactly what we would expect from an economy still deep in private debt and without any coherent political leadership. Insipid policies have real consequences. You don’t deal with the demons of an underperforming, overly indebted, and decaying private economy by introducing a series of tweaks. You hit it with a hammer. But that implies having the courage and conviction to deliver such a blow. Obama didn’t in 2009. He still doesn’t. And, worse, Romney doesn’t see the need to do anything positive at all. So this year’s election will not be a palliative for our economic woes. It may be significant for other reasons, but the economy looks set to flounder whoever wins in November.

The data speaks enormously to our malaise:

Private consumption, which makes up about two thirds of the total, contributed +1.9% to growth.

Private investment, which has slowed since last year, contributed +0.8%.

Trade – exports minus imports – contributed nothing.

Government spending was negative and thus reduced growth by -0.8%.

Personal consumption was actually up quite a bit over the levels we were plodding along at last year. It grew 2.7% in the first quarter, which is the best showing since back in the first half of 2010. Most of the strength came in the purchasing of goods, with durable goods growing at a 6.1% rate, and non-durable goods at 14.3%. Unfortunately spending on services, which is a very large and diverse category, was only up at a 1.0% rate, and thus pulled the overall spending pattern down.

Private investment grew at a 6.3% rate, which looks good until you compare it with the 22.1% rate of the fourth quarter last year. Investment is always a volatile category so such a violent shift is not unusual, but the slow down is unwelcome as it indicates, potentially, a weakening of business confidence. The goods news within the investment figures was in home construction which jumped 19.4% after languishing for so many of the previous quarters. This was, naturally, from a low base and so had little overall impact, but at least it is no longer a drag on GDP.

The trade figures netted out to a zero impact on overall growth despite both exports and imports growing at significant rates. Exports rose a little more quickly, at a 7.2% rate compared with the 6.1% increase in imports, but because exports started from a smaller base that faster growth could not contribute to GDP as a whole.

The real warning sign in the data is that government spending contribution. We are deep in austerity. Not to the degree that Europe is, but significantly enough for it to act a substantial brake on the economy. With the effects of the stimulus package of 2009 well behind us Federal spending is now declining – this is the sixth straight quarter of reduced Federal spending – with both defense and non-defense spending head downwards. While our attention seems always to be on the budget fights in Washington, we should all remember that state and local government is playing a large role in pulling the economy down. Spending at those local levels declined 2.5% last quarter and has been negative in 14 of the past 16 quarters. Indeed much of the Federal level stimulus was offset by the by the efforts of states and local governments to balance their books. For instance in 2010, when the Federal stimulus was at its peak, Federal spending grew 4.5%. But state spending contracted by 1.8%, meaning that the stimulus, too small to begin with, was mush weaker than the headline numbers suggested.

It is this government austerity program that most threatens our growth rate at the moment. We have imposed a lower growth rate on ourselves through our government budget cutting, and are thus prolonging the period of convalescence beyond what it could, or ought to, have been. And this austerity is producing no discernible benefits.

Those economists – I am not one of them – who argue that cutting government spending will somehow spur business confidence and thus produce a magical burst of investment growth have a lot of explaining to do. The data contradicts their thesis. Yet they persist. Indeed they still dominate the airwaves, media debates, and policy decision making. History will be unkind to them. But unfortunately for millions of unemployed Americans, history’s verdict will be scant repayment for the unnecessary impoverishment being forced on them by the combination of incompetence and ideological blockheadedness that currently passes for Washington elite thinking.

One last thing.

As Europe continues to self-destruct moony is flowing out of the Euro into “safe harbor” currencies like the Pound Sterling and the US Dollar. This is driving down interest rates on government debt. The rate on long term UK bonds is now at an all time low. All time being since 1702, when records were first kept. Here in the US rates are now down to levels not seen since 1948. So. Why are we not borrowing as much as we can? At those rates we could borrow enormous amounts and rebuild our rotten infrastructure thus bequeathing our children and grand children a modern economy replete with world class infrastructure. And the cost burden on them would be small compared with the benefits. The rate of growth in GDP would be higher thus allowing them a higher standard of living even after the debt repayments they would need to make. Instead we are being foolish and passing by this historic opportunity in the name of false economy. We are going to bequeath a diminished economy riven through with second class infrastructure and unnecessarily inefficient costs. Clear thinking and a commitment to our kids would produce a very different policy response than that we have in place.

Then again, we lack vision, courage and a sense of generational morality. No news there. It’s been that way for at least three decades. Why change now?

Oh. And the result of our efforts?

Economic drift for ourselves, and a rotten future for our kids.

Sad. No?

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US Growth Picks Up – A Bit

Be careful with today’s report on US GDP. It looks better than it is. The headlines all read that the US economic activity accelerated in the fourth quarter of 2011. It did. At 2.8% the last three months of the year represent a significant improvement, and suggest that the recovery, however strong it is, is persisting. That much is good news.

But.

Beneath the surface there are a few problems we should all be aware of before we trumpet success. This is particularly true in our current fraught election mode. No doubt Obama fans will be crowing, continued improvements like this will create a nice following wind for him as we approach election time. Can we expect that? In a word: no.

First here are the numbers.

  • Personal consumption contributed + 1.45%
  • Private Fixed Investment contributed + 2.35%
  • Net Trade contributed – 0.11%
  • Government Spending contributed – 0.93%

This all adds up to an increase in GDP of 2.76%, which the media rounds to 2.8%.

The consumption number is stronger than the third quarter, with the most significant increase coming in durable goods, especially auto sales. We had been tracking this shift in spending as the year wound down and so there is no surprise: consumers took advantage of discounts as the industry tried to reduce last year’s inventory; lower borrowing costs encouraged some activity; and, possibly most important, people were forced to replace older vehicles that could no longer be fixed up. There always comes a time in each business cycle when pent up demand creates a little surge in sales. It looks as if the fourth quarter saw such a surge. Whether we see it continue is questionable, and is one of the bigger causes for caution in interpreting these numbers.

But the biggest issue is embedded in the investment figures.

Most of the gain in private sector investment came from a run up in inventories. I have said many times that we need to be very careful in our analysis of inventory accumulations. There are both positive and negative interpretations for a build up. The positive spin is that businesses are preparing for a better sales environment or that they have experienced unusually strong sales and need to replenish stocks. The negative spin is that anticipated sales failed to materialize and that businesses are stuck with rising, and unwanted, inventories. Judging by the improved pace of sales in the fourth quarter I think we can err towards a more positive spin: demand is picking up, hence the need to re-stock. Naturally there is a downside: once business is satisfied it has the right stock on hand it will slow additional inventory accumulation. This will imply less of an impact in the first half of 2012. Because of the significance of the impact of re-stocking in the current numbers, this inevitably means that the headline GDP growth figure will be much lower.

That following wind will abate and growth will appear to slow back down.

The impact of trade is not very significant, so we don’t need to dwell on it, except to note that it is a small part of the economy. This is important to remember when we discuss the impact of Chinese imports on jobs and so on. The vast majority of American jobs are in the service sector and are not at all subject to the impact of trade. While manufacturing is obviously affected by trade, and some parts of the service sector – IT, banking, and consulting for instance – are as well, the largest source of employment here is in locally generated and locally consumed activity. Boosting trade is a great idea to help manufacturing. It is not a panacea for our overall employment problems.

Lastly, government spending is now a major negative for the economy. We are on the downward side of the Federal stimulus of 2009, as this programs end and abate they reduce the amount of money being injected into the economy and thus show up as a decline in spending. This acts as a brake on GDP. Likewise the ongoing slash and burn tactics at the state and local government level, as the effort to balance budgets continues, is having a dampening impact. State level retrenchment slashed 0.3% off GDP at the end of last year. As state’s approach balance this austerity impact will be reduced, but it is likely to be replaced by a ramped up Federal austerity effort. Consequently it looks as if government spending will restrict GDP growth for a while, putting more pressure on the private sector to recover more fully.

Adding all this together suggests that sustainable growth is much lower than the headline implies. The first and second quarters this year are likely to see growth around 2.0% – simply reducing that inventory figure to something more normal achieves this slow down. Further: once the bulge in durable goods sales fades there is nothing in the base data to suggest that other consumption will be sufficient to replace it. This, too, supports the argument for a modest 2012.

Lastly, even though the fourth quarter was much better than the earlier part of 2011, it didn’t quite match up to expectations. As the basic information trickled out during November and December, many analysts – although not me – started talking about fourth quarter growth of well in excess of 3.0%. Some even began to talk of 3.0%+ for 2012 as a whole. I just don’t see it. This is a post debt binge grind it out kind of recovery. There will be periodic spurts of faster growth – that inventory build up for instance – but by and large this is more akin to trench warfare than blitzkrieg.

The forecast for a long, slow recovery still stands. This year will come in around 2.0% as a whole. Next year may be a little better. Unemployment will edge down very slowly.

Things are better?

Yes.

Are they great?

Not at all.

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The Economy Grows! So What?

The enormous sigh of relief we heard this morning when the GDP figures for the third quarter were released is absurd. I realize I am being a tad curmudgeonly here, but: so what?

For the record this is the first, or “advance”, estimate and will go through two revisions before becoming final. Even after that it could get revised as the government geeks sift through their piles of data. According to this release GDP grew at a 2.5% annual rate in the third quarter, up from the miserable 1.3% of the second and the appalling 0.4% of the first.

Hurray.

Unfortunately this figure is less than the numbers being tossed about last week by the experts who had all been taken in by the more upbeat nature of recent piecemeal reports. The consensus had settled at growth of around 3.0%, with individual forecasts ranging as high as 3.5%. I saw no reason to budge from my less optimistic predictions of between 2.0% and 2.5%. Thus my ongoing view of malaise seems vindicated.

That’s not good.

Here’s the breakdown of the numbers, as usual I express it as contributions to the overall 2.5%:

  • Personal Consumption contributed positively at +1.72%
  • Private Investment added +0.52%
  • Net trade [exports less imports] added +0.22%
  • Government spending was flat, adding 0.00%

Add those up and you get growth of 2.46% which the government press releases all round up to that 2.5% number.

As you can see, the big story is that consumption ran at a decent pace, although it is still considerably down from the pace we saw a year ago. It has bounced up from the second quarter’s terrible showing and is at least in the black, but it is not a strong figure by any stretch of the imagination. Digging beneath the surface we find two major contributors: health care spending, which produced 0.61% of the overall 1.72% I mentioned above; and spending on autos, which added 0.31%. So over half of the uptick came from just to parts of the economy. The rest was spread thinly across the rest of consumption, with no one area showing either notable strengths or weaknesses.

This is a decent but not great quarter. There is no need to get particularly excited about it. Except: at least we are not headed downwards into another recession, but I never thought we were. Indeed, in my opinion, all the talk of double dips over the past two or three months represented a complete misreading of the data. The economy is sluggish, not imploding. Demand is weak – as today’s figures confirm – but it is not trending down.

The private sector investment numbers would have been much stronger were it not for the ongoing unwinding of inventories. Fixed investment added 1.6%, but inventories chipped -1.08% off this figure. As you all know, inventory swings can distort the overall investment figures, and this quarter is no exception. A key question we need to ask, as always, is what motivated the inventory swing? Was business de-stocking shelves because it anticipates less sales this winter? Or was the reduction involuntary because businesses misjudged the slight surge in consumption? Or was it weather related? This conundrum always plagues the proper interpretation of the data. If the de-stocking is accompanied by a strong uptick in sales then we could spin it in a positive light. If not, then the more likely interpretation, and my current preference, is that business is still cautious and is thus keeping inventories at a minimium. It will be interesting to watch this aspect of the report as it goes through revision over the next two months.

There isn’t much of a story behind the trade figures. Both exports and imports grew, with exports comfortably outpacing imports. One slight oddity to report is that imports of services grew at exactly the same rate as exports of services. This is unusual. Under normal circumstances the US is a net exporter of services which thus make a steady contribution to GDP and the growth of exports is usually higher than that of imports. So the third quarter was something of a quirk. That is, of course, in terms of rate of change. In absolute numbers exports of services still dwarfs imports by about a 5:3 ratio.

Lastly, government spending was neither positive nor negative. I have mentioned many times that the impact of the 2009 stimulus has worn off, and the third quarter is a good example of this. Federal spending has grown about $10 billion in inflation adjusted terms over the past six months, but non-defense spending has contracted by $10.3 billion over that same period. Yes, government spending, other than defense is shrinking – contrary to what you might hear in our political dialog. That $10.3 billion contraction was offset, obviously, by a surge in defense spending of $20.3 billion. Furthermore, and to add to my constant drumbeat, spending at the state and local level continues to decline as states trim their budgets. This is a hidden aspect of the total story of government spending, and is why I have advocated federal aid to the states. In the past six months the contraction of local spending cut about $15.2 billion out of the economy, following a contraction of $27.2 billion in 2010. So austerity at the state level has eroded, very significantly, the effectiveness of federal stimulus. Which is yet one more reason why I thought the original stimulus was way too small and ill-conceived. But that’s an old story.

So, what does this all mean?

Bear in mind that these numbers will be heavily revised, so we should be careful in our interpretation. Still, I think we can conclude that the economy is growing, not contracting; it is not robust by any means; growth is well dispersed throughout all sectors, but nowhere is it a source of strength. Thus the picture is one of malaise. I cannot see a reason to move towards predicting stronger growth any time soon. All the basic building blocks are in place for more of the same. yes, we may see a quarter of higher growth, but I don’t think it will signify a break out to a sustainably higher level. We need household debt reduction to work its way through, wages to increase, and unemployment to fall before we can argue for a return to “normal” growth of 3.0%+.

We are firmly stuck in no man’s land. None of these important factors will be resolved quickly as long as we potter along with mediocre growth. And yet unless they are resolved we can only expect mediocre growth. The case for stimulus is clear. But it isn’t being heard. Hence my view of more, and possibly intractable, stagnation.

So, don’t get carried away by the third quarter. It was nice. Nicer than a decline for sure. But not that nice. It doesn’t solve anything.

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Stagnation Watch: GDP, Jobs, And Confidence

We are almost at a point where we can all take a month or so off after which we would return to be met by economic reports eerily similar to those we left behind earlier. Nothing substantial is going on. Nothing. We are stuck in a malaise. Neither sinking nor rising with any consistency or velocity. We are lingering. Or perhaps, given the political idiocy current in Washington, a better word is malingering.

Today’s numbers on the economy support this view. The latest estimate of second quarter GDP showed a slight upward revision to 1.3%. Let’s not cheer that slight upward move because 1.3% is pathetic and would be cause for alarm were it not following the first quarter’s 0.4%. Suffice to say that, thus far, 2011 has been a year to forget. Here’s the breakdown of where that 1.3% came from:

  • Personal Consumption contributed +0.5%
  • Private Fixed Investment contributed +0.8%
  • Net Exports contributed +0.2%
  • Government Spending deducted -0.2%

I have rounded all these numbers liberally for ease of comparison.

So what stands out?

Consumption is at its lowest pace since the end of 2009. There was so after a string of decent, but not great, quarters since then personal spending seems to have sunk into a lull. Tuesday’s Conference Board consumer confidence figures, where the confidence index was stuck at 45.4 in September compared with 45.2 in August suggests that we are not about to experience any sort of a sustained surge either. Bear in mind that in a healthy economy that index records regular readings of over 90. We are a long, long, way from those heights and will not return any time soon. This remains a fear riddled economy for all the reasons we have discussed endlessly – unemployment, real estate, lack of wage growth, and political impasse. I see no change on the horizon. It is likely that consumption will bounce around a little over the next few quarters as households are forced into replacing needed items, but the days of higher and voluntary consumption will not return until that fear abates. That will take leadership in Washington and wage increases in business. Neither are on the horizon. Hence more malaise is headed our way.

The increase in investment fits well with the other figures we have been seeing and reflects the fact that business continues to nibble around the edges of expansion and improvement rather than going full bore. As we would expect almost all of private investment came via business activity, home construction barely moved, while inventory adjustment registered a slight drag on the numbers. Investment, or the lack thereof, has become central to the political farce. The Right wingers are arguing that business is not investing because it lacks confidence in the future, and that it is government red tape, intervention, and potential tax hikes that are doing the damage. That story sounds plausible until you go and talk to businesses. When polls are conducted of business attitudes the number one reason – by far – underlying a hesitancy to invest is that lack of demand. Those confidence issues, so beloved of supply side economists and right wing politicians get scant mention. It would be a welcome change were our Congressional leaders to follow the actual complaints of business and thus deal with weak demand, rather than continually create artificial but ideologically congruent ghosts at which to aim. We won’t get them to deal with real problems any time soon of course The truth is far to inconvenient.

There really is not much to add when talking about trade. Neither exports nor imports are showing a wildly different trajectory. Both bounce around a bit from quarter to quarter. And, in any case, trade is not a major factor in US GDP – not when compared with nations that are trade dependent like Japan or Germany. We are not going to export our way to good growth. An unusually high percentage of US business activity is non-tradeable and service oriented, meaning that it is activity that needs to take place locally and is thus immune to the global trends that have so depressed the sector subject to foreign competition. Besides Europe and other developed economies are hell bent on contraction rather than growth so exporting to them would be difficult.

Finally the GDP figures reveal, as they have for a while now, that whatever stimulative impact of government spending at the Federal level is being swamped by contraction at the state and local level. I will not re-hash the stimulus argument other than to say that, by any objective measure, it was a both a success and way too small. So it while it succeeded in stopping a free fall, it failed to launch a recovery. By now its major impact has worn off, and due to the perversity of accounting, that wearing off actually creates a net drag on growth. Meanwhile defense spending provided most of what positive impact we saw at the Federal level, and that is not sustainable and tends to be volatile anyway.

So, where are we?

Going sideways. There is no evidence of any substantial strength anywhere. Nor are there egregious weaknesses popping up. We are stuc, and likely to remain so for a while. Maybe a very long while.

One last thing: today’s news that first time claims for unemployment assistance dropped to 391,000 – down 37,000 from the prior week – has been [mis]interpreted as a positive sign that our weakness may be ebbing. We have been here before, earlier this year. Before we rush to publish positive reviews we need to think thoroughly about what the numbers tell us. First, the four week moving average is still high, at 417,000. Second long term unemployment is now our major problem, not just these short term job losses. And third, at any point in recent history a figure in the high 300,000’s would have been cause for despair. There is no way that this report should be used to justify claims of a brighter future. On its own it is bleak. Taken along with its predecessors it is grim. We remain mired deeply in a jobless recovery, with no end in sight, and with no political will to undertake a fix. And before you make assertions that this is an unusual circumstance, I should remind you that the past two recessions were also followed by weak employment and near jobless recoveries. The 2001 recovery was so weak that it scarcely registered. Indeed we can argue with some justification that the entire last decade constitutes a “lost decade” and that we are now well embarked on our second.

In a less farcical political environment that would be sufficient to spur stimulus, and policies designed to help. Unfortunately sanity has long been cast aside and obdurate negativism substituted in its place. Congress has decided to make matters worse in order to create electoral advantage – the Republicans prefer high unemployment so object to any solution. Hence the outlook for further malaise. I doubt the next election will produce a sufficiently decisive result to break the gridlock, so the malaise looks set to last well beyond 2012.

Get used to it.

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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.

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