U.S. and Japanese Growth Properties

May 27, 2010

U.S. real GDP growth of 3.0% at a seasonally adjusted annualized rate (saar) in the first quarter was only 60% as rapid as Japanese growth of 4.9% saar in the same period.  However, two-quarter U.S. annualized growth between 3Q09 and 1Q10 was very similar at 4.3% saar to Japan’s 4.6% over the same period.  Other growth patterns also resembled one another in those two countries between the third quarter of 2009 and the first quarter of 2010.  Expressed in annualized terms, personal consumption rose at a 2.5% pace in the United States and by 2.0% in Japan.  Non-residential investment increased by 4.2% saar in the United States and 4.7% in Japan.  Residential investment contracted 3.7% in the U.S. and by 4.8% saar in Japan.  Government spending was weak in each instance, falling 1.6% in the States but edging 0.5% higher saar in Japan.

Net exports was the source of Japan’s economic growth edge last quarter over what America was able to achieve.  Japanese exports advanced 14.9% saar between 4Q09 and 1Q10, nearly three percentage points faster than the 12.0% rise of U.S. exports.  Imports produced a mirror image, with U.S. purchases of foreign goods and services climbing 14.7% saar compared to a 10.1% increase in their Japanese counterpart.  So while net foreign demand reduced U.S. growth in the last quarter by 0.66 percentage points (ppts), such enhanced Japanese GDP growth by 2.98 ppts.  This advantage was partly mitigated by inventories and the statistical discrepancy, which collectively boosted U.S. growth strongly while enhancing Japanese growth by only about a quarter as much. 

Another strike difference in the anatomy of the two economies’ national income accounts concerns their price deflators.  Real GDP measures volume flows, not values.  Shifting general prices account for the difference between movements in real and nominal GDP, and they are measured by price deflators.  Japan’s ongoing struggle with deflation (falling prices) was highlighted by declines between 1Q09 and 1Q10 of 3.0% in the GDP deflator and 2.1% in the personal consumption deflator.  The subdued state of U.S. inflation was exemplified by on-year increases in 1Q10 of 0.5% in the GDP price deflator and 2.0% in the personal consumption deflator. In the Great Depression, sharply falling prices were an accelerant for real-sector contraction.  Japan’s deflation has been not nearly as extreme as what occurred in the 1930’s and has not prevented positive real economic growth from occurring.

Japan and the United States remain in the recovery but not expansionary phases of their respective business cycles.  The distinction is made early in business upturns when activity is no longer contracting but hasn’t surpassed prior cyclical peaks.  A two-year comparison, that is 1Q10 against 1Q08, illustrates this technical but very important distinction.  Japanese GDP in the first quarter was 4.7% lower than two years earlier, while U.S. GDP showed a much smaller net drop of 0.9%.  Personal consumption was up 0.2% on balance in the States but down 1.1% in Japan.  Non-residential business spending, which customarily exhibits wider swings than consumption and lags the overall GDP cycle, fell between 1Q08 and 1Q10 by 19.1% in the U.S. and 22.6% in Japan, and residential investment posted respective net plunges of 27.0% and 18.7%.  In a four-year comparison, U.S. residential investment was 54.5% lower than in 1Q06.  The U.S. and Japan had similar 1Q10-over-1Q08 rises in government expenditures of 3.3% and 3.0%.  Considering the depth their recessions, those increrases represent rather tepid responses.  The present market obsession with future inflation caused by excessive budget deficits, is ominously reminiscent of the post-1929 mood, an ill-advised phobia which deepened and lengthened the world depression and paradoxically made the deficits of that day larger than a more pro-active fiscal response would have produced.  Finally, U.S. exports were only 2.4% lower in 1Q10 than in 1Q08, whereas Japanese shipments showed a net 16.6% drop from two years earlier.

Japan has more slack than the United States, but it is shrinking at a decent clip because Japan’s potential GDP growth rate is very low.  The acute unused labor resources in the United States is observed in the stubbornly high level of new jobless insurance claims.  In the early stages of a recovery, firms first slow the rate of firings and raise overtime.  Only later do they raise the pace of new hiring.  The line of demarcation that triggers that shift tends to get crossed when new jobless claims approach and fall under 400K per week.  The four-week average of such had declined from over 650K to 520.5K in the four weeks to last November 7 and 468K in the following four weeks to December 5, but the trend then stagnated.  In successive four-week periods, new claims roughly averaged 450K in the four weeks to January 2, 469K in the four weeks to January 30, 469K again in the four weeks to February 27, 447K in the four weeks to March 27, 463K in the four weeks to April 24, and 457K in the four weeks to May 22.  For the most recently reported week, new claims were at 460K. 

Sustained strong upward growth in jobs is not in sight, and investors should not be fooled by the census-fueled flurry of temporary hirings this spring, which will buoy the data in coming months.  U.S. employment is 7.79 million less than at the end of 2007.  If jobs after December 1999 had continued to climb at the average pace of the final quarter of the 20th century, they would be 31.2K higher than the current level. With that fact in mind, the U.S. soil will simply not be conducive to growing inflation in the period ahead.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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