Revised U.S. GDP Reveals New Troubles

November 22, 2011

Real GDP growth last quarter was revised unexpectedly downward to an annualized rate of 2.0%.  As a consequence, GDP expanded only 1.5% over the latest reported four quarters, and at an even slower pace (1.2%) during the first three quarters of 2011.  3Q11 was the ninth quarter of the post-Great Recession recovery.  In that span, real GDP rose 5.5% or 2.4% annualized.  This is a weak rebound from America’s severest downturn since the 1930s, discrediting simplistic presumptions that the harder activity drops, the quicker it recovers.  2.4% constitutes less than half the rate of expansion after the second and third most severe postwar recessions.  Over the first nine quarters following those recessions that ended in 1Q75 and 4Q82, GDP increased at annualized rates of 5.0% and 6.3%.  A recovery of 2.4% this time is also less than the two immediately prior recessions, which ended in 3Q01 and 1Q91.  Those times, GDP respectively increased at annualized rates of 2.7% and 2.9% during the subsequent nine quarters.

America cannot catch a break from abroad.  Japan’s triple disaster disturbed the U.S. recovery in the first half of this year, helping to restrain the rise of U.S. GDP to a mere 0.8% annualized.  In late summer, the drag from Japan faded, but the adverse impact of the euro debt crisis intensified.  Oil and other commodity prices, although off record levels, remain very pricey.

A large part of the U.S. economic problems are homegrown.  Fiscal policy has been a drag even before the heaviest restraint is to be applied.  Real government expenditures dropped 2.4% between 3Q10 and 3Q11 and at an annualized rate of 0.7% since the second quarter of 2009.  Most alarming has been the eroding momentum of real disposable incomes, which grew 5.2% annualized in this year’s first quarter but then at 2.8% in 2Q and merely 0.2% in 3Q.  Consumption managed to speed up last quarter only because of a drop in the savings rate to 3.8% from 4.8% in 2Q, 5.0% in 1Q and 5.6% in the third quarter of 2010.  This decline of household savings cannot continue much longer because it’s already returned to very low historical levels and because this is an era of deleveraging.  Households cannot deleverage by running down their savings.  Slower consumer spending growth in 2012 appears unavoidable.

Aside from the unsustainable fillip from personal consumption, economic activity last quarter was attributable to non-residential investment, which buoyed GDP growth by 1.41 percentage points, and net exports, which chipped in another 0.49 percentage points of growth.  Companies need to see real final demand and some semblance of predictability to be persuaded to continue spending as readily as they have.  They will get neither.  So non-residential investment growth, 8.9% over the last year and 6.9% annualized since 2Q09, is set to decelerate, too.  Meanwhile, U.S. exporters must contend with recessionary conditions in Europe and slow expansion in Japan.  Emerging markets will also not expand as much in 2012 as in 2011.

The Federal Reserve has been assigned two goals to guide monetary policy, price stability (that is, inflation of a tad less than 2% in the medium term) and job maximization subject to the constraint of the first goal.  With a core personal consumption deflator up 1.6% in the year to 3Q11 and GDP facing sub-trend growth, the first condition is unlikely to be met even with the enlarged balance sheet.  Federal Reserve officials consider full employment consistent with a jobless rate of around 5.4% but anticipate such will hover near 8.6% next year and 7.3% in 2014.  The clear demand management directive in these circumstances is to stimulate forcefully, but political pressure is constraining the central bank from doing as much as many policymakers believe to be appropriate. 

It would be wrong for fiscal policy to be framed in a way that exactly neutralized the thrust of monetary policy.  Then, neither arm of demand management can succeed.  Yet precisely that stalemate defines the current predicament that investors perceive, and it seems likely to persist through the 2012 election if not longer.  Current data do not inspire, and expectations are unconstructive as well.  In the trenches of stock market pundits can be found many brokers accentuating the positives, things such as the considerably smaller drop since end-2010 of U.S. share prices vis-a-vis markets in Europe and Asia.  Some people always predict a rising market, but the fact is that current levels are little higher than they were a dozen years ago.  If such a span doesn’t constitute the long run, what does?  And if long-run results are far from good enough, where are the genuine grounds to justify optimism?

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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