Stagnation Watch: GDP, Jobs, And Confidence
from Peter Radford
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.