from Peter Radford
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 curing 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.