For the past several years, the US press, pundits, and apologists for both liberal and conservative politicians in the US have jumped at every slight indication of this or that monthly economic indicator showing improvement. The hype that followed typically declared the ‘recovery was now solidly underway’. That has been the media ‘mantra’ now for the past four years. Each time, the temporary good news was reversed, however, revealing the US economy was not on a trajectory of sustained economic recovery, but instead ‘bouncing along the bottom’, growing at a rate typically half that of recession recoveries in the past.
This summer 2013 has been no exception. Once again the drum beat continues, with press, pundits, and politicians grasping at straws to find the slightest evidence of improvement in the economy, which is subsequently spun to represent the view that a sustained economic recovery has begun. This latest view that once again ‘recovery is underway’ has been bolstered by a major redefinition of Gross Domestic Product (GDP) by the Bureau of Economic Analysis, the US government agency responsible for issuing GDP data, this past July 2013. With a ‘stroke of the pen’, GDP for 2012 was boosted by $559 billion, and the GDP rate of growth for 2012 by almost a third.
But a closer look of the US economy over the past year, July 2012 to July 2013, reveals a longer term trend of the US economy weakening, not growing—and that despite even the recent upward revisions of GDP on paper by the US government’s Bureau of Economic Analysis, BEA.
The US Economy 2012-2013
When GDP for the calendar year 2012 is considered, the US economy grew at a rate of only 2.2%–i.e. about half to two-thirds of what is considered normal growth 39 months after the official end of the recession in June 2009, compared to the 10 prior recessions in the US since 1947. Moreover, even after the revisions to GDP this past month, the US economy grew the last twelve months—between July 2012 and June 2013—at a still weaker 1.4% annual rate.
After a 3.1% growth rate in the third quarter last year, 2012, the economy nearly stalled completely in the subsequent fourth quarter 2012, October-December, when it grew a paltry 0.4%. This was followed in the first quarter 2013 by a 1.1% GDP annual rate and in the most recent 2nd quarter, April-June 2013, by 1.7%. The latter, preliminary GDP estimate, will almost certainly be revised downward to less than 1.7% in subsequent second and third GDP adjustments to come.
It is worth further noting that the very weak, declining, 1.4% rate over the last 12 consecutive months would have been even much lower had special, one-time developments not boosted GDP temporarily in the final two quarters of 2012.
For example, in the 3rd quarter 2012 GDP rose by 3.1%. But the growth was heavily determined by a one time major surge in government spending, largely defense expenditures. Politicians typically concentrate spending before national elections and 2012 was no exception. That one time surge in defense federal spending was clearly an aberration from the longer term government spending trend since 2010, which has been declining since 2011 every quarter. The same pertains to state and local government spending.
The 3rd quarter 2012 defense spending surge reverted back to its longer term trend in the 4th quarter 2012. The economy and GDP then quickly collapsed to a meager 0.4% GDP rate, after being upward revised from a -0.1% actual decline. Whether -0.1% or 0.4%, when averaged with the preceding quarter’s 3.1%, the result was about 1.7%–which has been the average annual growth for the past two and half years.
The 4th quarter would have been even lower were it not for a surge in business spending on equipment in anticipation of a possible tax hike with the ‘fiscal cliff’ negotiations scheduled to conclude on January 1, 2013. But that late 2012 business equipment spending surge also proved temporary as well, flattening out and declining in the first quarter 2013.
Another one-off event then occurred in the 1st quarter 2013: a rise in business inventory expansion, which accounted for a full 1.5% of the total 2.5% of the 1st quarter 2013 GDP (henceforth revised down to 1.8% and again to 1.1%). That one time exceptional event of inventory accumulation subsequently disappeared too in the 2nd quarter 2013.
The 2nd Quarter 2013
During April-June 2013, the US economy grew at a slightly faster 1.7%. That growth was concentrated mostly in the business investment sector of the economy, which was significantly boosted by the GDP definition changes by the BEA that focused primarily on investment changes. Investment rose by 4.6% in the second quarter. How much of that was actual investment, and how much due to government redefinition of investment, remains to be seen. But with the GDP revisions adding $559 billion to 2012 US GDP, it is likely the 2nd quarter 2013 GDP data of 1.7% growth was significantly due to the BEA’s GDP redefinitions.
Consumer spending also contributed to the most recent second quarter’s 1.7% still below-normal growth. Its contribution was driven largely by auto spending and by residential housing construction. But neither housing nor auto consumption appear will continue at prior growth rates going forward into 2013. Here’s why:
Residential housing ‘hit a wall’ in mid-June 2013, in response to Federal Reserve policy announcements and mortgage rates shooting up by more than 1% in a matter of weeks. Since mid-June, home mortgage applications have fallen for seven consecutive weeks and home refinance activity collapsed by 57% to a two year low. It may be that the contribution of residential housing to GDP hereafter will decline sharply, slowing growth in the rest of 2013. Meanwhile, commercial and government construction activity continued its 5 year stagnation and decline.
In terms of auto spending, what was a robust growth in spending on autos appears recently in July to have pulled back sharply. Only truck sales are growing, stimulated by the prior housing expansion which, as noted, may be coming to an end as interest rates almost certainly will rise further in 2013. So truck sales can be expected to slow as well.
The most fundamental, important determinant of consumer spending is wage and income growth, and that continues to decline longer term, as it has for the past four years for all but the wealthiest households. By 2012 wages share of total national income had fallen to a record low of 43.5%, down from 50% in 2000. Thus far in 2013 the decline has continued.
The most important determinant of wage growth—and consumer spending—is employment. But here the picture is not particularly positive, despite all the hype about job creation this year in the US. For the first seven months of 2013, January through July, there were about 900,000 jobs created. That is about the same number of new entrants into the US labor force, which occurs at 150,000 a month. So the economy is just barely absorbing new entrants. However, the real picture is worse in terms of job driven wage growth and consumer spending. About two-thirds of that 900,000 job growth represents part time workers, who receive half pay and no benefits. The US economy is generating low pay, service, part time and temporary jobs. Full time permanent jobs, at higher pay and with benefits, declined since January by more than 250,000. This explains much of the declining wage and income share for working class households despite the modest wage growth. To the extent consumer spending has occurred, that spending appears mostly credit and debt driven.
That leaves business Investment as the major factor in the 2nd quarter 2013 US growth picture and its already weak 1.7% growth rate. However, as previously noted, it is unclear how much of that Investment is real and how much is the result of ‘the redefinition of the meaning and magnitudes of investment activity’ as a result of government changes to GDP definitions this past month.
Two other major segments of the US economy, apart from consumption and investment, are government spending and what’s called ‘net exports’ (exports minus imports). Here the government spending picture is even less positive. Combined federal and state-local government spending continued to decline in the latest quarter, as in preceding quarters. Anticipated additional deficit cutting later in 2013 and another debt ceiling debacle, should it occur, will only add to this sector’s drag on the US economy and counter claims of sustained US economic recovery on the way.
A Scenario for the Remainder of 2013
The factors contributing to US economic growth thus far in 2013 were primarily consumer spending on residential housing and auto sales, and the aforementioned revisions to GDP investment in the second quarter.
Both housing and auto sales now face significant headwinds with rising interest rates, show initial signs of slowing, and therefore are questionable as major contributing factors to further US economic growth for the remainder of the year—especially should interest rates rise once again. Should the US Federal Reserve begins to slow its $85 billion a month money injection, as most market analysts predict will soon happen, US interest rates will rise still further.
That will not only slow consumer spending and investment further, but will raise the value of the US dollar relative to other currencies, subsequently slowing US exports and the latter’s already weak contribution to US GDP in coming months as well.
Rising rates will also dampen business investment, at a time when businesses show little interest in expanding inventories of goods on hand from current lows.
It is worth noting that the mere suggestion of the Federal Reserve reducing its $85 billion a month money injection this past June 2013 provoked a major contraction of financial markets. The US 10 year Treasury bond in real terms rose 1.3% in a matter of a few weeks. That benchmark rate has significant impact not only on housing mortgages but auto sales and other rates negatively impacting consumption and investment. Should the Fed actually start ‘tapering’ its $85 billion in coming months, as is highly likely, that will almost certainly result in a further reaction by financial markets, possibly much worse, and this time perhaps enough to slow consumption, investment and the economy still further.
Added to all this, Government spending continues to be negative force and may even worsen significantly with another round of deficit spending cuts later this year. The very strong likelihood of another fight over the deficit, Obama’s budget due October 1, funding the federal government, and over extending the debt ceiling once again, will have further negative psychological effects on the US economy in coming months.
The US economy may thus, in the immediate months ahead, confront a dual problem of Fed ‘tapering, rising interest rates, more deficit cutting, and a renewed debt ceiling fight with its negative psychological impact similar to that witnessed in 2011 during a similar event.
Finally, unknown ‘tail events’ in the global economy cannot be ignored either. The often heard prospect that the US economy will soon pull the rest of the world onto a sustained growth path is wishful thinking. The Euro economy as a whole continues to ‘bounce along the bottom’, with little or no growth in its northern ‘core’ and continuing depression in its periphery. China appears headed for a hard landing, as its own long term growth rate continues to slow and the potential grows for a real estate bubble bust of major dimensions. Other BRIC economies (Brazil, Russia, etc.) continue to struggle with a 1% average growth rate and are also ‘bouncing along the bottom’. And what was heralded as the new growth sector in the global economy only a few months, Japan’s growth rate has again slowed significantly in the most recent quarter.
In short, the longer term trend indicates the US economy is ‘bumping along the bottom’, growing most likely at no more than 1%-1.5% annually—hardly a rate to cheer about or to claim sustained economic growth has finally arrived. Contrary to the continued hype about a robust ‘snap back’ about to occur in the second half of 2013, there is little sign this will happen. The factors that have been responsible for that weak barely 1% longer term growth rate are themselves showing signs of slowing: housing spending, auto car sales, wages and household income, and government spending. And other major headwinds in terms of fiscal and monetary policies in the US, and in the broader global economy, are emerging on the horizon.
Nevertheless, the US economic recovery ‘spin machine’ continues to grind on—as it has for the past four years—declaring this time will be different and the ‘light at the end of the tunnel’ is real and not just a locomotive coming down the track.
Jack Rasmus, August 2013