The following article was published in early May, when initial reports of 1st Quarter US GDP showed a mere 0.2% quarterly gain. Since then, as of mid-May, more data on the quarter suggest strongly the 1st quarter will show a negative GDP when further revisions are reported later this month, due to even worse data for business inventories, retail sales, and trade. Here’s my ‘first view’ of the initial first quarter US GDP estimates released in early May:
(The following was published by TeleSURTv and Media on May 5, 2015)
“Data released last week by the US government showed the US economy came to a near halt in the first three months of 2015, falling to nearly zero—i.e. a mere 0.2% annual growth rate for the January-March quarter. The collapse was the fourth time that the US economy in the past four years either came to a virtual halt or actually declined. Four times in four years it has stalled out. So what’s going on?
In 2011, the US economy collapsed to 0.1% in terms of annual growth rate. At the end of 2012, to a mere 0.2% initial decline. In early 2014, it actually declined by -2.2%. And now in 2015, it is essentially flat once again at 0.2%.
The numbers are actually even worse, if one discounts the redefinitions of GDP that were made by the US in 2013, counting new categories as contributing to growth, like R&D spending, that for decades were not considered contributors to growth—in effect creating economic growth by statistical manipulation. Those highly questionable 2013 definitional additions to growth added around $500 billion a year to US growth estimates, or about 0.3% of US GDP. Back those redefinitions out, and the US experienced negative GDP four times in the last four years. We get -0.2% in 2011, 0% in 2012, -2.5% in 2014 and -0.1% earlier this year.
It is therefore arguable that the US has also experienced at least one mild ‘double dip’ recession, and perhaps two, since 2010.
All the four US economic relapses occurred following preceding month gains in growth sufficient to generate claims by politicians and pundits alike that the US economy had finally ‘turned the corner’ and was now on a path of sustained economic recovery. Yet every time such claims were made, reality contradicted their predictions within a few months, and the economy collapsed again, creating a scenario not of sustained economic recovery but of a ‘stop-go’ trajectory.
The consequence of this ‘stop-go’ recovery is that the US economy since 2009—the official end of the last recession—has experienced the weakest recovery from recession in the last fifty years, just about half the normal post-recession recovery. And this ‘half normal’ recovery since 2009 occurs after an annual growth averaging only 1.7% during the years 2001-2010 in the US. Something new is happening to the US economy since 2000. What is it?
Recessions in the US have occurred on average every 7 years. It’s now year five since the last one officially ended in June 2009. What happens if the current weak recovery reaches its end at around 7 years, i.e. in mid-2016 a year from now? Will the next recession prove even worse, perhaps much worse, occurring as it will on a base recovery half of normal?
Unfortunately, such questions aren’t asked by most mainstream economists, and certainly not by politicians and business media pundits.
Stop-Go On A Steady Slowing Global Economy
The problem of weak, stop-go, recovery in the US today is further exacerbated by a global economy that continues to slow even more rapidly and, in case after case, slip increasingly into recessions or stagnate at best.
Signs of weakness and stress in the global economy are everywhere and growing. Despite massive money injections by its central bank in 2013, and again in 2014, Japan’s economy has fallen in 2015, a fourth time, into recession.
After having experienced two recessions since 2009, Europe’s economy is also trending toward stagnation once more after it too, like Japan, just introduced a $60 billion a month central bank money injection this past winter. Despite daily hype in the business press, unemployment in the Eurozone is still officially at 11.4%, and in countries like Spain and Greece, still at 24%. Yet we hear Spain is now the ‘poster-boy’ of the Eurozone, having returned to robust growth. Growth for whom? Certainly not the 24% still jobless, a rate that hasn’t changed in years. Euro businesses in Spain are doing better, having imposed severe ‘labor market reforms’ on workers there, in order to drive down wages to help reduce costs and boost Spanish exports. Meanwhile, Italy remains the economic black sheep of the Eurozone, still in recession for years now, while France officially records no growth, but is likely in recession as well.
Elites in both Italy and France hope to copy Spain’s ‘labor market reforms’ (read: cut wages, pensions, and make it easier to layoff full time workers). In order to boost its growth, Italy is considering, or may have already decided, to redefine its way to growth by including the services of prostitutes and drug dealers as part of its GDP. Were the USA to do the same redefinition, it would no doubt mean a record boost to GDP.
Across the Eurozone, the greater economy of its 18 countries still hasn’t reached levels it had in 2007, before the onset of the last recession. Unlike the US’s ‘stop-go’, Europe has been ‘stop-go-stop’.
Even beyond the Eurozone, in the broader Euro area the picture is not much better. After a brief, artificial real estate boom fueled by foreign investment, the UK is now growing again at a mere 0.3% rate. And then there’s China, where economic growth continues to slow, despite multiple fiscal and monetary stimulus programs introduced the past two years to try to boost the economy further. And the global slowdown applies not just the largest economies. Emerging market economies in Latin America, Africa, and elsewhere that are especially dependent on commodities production and exports have been descending one by one into recession, or at best stagnating.
Yet despite this growing global economic weakness, and the US economy’s repeated annual economic relapses and ‘half normal’ recovery rate, we are still being told that the US economy is sound and that it will lead the rest of the world economy toward sustained economic growth this year and next.
It’s the Weather!
We’re told the declines in US growth the last two years—January to March 2015 and before that 2014—have been due to ‘bad weather’. And that this coming summer 2015 the US economy will ‘snap back’ again, as it did last summer 2014.
But is economic forecast by weather metaphor really the cause of the recent US slowdown? Not really. Even economists themselves admit that, at the very most, only 0.5% of last quarter GDP decline can be attributed to weather. If the fourth quarter 2014 US GDP was 2.2%, in other words, then only -0.5% of the drop was due to weather. So what about the other -1.5% drop from the fourth to the first quarter 2015?
A closer look shows that at least -1.25% of that -1.5% was due to the sharp decline in US exports. That decline was due largely to the US dollar’s sharp rise in value compared to other currencies since last fall. A rising dollar makes US exports more expensive. US exporters lose out to European, Japanese and Chinese competitors. Since US exports are largely manufactured goods, that means US manufacturing slows—which it has. And that in turn means US growth slows.
The reason for the dollar’s rise is threefold. First, the US central bank’s repeated signaling of intent to raise US interest rates this year. Second, the collapse of world oil prices that also drive up the dollar. Third, the massive money injections by Europe and Japan central banks in the form of ‘quantitative easing’ (QE) programs that are designed to drive down the value of the Euro and the Yen in order to achieve a competitive advantage for their region’s exports at the expense of US exporters.
What’s going on globally today is rolling ‘competitive devaluations’ of currencies by means of massive central bank monetary injections. In ways this is somewhat like the 1930s depression. Then countries devalued their currencies by legal declaration, as they tried to boost their economies by stealing exports from competitors. The problem with that strategy is that all could do it, and they did. So no one gained in the end and the global economy and trade sank further. Today’s new form of competitive devaluation is no different. It signals the major capitalist regions of the world—i.e. north America, Europe, Japan, and now even China—are beginning to fight over a slower growing global economic pie. The devaluations are just assuming a different form. Not legal declaration but monetary injection by central banks.
In early 2014 Japan introduced its QE and central bank injection. It gained a temporary trade advantage. But then Europe did the same. Japan lost its advantage, which Europe gained. The US lost the most in terms of exports, since its dollar rose for two reasons—Japan and Europe currencies falling and talk of US interest rate hikes as well.
But most recently, the US central bank has signaled that interest rates may not rise this year. Oops. There goes the Euro and Yen losing its advantage once more and their economies slipping again. This see-saw, back and forth, fighting over a shrinking trade pie only reveals a new instability growing in the global economy. Europe in particular will soon be hammered by a potential Greek debt default, a continually imploding Ukrainian economy it has committed to bail out at $40 billion so far, and now the US indicating it won’t raise rates.
Watch Japan, which will likely again devalue still further to offset US and Europe measures. Meanwhile, as China continues to slow, it could eventually reduce the Yuan to boost its exports as well.
What this global scenario means is that the US economy significantly weakened in the first quarter 2015 due not to weather, but because of loss of global exports due to the reasons noted. But trade competition and currency wars are not the only explanation for the near collapse of the US economy last quarter.
Collapse of Oil Prices and US Economic Slowdown
Another major development in 2014 in the US, that disappeared by early 2015, was the Oil/Shale Gas boom. After having surged to record levels in the first half of 2014, contributing largely to the summer 2014 US 5% GDP rise, after mid-year the global price of oil collapsed. By end of year 2014 the collapse was in full swing. Investment in this sector fell by nearly half, regional construction activity in the Dakota-Texas area also fell abruptly, as did the mining activity as oil/gas wells were shut down, and as railroad and trucking transport activity declined. A major contributor to 2014 economic growth in the US thus fell through by early 2015. What’s significant, moreover, is that it won’t come back in 2015. So the ‘recovery’ in the summer of 2014 won’t have this contributing factor behind it in 2015.
One-Time Consumer Spending on Health Care
Another temporary factor that contributed to the summer 2014 surge in US growth, that has also since disappeared, is first time consumer household spending on healthcare services. Last summer was the first full year of sign-ups by 10 million households to Obama’s ‘Affordable Care’ Insurance Program. Spending on new insurance premiums, and on healthcare services by millions of new customers for the first time, together served to give US GDP last summer 2014 another major boost. But those sign-ups have leveled off. Most of those who wanted to sign up have done so. Future growth in health insurance and health care services has therefore leveled off.
So like the shale/oil gas surge and the export-trade advantage, the health care spending surge contribution to US economic growth is most likely temporary as well.
Why the US Economy Will Continue A ‘Stop-Go’ Trajectory
There are three fundamental causes why the US economy will continue on its 5 year long, stop-go recovery trajectory until the next recession in 2016 or after.
First, there is insufficient wage and income growth for the approximate 100 million wage earning households that constitute the bulk of consumer spending in the US, which accounts for roughly 70% of the US economy annually. In turn, the reason for the lack of wage and income growth by these households is the lack of full time, decent paying jobs creation in the US. Jobs that are being created are low pay, no benefit jobs. Part time and temp jobs. Service jobs, and few manufacturing or construction jobs. Working class consumption is also compressed by inability to earn interest on basic savings accounts. Then there’s household debt, for past education borrowing, for auto purchases, and credit cards, which also takes a toll on spending.
Second, there’s the lack of investment spending by business. Large, multinational corporations in particular continue to prefer to invest outside the US rather than in it. When not investing abroad, they prefer to ‘spend’ their record profits on stock buybacks and dividend payouts to shareholders. More than $5 trillion worth since 2009. Another trillion dollars projected in 2015 alone as well. Then there’s their growing investing in financial asset markets and securities, which now constitute about 25% of all multinational corporate investing. And what they don’t invest in financial assets, invest abroad, or spend in buybacks and dividends, they just hoard as cash on their balance sheets, reportedly now in excess of $1.7 trillion in their offshore subsidiaries. None of these alternatives and diversions result in real investment that create real decent paying jobs, at decent pay and benefits. Hence, consumption by the 100 million households stagnates or lags—except for more debt based spending perhaps.
Third, there’s no sustained recovery on the near horizon because the US government has clearly decided on growing only defense spending. The new Republican Party dominated US Congress insists on cutting social programs further, including long time once sacrosanct programs like Medicare for seniors. In the first quarter US GDP numbers, spending by State and Local governments slowed noticeably, as did US federal spending on non-defense products and projects.
Instead of sustained growth, the scenario is ‘stop-go’, as this or that temporary factor occur to boost US GDP and growth temporarily, followed by other temporary developments that in turn subsequently drag US GDP back to zero or negative growth. Add further to this scenario the Eurozone’s continuing economic instability, the UK’s new stagnant growth, Japan’s descent into yet another recession, China’s deepening struggle to maintain 7% growth that is almost certain to fall below that level soon, oil and commodity producing emerging markets that are already in recession, and an historic weak recovery already in its 5th year of an average 7 year cycle—then what remains is a likely further long term, stop-go US economy as the global economy continues to slow as well.
Jack Rasmus is the author of the forthcoming book, ‘Systemic Fragility in the Global Economy’, by Clarity Press, 2015, and the prior book’s, ‘Epic Recession: Prelude to Global Depression’, 2012, and ‘Obama’s Economy: Recovery for the Few’, 2012. He blogs at jackrasmus.com.