US GDP for the 1st quarter 2019 in its preliminary report (2 more revisions coming) registered a surprising 3.2% annual growth rate. It was forecast by all the major US bank research departments and independent macroeconomic forecasters to come in well below 2%. Some banks forecast as low as 1.1%. So why the big difference?
One reason may be the problems with government data collection in the first quarter with the government shutdown that threw data collection into a turmoil. First preliminary issue of GDP stats are typically adjusted significantly in the second revision coming in future weeks. (The third revision, months later, often is little changed).
There are many problems with GDP accuracy reflecting the real trends and real GDP, that many economists have discussed at length elsewhere. My major critique is the redefinition in 2013 that added at least 0.3% (and $500b a year) to GDP totals by simply redefining what constituted investment. Another chronic problem is how the price index, the GDP Deflator as it’s called, grossly underestimates inflation and thus the price adjustment to get the 3.2% ‘real’ GDP figure reported. In this latest report, the Deflator estimated inflation of only 1.9%. If actual inflation were higher, which it is, the 3.2% would be much lower, which it should. There are many other problems with GDP, such as the government including in their calculation totals the ‘rent’ that 50 million homeowners with mortgages reputedly ‘pay to themselves’.
Apart from these definitional issues and data collection problems in the first quarter, underlying the 3.2% are some red flags revealing that the 3.2% is the consequence of temporary factors, like Trump’s trade war, which is about to come to an end next month with the conclusion of the US-China trade negotiations. How does the trade war boost GDP temporarily?
Two ways at least. First, it pushes corporations to build up inventories artificially to get the cost of materials and semi-finished goods before the tariffs begin to hit. Second, trade dispute initially result in lower imports. In US GDP analysis, lower imports result in what’s called higher ‘net exports’ (i.e. the difference between imports and exports). Net exports contribute to GDP. The US economy could be slowing in terms of output and exports, but if imports decline faster it appears that ‘net exports’ are rising and therefore so too is GDP from trade.
Looking behind the 1st quarter numbers it is clear that the 3.2% is largely due to excessive rising business inventories and rising net exports contributions to GDP.
Net exports contributed 1.03% to the 3.2% and inventories another 0.65% to the 3.2%. Even the Wall St. Journal reported that without these temporary contributions (both will abate in future months sharply), US GDP in the quarter would have been only 1.3%. (And less if adjusted more accurately for inflation and if the 2013 phony redefinitions were also ‘backed out’). US GDP in reality probably grew around the 1.1% forecasted by the research departments of the big US banks.
This analysis is supported by the fact that around 75% of the US economy and GDP is due to business investment and household consumption typically. And both those primary sources of GDP. (the rest from government spending and ‘net exports).
Consumer spending (68% of GDP) rose only by 1.2% and thereby contributed only 0.82% of the 3.2%. That’s only one fourth of the 3.2%, when consumption typically contributed 68%!
(Durable manufactured goods collapsed by -5.3% and autos sales are in freefall). And all this during tax refund season which otherwise boosts spending. (Thus confirming middle class refunds due to Trump tax cuts have been sharply reduced due to Trump’s 2018 tax act).
Similarly private business investment contributed only a tepid 0.27% of the 3.2%, well below its average for GDP share.
Business investment is composed of building structures (including housing), private equipment, software and the nebulously defined ‘intellectual property’, and of course the business inventories previously mentioned. The structures and equipment categories are by far the largest. In the first quarter 2019, structures declined by -0.8%, housing b y -2.8% and equipment investment rose only a statistically insignificant 0.2%.
This poor contribution of business investment contributing only 2.7% to GDP, when the historical average is about 8-10% normally, is all the more interesting given that Trump projected a 30% boost to GDP is his business-investor-multinational corporate heavy 2018 tax cuts were passed. 2.7% is a long way off 30%! The tax cuts for business didn’t flow into real investment, in other words. (They went instead into stock buybacks, dividend payments, and mergers and acquisitions of competitors). And they compressed household consumer spending to boot.
Sine Trump’s tax cuts there’s been virtually no increase in the rate of Gross private domestic investment in the US. It’s held steady at around 5% of GDP on average since mid-2017. Within that 5%, housing and business equipment contributions have been falling, while IP (hard to estimate) and inventories have been rising.
In short, both Consumer spending and core business investment contributions to US GDP have been slowing, and that’s true within the 3.2% GDP. First quarter GDP rose 3.2% due to the short term, and temporary contributions to inventories and net exports–both driven artificially by Trump’s trade wars.
The only other major contribution to first quarter GDP is, of course, Trump war spending which rose by 4.1% in 1st quarter GDP. (Conversely, nondefense spending was reduced -5.9% in the first quarter GDP).
Going forward in 2019, no doubt war spending will continue to increase, but business inventories and household consumption will continue to weaken.
Trump is betting on his 2020 re-election and preventing the next recession now knocking at the US and global economy door. He will keep defense spending growing by hundreds of billions of dollars. He’ll hope that concluding his trade wars will give the economy a temporary boost. And he’ll up the pressure on the Federal Reserve to cut interest rates before year end.
Meanwhile, beneath the surface of the US economy the major categories of US GDP–business structures, housing, business equipment, and household consumer spending (especially on durables and autos)–will continue to weaken. Whether war spending, the Fed, and trade deals can offset these more fundamental weakening forces remains to be seen.
Bottom line, however, the 3.2% GDP is no harbinger of a growing economy. Quite the contrary. It is artificial and due to temporary forces that are likely about to change. It all depends on further war spending, browbeating the Fed into further submission to lower rates, and what happens with the trade negotiations.
(For a further discussion of these trends, listen to my April 26, 2019 Alternative Visions Radio show).
GO TO:
http://prn.fm/alternative-visions-us-gdp-latest-release-preview-new-book-scourge-neoliberalism/
OR GO TO:
http://alternativevisions.podbean.com
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SHOW ANNOUNCEMENT
Dr. Rasmus provides his analysis of US GDP estimates for 1st quarter 2019 out today. 1st quarter GDP is over-estimated, he argues, due to boost in due to an excessive, one time boost in business inventory accumulation and decline in US imports, both of which are temporary events that will reverse soon in subsequent quarters. The real base of the US economy—i.e. business investment in structures, housing and equipment and household consumption (together 80% of GDP) show stagnation at best: Consumption grew only 1.2% annual rate in 1st quarter (with durables down -5.3%) and business investment slowed to only 2.7% (after hundreds of billions $ of Trump tax cuts for business a year ago). Rasmus predicts investment and consumption will continue to lag in 2019, while inventories and trade effects will dissipate quickly. Global economic developments are discussed in what’s behind rising oil prices and the re-emergence of currency instability, especially in Argentina and Latin America. The show concludes with Dr. Rasmus providing an overview of his forthcoming book, ‘The Scourge of Neoliberalism’, and why most contemporary accounts of Neoliberalism offer only a partial explanation of what it’s about and miss understanding Neoliberalism at capitalist restructuring, ideological justification, and political institutional change. (Next week: An excerpt from the book on Neoliberalism under Obama and now Trump).
Discusses Trump’s economic strategy to get reelected.
Excellent analysis, Dr. Rasmus.
Net exports rise (as a result of less imports) and inventory stock piling move the GDP to 3.2% growth. Consumer consumption and business investment lackluster. Convincing report.
Jack, excellent article and radio show as always. Jack, in what year did The Treasury Department start to raid the social security trust fund and why?
I don’t know the exact year, but I’m sure it was soon after the 1986 changes to the Social Security Act were enacted. (The chair of the commission that recommended the changes, supported by Democrats and Republicans in Congress alike, was none other than Alan Greenspan. For his ‘loyal work’ for Reagan, he was then appointed Federal Reserve chair as James Baker, who was then running the government de facto as Reagan mentally deteriorated, pushed out prior Fed chair, Paul Volcker. Volcker refused to cut interest rates dramatically in order to puff up the stock market and he was removed. (So much for ‘central bank independence’ once again). Greenspan went on to provide increasingly excess liquidity and free money to bankers for the next 20 years. That fueled ultimately the financialization of the US and global economy by the 21st century that led to increasing financial asset bubbles and financial instability, culminating in the 2008-09 global financial crash. (Bernanke, Yellen and now Powell (after a brief 2 yr. reversal) now continue that tradition of free money and subsidization of capital incomes by means of monetary policy.
The 19896 social security act changes dramatically raised the payroll tax for social security (retirement, SSDI, etc.) and indexed the rise to inflation, but placed a ‘cap’ on the highest incomes that would have to pay the payroll tax hike in order to protect those with incomes from capital or even highest wages (professionals, managers, etc.) from paying the tax once a high threshold in their wage incomes was reached. As a result of these 1986 changes, the social security trust fund began to accumulate a surplus every year. That surplus would reach $4 trillion by the 21st century first decade. The ideological argument made to justify the tax hikes was that it would be needed when the 78 million baby boomers began to retire after 2010-12. But the US government ‘borrowed’ the real tax payments deposited in the trust fund from the payroll tax hike every year. It ‘replaced’ the borrowed funds with special issue Treasury Bonds. (It did the same borrowing with federal workers’ pension funds). This ‘borrowing’ is what the phrase ‘the government borrows from itself’ means. Of the current $21trillion or so US federal debt, between $5-$6 trillion I believe is what the government has ‘borrowed from itself’. (The other $15-$16 trillion has been borrowed from private investors, banks, corporations, foreign central banks, investors, etc. etc.)
This massive theft from the social security trust fund, (and it is theft because, in a crisis, the government cannot convert the sale of those special bonds deposited in the fund back to real dollars), enabled the US government to create ever larger US government budget deficits by cutting taxes repeatedly on the rich, investors, corporations and businesses, while simultaneously spending trillions of dollars on wars in the middle east, and while allowing the big pharma and health industries to gouge medicare and other government health programs with chronic excess price increases.
One should think of the social security program, and social security monthly benefit payments as a form of workers wages. It is what I call the ‘social wage’. By borrowing and spending the trust fund surplus on tax cuts for capital and war spending, the government is in effect acting as a redistributor of wage incomes back to capital incomes (in the form of tax cuts and war spending and pharma-health industry subsidization). You won’t find that in government stats on wage change. Nor in considerations of causes of income inequality that keeps accelerating in the US.
Since the 2008-09 crash, moreover, the US government has been ‘borrowing down’ the trust fund, or else using it (as did Obama) to divert the payroll tax in part to try to boost wage incomes during his abysmal ‘recovery’ period after the crash. All Obama did was accelerate the decline of the social security trust fund. Nonetheless, it’s still positive around $3 trillion but at the current rate is expected to be used up by 2035 or so. After that social security payments will be financed only out of current payroll taxes.
At some point another Greenspan-like Social Security Commission will be tasked to save social security again, a la 1986. It will then likely raise the minimum retirement age to collect it to 70 years (and early retirement to 65 or more from the current 62). Disability and survivor benefits will also be likely reduced. This was already pioneered by the (Senator) Simpson report and recommendations back in 2010 or so. They’ll say they’re ‘saving’ social security by gutting it. They’ll also likely try to legally allow the fund to invest in stock markets. (Making the bankers happy, who will manage it). What capitalists want is to privatize social security, in effect destroying it as a social retirement system and converting it, as they previously have done with business-union defined benefit plans converted to phony 401k private contribution pensions. Privatizing of course means bankers and their buddies get their hands on the fund to their benefit.
Social security could, and should be reformed, without privatization. This can be easily done by simply raising the ‘cap’ on earned incomes (now about $125k a year or so). Apply the payroll tax to all earned (e.g. wage incomes). Then apply it to forms of capital incomes (interest, rent, royalties, dividends, capital gains, inheritance, etc.) as well. And of course, stop the government from ‘borrowing’ from the fund annually, which would make it reduce its business tax cutting and war spending.
My previous studies showed that this could raise trillions of dollars for the fund with hundreds of billions left over–to fund ‘medicare for all’ in large part (the rest of Medicare for All funded by a financial transaction tax). It might even enable some funding for free public higher education. But you won’t hear Democrats calling for any of that. The originators of Medicare itself no longer support it (at least the Democrat Party leadership and their pundits and media outlets). Of course, Medicare for All is anathema to Republicans and their moneybags behind them. They’re the ones, not surprising, calling for cuts to Social Security or trying to label the program as ‘Socialism’ (along with free public college tuition, green new deal, and tax recovery from the rich and their corporations. It’s a new ideological offensive against social security.
But I’ve been predicting this ideological (and policy) offensive for some time. The massive subsidization of capital incomes that has been occurring, and accelerating, for at least two decades now by means of fiscal policy (tax cuts for business and rich) and monetary policy (free money from the central bank, the Fed). ALong with accelerating, now annual, $1 trillion war spending the $15 trillion in tax cuts for capital incomes since 2001 has now produced a $20 trillion plus government national debt. Projected $1 trillion a year or more further budget deficits will balloon the US national debt to $34 trillion by 2017. (Add another $5 trillion for state and local debt and the current $4 trillion in Federal Reserve debt plus other government agencies’ debt, and you have by the next decade around $50 trillion or so in total debt. And that’s not counting either the current $13.5 Trillion in household debt and nearly $10 trillion in corporate bond debt even today and going higher.
The Congressional Budget Office research staff has estimated that even at the conservative estimate of the rise in just the US government debt, the cost of interest on the national debt alone will exceed $900 billion a year by 2027. (More if there’s a recession, which there will be and sooner rather than later).
Neither wing of the Corporate Party of America (aka Republicans and Democrat party elites) will address this looming debt crisis. Republicans will keep cutting taxes for capital incomes and escalating war spending; Democrats will continue war spending and will enact (if Republicans allow them) token hikes in capital income taxation. But don’t hold your breath or expect that any of the latter will ever go to address social security and the diverting of the $3 trillion remaining surplus to help offset the annual $trillion budget deficits and additions to the national debt. Both wings of the CPoA will ‘address’ social security shortfalls by raising the retirement age dramatically, reducing the annual inflation adjustments, cutting SS disability payments (already occurring), and–once again as under Greenspan–raising the payroll tax (i.e. to continue diverting any surplus to tax cuts and war).
It could all be resolved simply by: 1. eliminating the ‘cap’ on taxable wage incomes; 2. taxing capital incomes at the payroll rate; 3. preventing the government from ‘borrowing’ from the social security fund. (By the way, the borrowing from the fund was disallowed in 1990 legislation, but Congress suspends that rule every year and grabs the surplus, replacing it with phony special issue Treasury bonds that can’t be resold to raise cash when the fund surplus runs out.
For more on this, which I’ve been writing on for years, see my chapter on Social Security in my 2006 book, ‘The War At Home’, and numerous magazine articles I’ve written on it thereafter located on my website (http://kyklosproductions.com) during the Obama period. It’s also addressed in my forthcoming book, ‘The Scourge of Neoliberalism’, Clarity Press, summer 2019).
Jack Rasmus
April 29, 2019
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