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Posts Tagged ‘GDP’

Recession Door Opens in US

Posted in Uncategorized, tagged , , , , , , , on August 6, 2025| 1 Comment »

This past week was punctuated by a perfect storm of negative US economic reports and events. Together they mean the door to recession in the US has now opened—quite contrary to all of Trump’s hype that the US economy is doing great.

The reports in question are the July jobs report lasts Friday and the advanced (preliminary) US GDP report for the 2nd quarter (April-June) released a few days before. The events associated with these reports were (1)Trump’s announcement imposing widespread tariff hikes ranging from 15% to 41% on more than 40 countries, with even higher tariffs previously announced on China, Russia, Mexico, Canada as well as ‘across the board’ global tariffs steel, aluminum, copper and other commodities; (2) and The Federal Reserve bank’s decision to keep US interest rates at current levels for at least another six weeks.

If last week’s 2nd quarter GDP data unlocked the door to recession, then last Friday’s Jobs data kicked it wide open. And Trump’s tariffs coming behind threaten to blow it off its hinges.

The Jobs Data Tsunami

It’s generally acknowledged that jobs are a lagging indicator of the condition of the US economy. If so, the July Jobs report shows that there’s no more lag. Jobs have caught up and Friday’s August 1, 2025 report shows Labor Market conditions in the US economy are now flashing red.

According to the US Labor Department’s Establishment Survey (CES) only 73,000 net new jobs were created in July. Moreover, this number is likely to be downward revised, since the July jobs report also revised its previous May and June reports downward big time: for May, the jobs created were reduced from an initially reported 144,000 jobs created that month to only 19,000 in fact: for June, the revision was from 147,000 to 14,000. So when July is similarly revised, it’s highly likely the 73,000 will be reduced dramatically as well. This will mean the total jobs created over the past three months will be barely 50,000!

It’s generally acknowledged the economy has 125,000 new workers entering the labor force and economy every month. The economy must therefore create that many jobs every month just to absorb new entrants, mostly youths seeking jobs for the first time. Only 50,000 created means more than 300,000 are entering the ranks of the unemployed not gainful employment.

The US Labor Department has a second jobs survey to the CES, which covers mostly large companies. The second survey is called the Current Population Survey or CPS. It covers more small and medium sized businesses as well as unemployment levels the CES does not report. The CPS report on Friday showed that new entrants’ unemployment rise by 275,000 in July.

The plight of new workers seeking employment is not the only negative indicator of a rapidly deteriorating US labor market this summer. Here’s some other telling job indicators:

  • The general level of employment in July fell by -260,000. It would have been an even greater decline had the level of part time employment not also risen by 433,000 as well. No doubt many companies converted their full time employed workers to part time in lieu of laying them off. Conversion of full time to part time typically occurs with the onset of early stages of recession.
  • Beyond just July, the CPS revealed that since May 1 the Employment level for the US economy in general declined by -863,000.
  • The unemployment rate, also indicated by the CPS only, remains at approximately 8% for the entire US labor force of 170 million—not the ‘official unemployment rate of 4.2% one consistently reported by the mainstream media and hyped by politicians. The 8% includes the 50 million plus part time, temp, discouraged, independent contractor, gig and similar job categories that the ‘official’ 4.2% excludes.
  • The 8% means there’s roughly 14 million US workers unemployed or underemployed. Of that 14 million, those unemployed long term (more than 27 weeks) has risen sharply as well over the summer. In July alone their numbers rose by 179,000.

Multiple statistics show the band-aid has been ripped off the obfuscation of the real condition of the labor market that has prevailed for at least this past year, exposing the long festering wound beneath.

The labor market has been weak for some time, as this writer has been reporting repeatedly over the past year. One needed only to look behind the mainstream media’s cherry picked reporting of the most favorable numbers in the two jobs reports, ignoring other data in the same reports that were growing consistently weaker.

What’s different the past three months, and in the July report in particular, is that the real rot in the jobs market could no longer be covered up by selective media reporting or by politicians’ hype.

Trump’s response to the recent jobs data has been to shoot the messenger, as he quickly announced his firing of the Labor Department’s statistics chief. But there’s no politically ‘cooked numbers’ to make him look bad here, as Trump claims. It’s just that the facts have now deteriorated to such an extent that even efforts to pave over the pot holes with marginal under-reporting and selective media reporting can no longer cover up the true condition of the deteriorating jobs ‘road-bed’.

The US GDP April-June Report

The second report indicating the US economy now balances on the precipice of recession is the advance (preliminary) US GDP report for the 2nd Quarter 2025. Here’s just three reasons why the announced 3% growth rate is not actually 3%.

First, readers should understand the US, virtually alone among advanced economies, puffs up its quarterly GDP numbers by multiplying the quarter change from the previous quarter by annualizing it. That is, 3% for the 2nd quarter is actually 4 times roughly what the economy actually grew from the previous 1st quarter.  3% sounds a lot better than 0.75% if one is publicly hyping the growth rate in the media.

However, even the 3%(0.75%) is grossly over-estimated for several reasons. Here’s just two of many: First, real GDP is artificially boosted by under-estimating the real rate of inflation. This occurs every report. Second, in the case of the 2nd quarter GDP report, the 3% is grossly over-estimated by temporary effects due to Trump’s current tariffs policies now rolling out which has dramatically distorted the contribution to GDP from what is called ‘net exports’—i.e. the difference and gap between imports into the US and US exports to the rest of the world.  For decades, imports have significantly exceeded exports. The result is that ‘net exports’, as the gap is called, has been a consistent subtraction from GDP from other categories like consumer spending, business investment, and government spending.

Let’s look at the under-reporting of real GDP due to low-balling inflation, and then the volatile impact of Trump’s tariffs on GDP for the entire first half of 2025.

(How Under-Estimating Inflation Over-Estimates GDP)

When the government reports GDP it’s for what’s called ‘real’ GDP. Real means adjusted for inflation (unadjusted is called ‘nominal’ GDP). The media reports the ‘real’. For the 2nd quarter that was the 3%. The problem is the inflation adjustment used greatly understates actual inflation. And the more it underestimates actual inflation, the more in turn real GDP is over-estimated.

The price index used to estimate real GDP is called the PCE. For the 2nd quarter the PCE was 2.1%. In the first quarter it was higher, at 3.7%. So simply by reducing PCE from 3.7% to 2.1%, all things equal the real GDP of 3% was boosted by a 1.6% lower PCE in the 2nd quarter.  If PCE in the 2nd quarter was 3.7% as in the 1st quarter, then 2nd quarter real GDP would be 1.4% instead of the reported 3%.

Ok. Some will argue perhaps inflation did abate significantly in the 2nd quarter compared to the first. Perhaps inflation was indeed 40%+ less in the 2nd compared to the 1st. But whichever the quarter PCE grossly underestimates actual inflation for dozens of reasons due to faulty assumptions and questionable methodologies used by the government to get PCE. Don’t think the government actually goes out and surveys price changes by businesses to get the PCE, like it does the other price index called the Consumer Price Index. It doesn’t. PCE is determined totally by estimating prices from other sources than the actual prices charged by businesses.

For example, let’s take insurance costs for home, auto, etc. which have been surging the past year. Insurance prices aren’t surveyed. They are extrapolated from insurance company profits. If the big insurance companies hide their profits in order to pay less taxes—which they do—then insurance inflation is grossly underestimated. But that’s what happens with PCE. How about rent inflation. Rents in the PCE index are calculated from reported new rental contracts from a subset of big apartment owners. Landlord price hikes for renters with existing contracts do not report price hikes within the term of the rental contract. There are dozens such examples that result in PCE underestimating actual inflation. Nonethless, PCE is used to low ball actual inflation in order in turn to over-estimate reported ‘real’ GDP. In short, 3% GDP in 2nd quarter is not actual GDP because PCE inflation is not actual inflation.

There are many other ways GDP in general is always over-estimated, apart from the faulty inflation adjustment. There are issues with seasonality adjustment methodologies. There are issues with how GDP is periodically re-defined in order to make it look larger. The latest such example was in 2013 when the government included as business investment items like business logos, trademarks, R&D expenses, IP and other similarly un-estimable values. The government simply accepts whatever businesses tell it are the increase in value (and thus price) of these ephemeral items, and then adds them to GDP.  When first introduced more than a decade ago, this boosted real GDP from business investment by more than $500 billion a year. Thus real business investment and its contribution to GDP is, and has been, less than reported every year.

Trump Tariffs & Volatile Net Exports

The even bigger reason why the 2nd quarter GDP growth of 3% is misrepresented has to do with Trump’s recent tariffs and trade policies. Briefly stated: nearly all of the 2nd quarter 3% GDP growth was due to the collapse of imports to the US economy in the quarter in response to Trump’s tariffs.

In the 1st quarter 2025, companies increased their imports excessively in anticipation of Trump’s coming tariffs. That artificially exacerbated the gap between exports from the US and imports to the US. A big negative number resulted, as imports exceeded exports by a wide margin. Imports thus subtracted from overall GDP calculation in the 1st quarter, overwhelming the effect on GDP from government spending, consumption, and business investment. GDP thus contracted by -0.5% in the first quarter. Virtually all due to the effect of import surge.

This flipped in the 2nd quarter. Imports that formerly surged in the 1st quarter collapsed in the 2nd. The difference between imports and exports now added to GDP. How much? Around 5% or 2% more than the actual 3% GDP. So what subtracted from the 5% to get the 3%? Business investment contracted, government spending flattened to virtually zero and consumption slowed. That knocked 2% off the 5% from imports-exports to get to the 3%.

Considering both quarters, it’s clear tariff policy and its impact on exports and imports, especially the latter, is distorting the numbers for GDP in the first half of the year 2025.

But beneath this what’s happening is business investment, a more permanent and less volatile factor in GDP determination, is steadily falling. In part due to tariff and trade volatility but also due to more fundamental forces and developments within the US economy. The same can be said for consumer spending, now steadily slowing even if still growing. In addition, Trump fiscal policies—spending cuts for social programs, government employment, and department dismantling are also building pressure toward less government GDP contribution.

US Economy Next 6-12 Months

The US economy is now at the precipice of recession and will likely deteriorate further over the next 6 to 12 months, and especially so in 2026. Here’s why:

Trump’s ‘big beautiful bill’ Act just passed by the Congress will have a net negative impact on GDP, and will not boost US economic growth as Trump claims.

Most of the at least $3 trillion in corporate and individual (and estate) tax cuts are just a continuation of previous 2018 cuts. The effect of the 2025 bill is just to make them permanent. That’s not net new fiscal stimulus from tax cutting. Meanwhile, the so-called working class $500 billion tax cuts in the bill—for tips, overtime pay, social security, interest on new cars, etc.—have been dramatically reduced and made temporary.

In contrast, the program and employment spending cuts in the bill—for Medicaid, ACA subsidies, education, layoffs of federal workers, and so on—amount to at least $1.5 trillion and take effect immediately. They will significantly reduce current consumer spending this year and next. Furthermore, Trump’s cuts in spending and layoffs will soon begin to spill over to state and local government spending cuts and layoffs, as the states will have to make up for reduced Federal government support and find ways to continue education, health and other spending from their own budgets. They too will have to begin layoffs and cuts to programs, both of which will exacerbate consumer spending in their states.

Add to all this what economists call the ‘multiplier effects’. Tax cut multiplier effects are less than spending cuts multiplier effects. Tax cuts don’t immediately result in more investment by businesses or wealthy investors. They lag. Moreover, the more the cuts accrue to the more wealthy and corporations, the less is actually spent of the total cuts. Some of the cuts are just hoarded. Some are distributed to shareholders as stock buybacks and dividend payouts. Some are invested in financial asset markets, none of which add to GDP. And some are redirected to offshore investment which also contributes nothing to US GDP. So tax multiplier positive effects are relatively low, and increasingly so in the 21st century as the US economy has globalized and financialized.

In contrast, the multiplier negative effects from spending on programs and jobs are immediate and much higher. This is especially more so, to the extent the spending cuts negatively impact incomes of middle to low income levels, which the Trump spending cuts clearly target. In other words, the composition of the Trump tax and spending cuts are net negative and exacerbate the negative multiplier effects of the combined tax and spending cuts as well.

In summary, over the next year US GDP is likely to weaken due to less consumer spending—as state and local government layoffs rise and Trump spending cuts take effect as well as due to less immediate and historically low impacts of tax cuts on the real economy—while the short term positive effect on Imports-Exports on 2nd quarter GDP dissipates.

The recent Jobs and GDP reports reveal the door to near term recession has opened. Trump tariff, tax and spending policies will likely kick it wide open as they take effect.

Jack Rasmus

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The ‘Stop-Go’ US Economic Recovery

Posted in Uncategorized, tagged , , on August 13, 2013| 1 Comment »

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

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U.S. GDP–A Longer Term Trend Analysis

Posted in Uncategorized, tagged , , on June 8, 2013| 1 Comment »

Nearly daily in recent weeks, indicators of the US economy have fluctuated wildly. One day reports of manufacturing and factory orders show a declining economy, another day housing prices and residential home building appear to rise; the next day purchasing managers show a services (88% of the economy) employment trend of absolutely no gain in job creation, followed by a monthly jobs report from the Bureau of Labor Statistics that 170,000 jobs were created in May 2013. What to make of these conflicting indicators?

Stock and bond markets and investors—especially the average ‘herd’ mentality driven average types—become schizophrenic, buying one day and selling off the next. A true sign that the so-called ‘experts’ have no idea what’s coming next and that the US economy is churning and ‘frothing’, a sign of instability that could flip either way—toward more growth or toward a major relapse of the same.

As this writer has argued on numerous past occasions, the ‘experts’—whether of the business press or professional economist variety—tend to focus and hype the most recent report and indicator as revealing the ‘true’ emerging trend. But a better view is to consider the longer term trends behind the daily numbers and latest report. Furthermore, to factor in to this purely economic data analysis considerations of government (US and global) economic policy shifts, as well as highly potential ‘tail risk’ developments (a bank crash, a ‘Cyprus’ event, intensification of a currency war, etc.).

With that in mind, what follows is this writer’s analysis of the ‘longer term’ apparent trend in the US economy over the past year—as reflected in US Gross Domestic Product (GDP) numbers. However, US GDP is notoriously insufficient to fully reflect the US economic trend, for various reasons that will not be discussed here, except for two points: one is that US GDP does not accurately reflect the rate of inflation and therefore the proper adjustment for inflation to get ‘real GDP’. It underestimates inflation, thereby overestimating real GDP. It also fails to account for population growth and therefore real GDP per capita, which is the real estimate of how well the economy is doing. There are other major issues with GDP calculation that result in its overestimate of real US economic growth, that will remain unaddressed for now.

Despite its limitations, however, GDP is still the best of the worst indicators of the general state of the US economy. What follows, therefore, is an ‘intermediate’ term analysis of US GDP, over the past four quarters since summer of 2012. What it reveals is that the US economy is not accelerating onto a path of more sustained growth; to the contrary, that growth is slowly declining, which means all the hype based on short term, monthly reports and indicators should be considered with a good dose of skepticism.

Over the past year, July 2012 to June 2013, it appears US GDP has been fluctuating between virtually zero growth and 3%. But when special one-time, one off factors are adjusted for, the average growth rate is actually no more than 1.5% on average—or about the same average growth in 2012 and 2011. In other words, the economy has remained stuck in an historical, well below average recovery for the past two and a half years. Moreover, when properly further adjusted for actual inflation and for population growth, the US growth rate is averaging well less than 1% annually—i.e. has been stagnating for some time.

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 has also proved temporary as well, flattening out and declining in 2013. Another one off event then occurred in the 1st quarter 2013: a rise in business inventory expansion, which account for a full 1.5% of the total 2.5% of the 1st quarter 2013 GDP. And that one time exceptional event disappeared too in the 2nd quarter. So when the temporary, one off effects of pre-election government defense spending, business equipment spending at year end, and inventory surge in early 2013 are ‘backed out’ of the longer term trend, that longer trend is a GDP growth of no more than 1.5%–or about half that normally at this stage, five years after the recession.

As noted previously, moreover, even that is an overestimation. What’s important is real GDP, not just price increases for goods and services. So adjustment is typically made for inflation. But the official inflation index used to calculate real GDP is called the ‘GDP Deflator’, the most conservative measure of inflation; that is, the index that minimizes inflation the most. And by minimizing inflation, the result is to maximize real GDP, making GDP appear larger than it actually is. For example, both the Consumer Price Index (CPI) and the Personal Consumption Expenditure Price Index (PCE) record a significantly higher inflation rate than the GDP Deflator, and therefore a significantly lower real GDP than the Deflator index. Using the CPI, the average for GDP since July 2012 through March 2013 would be well below 1.5% and likely closer to 1% average growth. Finally, when population growth is taken into account and ‘per capita GDP’ is considered—i.e. the real effect of growth on real people—than the growth rate is adjustable further by another 0.5%. We’re now talking about US GDP and economic growth at a sub-par less than 1%. That’s economic stagnation and an economy drifting toward, and teetering on the edge, of another recession—a condition of fragility that would take little to push over the edge into another, ‘double dip’ recession.
For the past 18 months this writer has therefore been predicting that a double dip recession in the US is quite possible, and even likely, somewhere in the late 2013 or early 2014 timeframe should the two following conditions occur: first, the continuation of government program spending cuts and, second, a new eruption of a banking crisis in Europe which is today the weakest link in the global economy. This prediction is reiterated, adding now a third possible major disruptive factor: a shift in Federal Reserve Monetary policy (slowing or stopping its current $85 billion per month ‘quantitative easing’ (QE) money injection into the economy) that would result in a sharp upward rise in general interest rates in the US.

Stated alternatively: given the slowing global economy and the deepening recession and financial instability in Europe, should the US continue to implement additional fiscal spending cuts (aka ‘austerity American style’) late in 2013 and, simultaneously, have the Federal Reserve act such that interest rates continue to rise—then the probability is high the US economy will slip into another ‘double dip’ recession.

Perhaps anticipating this possibility, the US government agency responsible for calculating GDP, the Bureau of Economic Analysis, is planning this summer 2013 to significantly revise the way it does so. That revision will increase GDP by as much as $500 billion, according to a report by the global business daily, The Financial Times, this past April 2013. Already a relatively weakly accurate indicator of the performance of the US economy, GDP will likely soon become even more so.
In other words, while an actual double dip recession may occur later in 2013-14, especially when properly adjusted for inflation and population growth, it may nonetheless be conveniently ‘defined away’ by the forthcoming changes in its method of calculation.

Jack Rasmus, June, 2013

Jack is the author of the 2012 book, “Obama’s Economy: Recovery for the Few”; host of the weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network; and ‘shadow’ chairman of the Federal Reserve in the recently formed Green Shadow Cabinet. His website is: http://www.kyklosproductions.com, his blog: jackrasmus.com, and twitter handle: #drjackrasmus.

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U.S. GDP–Why the US Slowdown Will Continue

Posted in Uncategorized, tagged , , on July 28, 2012| 3 Comments »

THE FOLLOWING IS THIS WRITER’S CONTINUING ANALYSIS OF THE MOST RECENT GDP DATA RELEASED YESTERDAY BY THE US COMMERCE DEPT. THE DATA CONFIRMS PAST PREDICTIONS AND ANALYSES LAST JANUARY AND APRIL CONCERNING THE DIRECTION OF THE US ECONOMIC SLOWDOWN, REASONS WHY, AND FUTURE SCENARIOS

On Friday, July 27, 2012 the US Department of Commerce released its report on Gross Domestic Product (GDP) results for the 2nd quarter for the US economy, with GDP revisions for the economy as well from 2009 through 2011.

Last winter the broad consensus among mainstream economists, politicians and the press was the US economy was finally on the way to recovery. Economic indicator after indicator was flashing green, they argued, proving recovery was in full swing. GDP for the 4th quarter 2011 recorded a moderately healthy 4% growth rate and was predicted by widespread sectors of the media would continue. But GDP numbers just released on July 27, 2012 show that 4% growth dropped precipitously by half, to only 2%. And in the latest report issued last week, 2nd quarter 2012 GDP continued to fall further to only 1.5%.

GDP for the first half of this year therefore has averaged about 1.7%–which is about the same 1.7% GDP growth for all of 2011. The US economy, in other words, is not growing any faster this year than it did last year. It is essentially stagnant, unable to generate a sustained recovery despite $3 trillion in spending and tax cuts over the past three and a half years. This scenario will at best continue, and may alternatively even worsen in the coming months; and if not worsen this year, certainly so in 2013.

This rapid slowing of the US economy in 2012 was predicted by this writer early last December 2011, in a general economic forecast for 2012-13 that appeared in the January 1 issue of Z magazine. Contrary to the 4th quarter 4% GDP trend, in December 2011 this writer contrarily predicted “the first quarter of 2012 will record a significant slowing of GDP growth” and “the US economy will weaken further in the second quarter, 2012”.

The US economy has been essentially stagnant for at least the past two years, bumping along the bottom at a sub-par 2.5% GDP growth rate. The economy needs to grow in excess of 2.5% for net job creation to occur. Given the economy’s longer term 1.7% growth rate, it is not surprising net job growth the past three months has averaged barely 80,000 a month—i.e. well below the 125,000 or more needed just to absorb new entrants into the labor force. So we are in fact losing jobs again this year, 2012, despite what the official unemployment rate says.

Readers should note this 1.7% sub-par GDP growth the past 18 months has occurred despite the $802 billion tax cut passed by Congress in December 2010, virtually all of which was tax cuts for businesses and higher income household investors. In fact, it was more than $802 billion if further tax cuts for small businesses over the past 18 months are also factored into the total. Perhaps as much as $900 billion in pro-business/investor tax cuts have been passed, which have had minimal to zero impact on the economy and job creation. So much for that myth, and conservative-corporate ideology constantly pushed by politicians and the press, that ‘tax cuts create jobs’. Readers should keep that factual absence of any positive relationship between tax cuts and jobs and economy in mind, when more tax cuts for corporations and the wealthy are proposed by both parties once again as part of the year end deal coming immediately after the November elections. Expect both sides, Republicans and Democrats alike, to agree on reducing the top bracket tax rate on personal and corporate income both, from current 35% to at least 28% (the old Reagan years rate).

1st Quarter GDP: Temporary Growth Factors Disappear

While the hype about economic recovery was in full swing last winter, this writer pointed out in various publications that the 4th quarter GDP numbers were based almost totally on one-off developments that would disappear by mid-year 2012. At least half of the 4th quarter’s 4% growth rate was due to business inventory spending, making up at year end for the collapse of the same in the preceding 3rd quarter. Auto sales driving consumer spending was also noted as a temporary effect, given they were based on deep discounting and temporary demand that would not continue. Business spending that surged in the 4th quarter was also identified as temporary, as it was driven by year end claiming of tax credits, while manufacturing export gains in late 2011 would soon dissipate, it was predicted, as the global economy and trade slowdown eventually reached the U.S. in 2012.

The halving of GDP growth by the 1st quarter 2012 was due in part, as predicted, to the slowing of auto sales. The previously predicted slowing of business inventory spending occurred, while the 4th quarter’s business investing also disappeared as predicted. In addition to the dissipating temporary factors, new developments added to the 1st quarter’s GDP decline: Consumer spending slowed, as escalating gasoline prices began once again (for a third year in a row) taking their toll on consumers and as auto sales growth began to show signs of weakening. The global slowing of manufacturing also finally began to penetrate US economy by 2012, as US exports grew more slowly than imports and thus depressing GDP still further. Finally, the 30 month long decline in government spending, especially at the state and local government level, continued unabated into 2012.

In late April this writer predicted that the 2% first quarter 2012 GDP would continue to decline still further. In a piece in Truthout.org on May 8, it was predicted the 1st quarter GDP “decline will likely continue further in the months immediately ahead, to possibly as low as 1.5% the second quarter, April-June 2012.” (In a piece in Znet on May 6 it was predicted for the second quarter 2012 that “The growth rate could slow to possibly as low as 1.5%”).

2nd Quarter GDP’s Continuing Downtrend

The same factors that have been driving the 4% GDP to 2% in the January-March 2012 period have driven it lower still, to the recent 1.5%.

In the most recent 2nd quarter 2012, both consumer and business spending showed even further weakening—while government spending continued to contract for the 33rd consecutive month and the contribution to GDP by exports fell further as well.

Consumer spending on goods declined from its 5.4% rate in the 4th quarter to only 0.7% this past quarter. Durable goods spending in particular fell off a cliff last quarter, as auto sales not only slowed dramatically, as in the 1st quarter, but now in the 2nd actually turned negative. But perhaps the most dramatic indicator is the fall off in retail sales in general. Retail sales April-June fell in each of the three months. That is the first time for a three consecutive month decline since the deep collapse of 2008! Even services consumption recorded its slowest and lowest growth in two years!

What consumer spending did occur in the 2nd quarter was driven by sharply rising credit card debt as well as household auto and education debt, credit cards growing by 11.2% and auto-student loans by 8%. In other words, to the extent consumer spending is occurring at all it is not due to rising household real disposable income—which is actually falling—but due to households taking on more debt. So much for the mainstream argument that consumer spending is slowing because households are working off debt (i.e. so-called deleveraging). That may be true for the wealthiest 10% households with income growth from stocks and bonds, but not for the bottom 90%, i.e. the more than 100 million rest of us. But consumer spending increasingly dependent on credit cards and other borrowing portends poorly for further spending down the road. It is not sustainable and will result in yet a further slowing of consumer spending and consequently economic growth.

Consumer spending is not the only major trouble spot in the 2nd quarter that promises to continue into the 3rd and beyond. Business spending also showed new signs of trouble in new places as well as the old last quarter. Business spending on plant expansion, which shows up as business ‘structures’ spending, collapsed last quarter from prior double digit levels in the 4th quarte—from 33.9% to only 0.9% in the last three months. That plummeting structures spending will eventually translate into a slowing of new job creation going forward as well. Businesses that don’t expand don’t add jobs. Slowing business spending was also evident in new orders placed for manufactured goods that turned negative for each of the past three. Watch next for the other business spending sector, on equipment and software, soon to flattened out in the future as well.

A third sector of the economy that contributed to growth in 2011, but has also reversed now as well, is exports. New orders for US exports have declined the past two months in a row, the first back to back fall since 2009. That confirms that any contribution of exports and manufacturing to GDP is now clearly over. It never really contributed that much in the first place, despite all the Obama administration hype in 2010-11 that manufacturing and more free trade would ‘lead the way’ to sustained US economic recovery. It was all hype to reward multinational technology and other companies—big contributors to Democratic election coffers—while diverting attention away from the obvious failures to generate sustained recovery after the three Obama ‘recovery programs’ introduced in 2009, 2010, and 2011.
Not least there’s the continued poor performance of the government sector in the 2nd quarter. It has continued to decline every quarter since the 3rd quarter of 2009, or 33 consecutive months now. That spending decline at the state and local government level has been the case despite more than $300 billion in federal stimulus subsidies to the states since June 2009 and hundreds of billions more in unemployment insurance payments by the federal government to the states. Why state-local government spending has declined every quarter since mid-2009 despite the massive subsidies is an anomaly yet to be explained. Like corporations hoarding their tax cuts, and banks hoarding their bailouts, both refusing to use the money to lend and create jobs—perhaps the states and local governments also hoarded their subsidies. Perhaps that’s why the Obama administration quickly shifted its promise that its stimulus package would create jobs, to a message that it would, if not create, at least ‘save jobs’.

In answer to the obvious further deteriorating in the 2nd quarter in both consumer, business, and government spending, the press and media in recent weeks have tried to grab at straws and hype a ‘recovery underway in the housing sector’. But this line has been based on the slimmest of evidence: the indicator that home builders’ new construction has risen. But the media hype in recent weeks regarding housing has conveniently ignored various other indicators recently showing continued housing sector stagnation: For example, new home sales declined by 8.4% in June, the largest fall since early 2011. Mortgage loan applications and new building permits also fell, while median home prices recorded a –3.2% decline compared to a year earlier. That amounts to nothing near a housing recovery. To the extent home building has risen, it has been largely limited to multi-family units—i.e. to apartment building. That’s not surprising, given the 12 million plus homeowners who have been foreclosed since the recession began and need some place to live. But housing sector indicators as a whole still show that sector languishing well below half of what it was pre-2007 and with little indication of any kind of sustained growth or recovery. As in the case of net job creation, without a housing recovery leading the way there is no sustained general US economic recovery.

In all the 11 prior recessions since 1947 in the U.S., state and local government spending increases, net job creation in the private sector equivalent to 350,000 jobs per month for six consecutive months, and housing sector recovery have all been necessary to ‘lead the way’ out of recession. But for the past four years none of the above has been the case. There have been no effective jobs program, housing-foreclosures solution program, or state-local government spending program. That tripartite failure is at the heart of the failed economic recovery of the Obama first term.

Jack Rasmus
Jack is the author of the April 2012 book, “Obama’ Economy: Recovery for the Few”, published by Pluto Press and Palgrave-Macmillan. His other recent articles, radio and tv interviews, are available on his website, http://www.kyklosproductions.com

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