The most recent release of quarterly real GDP numbers on August 29, 2012 (second estimate) revealed that real GDP growth dropped to 1.7% (annualized quarterly) from the revised first quarter value of 2.0%. The advanced estimates of second quarter GDP reflected 1.5% growth, so the revision identified a slight increase. Economists and government officials would have preferred more substantial growth, but the decline in the second quarter was well anticipated given the evidence from other sources like retail sales, international debt issues, inflation, and the rising unemployment rate. Once again, it is clear that the rate of growth was actually slowed primarily by cuts in state and local government spending and slow investment. Output growth continues to rise, but at slower levels than what is necessary to stimulate substantial drops in unemployment or promote inflationary pressures. In a normal growth economy, economists prefer growth between 2.5% and 3% annually. When the economy is trying to recover from weakness, double that amount historically has been necessary to cause unemployment to fall by around 1%. While real GDP growth of 1.7% does not imply recession like in much of the EU, it is insufficiently strong to produce improvements in the employment sector.The August release of the 2012.2 data implied that “[t]he increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residentialfixed investment that were partly offset by negative contributions from private inventory investment and from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. The deceleration in real GDP in the second quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in residential fixed investment that were partly offset by a smaller decrease in federal government spending, an acceleration in exports, and a smaller decrease in private inventory investment.” (http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm).The table below reveals the percentage changes in the primary expenditure categories of real GDP. The four bolded descriptions reflect the major categories for which the components below them add up. It is evident from the data that personal consumption expenditures matched the overall growth during 2012.2, with all categories of investment growing more rapidly than that. Exports grew at a rate in excess of imports, which is a positive contributor to overall real GDP, but the balance of trade is still negative $404 billion dollars (not shown). Both Federal and state and local government spending fell by less in 2012.2 than in the previous quarter, but federal spending fell by $400 million dollars while state and local government spending fell by just over $5 billion. The recent peak in government spending was in 2010.2 at $2.619 trillion dollars, but that magnitude has dropped to $2.484 trillion as of the most recent quarter. In percent terms, this drop is almost exactly 1% of real GDP. While we support reductions in government spending that enhance efficiency, the types and magnitudes of cuts in state and local government spending – particularly in education and healthcare, may not reflect the optimal outcomes for quality or quantity of these services provided.
Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product[Percent] Seasonally adjusted at annual ratesLast Revised on: August 29, 2012
Gross domestic product
Equipment and software
Change in private inventories
Net exports of
goods and services
consumption expenditures and gross investment
State and local
Gross domestic product, current dollars
Inflation at the national level is amazingly mild given the rising gasoline prices due to the falling dollar and speculative pressures, the drought throughout the middle of the country, and the growth in consumer spending relative to the depth of the trough of the Great Recession. Three of the last four months have seen absolutely flat inflation with the March value reflecting moderate deflation. The parallel with the malaise of the Japanese economy after the 1990 recession is undeniable. In hindsight in a decade or so we may look back and blame traditional monetary policy aims of keeping interest rates low, as the culprit for the economic stagnation that is unlikely to lift any year soon. The FED seems complicit with the Treasury in maintaining low interest rates not to stimulate production and investment, but to reduce financing burdens for the fiscal side of government. In the 1941 to 1952 time period this type of behavior was overt in what was called the FED-Treasury Accord. It worked because of all of the pent-up demand associated with rationing and soldiers returning from WWII. While we have soldiers returning from Iraq and Afghanistan today, their numbers are not nearly as sizable and there is no pent-up demand due to the wealth losses from the financial and housing crises. We are of the opinion that it would be better for the FED to adopt the opposite stance relative to interest rates for two purposes: one, to motivate consumers and particularly investors to lock in lower interest rates for durable goods purchases or investments in capital before they rise, and two, to motivate the federal government to pay down the debt through reductions in wasteful federal agencies, entitlement programs, and initiatives more appropriately designed for the states and local governments, before the interest costs escalate. Unemployment rose again in July to 8.3% as some layoffs took place and particularly large businesses derived additional benefits from cutting their workforces. Even though the Great Recession ended over two years ago, large business entities have discovered and continue to take advantage of the realization that they can meet consumer demand with fewer workers. While twenty years from now this might be a valuable stance given that baby-boomers will have almost entirely retired by then and the replacement population will be substantially smaller, but in 2012 with baby-boomers only starting to retire, the impacts are more than just disconcerting. The broadest measure of unemployment, U-6 (Table A-15 on the BLS site, www.bls.gov) has risen for four months in a row to 15.0%, almost back to the level from a year earlier after falling in March to 14.5%. Comparing this value to the U-5 rate of 9.7% suggests that most of the difference is from escalating unemployment amongst those who only work part time. These trends reflect not just the behavior of private sector employers, however. As emphasized last quarter, the decline in federal, state, and local government employment has placed greater pressure on unemployment figures. We have been discussing (only partially in a tongue-in-cheek fashion) the beneficial effects of paying federal employees to not work, extracting the substantial budgets provided to these bureaucrats to pay down the debt, and thus improving the climate for private sector businesses; motivating additional hiring, and generating incentives and funding for state governments to provide for their own constituencies without trying to fund local initiatives at someone else’s expense.
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