Archive for August, 2010
You read it right. It can’t.
Of course there has been some growth in GDP over the past year. All that government stimulus was going to goose the numbers at least a little, and inventory restocking started to look good for a couple of quarters. But if you look at the major components of GDP you can see why only the cheerleaders think that this supposed recovery is either powerful or self sustaining.
By definition, GDP is the sum of Consumption by individuals, Investment by businesses in plant, equipment, and inventory, Government spending, plus Exports minus Imports. Economists write this as Y = C+I+G+X-M. Note to the math challenged: you have just read the only equation in this article.
Both Drivers of Consumption Are Weak
Since consumption accounts for 70% or so of GDP, let’s look at it first. Consumers fund consumption out of income and wealth. Income not spent, by definition, is saved. Obviously the wealth of most consumers has taken a hit and is not about to recover any time soon. The S&P is still down 29% from its 2007 high.
Moreover, for most people the family home is the principal asset and home prices have not really budged from the bottom at this point. I am far from the only person to have said that home prices can’t recover until we work off the huge “shadow inventory” of delinquent mortgages, homes in foreclosure, borrowers with adjustable rate mortgages that have not yet reset, and homes owned by people who would sell if a price rebound allowed them to take their money out.
On the income side, most people depend on jobs, and the employment outlook remains poor. Total non-farm employment has grown all of 600,000 since December 2009 low of 129.6 million. Which is worse than it looks, because we need something like 200,000 new jobs per month just to keep up with population growth.
Offshoring Has Weakened our Ability to Recover, When Compared with Previous Recessions
In my view off shoring is a major culprit here, and it really shows up in the last twenty years of employment numbers. About 22.7 million jobs got created during the Clinton Administration. Only 8 million got created under Bush and the recession erased all of those. And yes, a big portion of the jobs created under Bush were in residential construction, a sector not expected to lead us out of recovery this time. But my point is, less jobs got created under Bush than Clinton, largely because US corporations are less and less eager to hire Americans even when business turns up. No one sees that trend reversing unless the government steps in.
For example, you’d think that Apple’s (AAPL) dazzling new product introductions would create American jobs. Not a chance. As former Intel (INTC) chief Andy Grove says, Apple Computer (AAPL) has 25,000 US workers and ten times as many in other countries. While AAPL keeps key engineering, design, and management people here, the actual work of stamping out Macs, ipods, iphones, and ipads gets done elsewhere. Which is why US computer manufacturing employment sits at 166,000, lower than it was 35 years ago. In my view, this example illustrates the long-term downtrend in the job growth numbers as well as anything possibly could.
Business Investment is in Low Gear
So far we have shown that wealth and employment, the principal consumption drivers, remain weak for long-term, structural reasons. How does the rest of the economy look? Well, business investment in plant and equipment has not moved far from trough levels either. I suspect that the picture is the same here as it is for employment: Increased US demand for goods is less and less likely to result in new US plant and equipment. Think of all the new AAPL factories in Asia.
The other main component of investment is inventory. We have had our spurt in inventory investment, and I don’t see how it continues without a sustained increase in consumer demand. Therefore I don’t expect business spending (investment) to contribute much to GDP either.
Net Exports Actually Subtract from our GDP
As for trade: the first thing to remember is that we import about 12 million barrels of oil per day, a cool billion dollars’ worth. By the definition of GDP we listed above, that billion (like all imports) gets subtracted from GDP, every single day. That won’t change unless we change our energy policy or a supply problem changes it for us.
The next thing to remember is, that the world trade system is set up so that the US imports far more than it exports, and many other countries depend heavily on US consumption. As former IMF consultant Richard Duncan points out in his book, The Dollar Crisis, the US current account deficit approximately equals the surpluses of all the other countries in the world. Again, this is a structural issue.
I think some change in that structure is inevitable, and it won’t be painless. But until and unless it does change, the international sector will continue to be a considerable net minus for GDP. We aren’t going to grow the economy by exporting to other countries, because on balance, they make a point of selling to us more than they buy from us.
Government Spending Can’t Make up for Private Sector Weakness
What about government spending? While the federal government is doing a fair amount of spending, state and local governments have had to cut back. They can’t print money the way the feds can, and so when state and local tax receipts fall, their spending falls too. Much of the stimulus program has in fact gone to help states and localities. Otherwise the states and localities would have let go more firefighters, police, and teachers than they already have. So yes, federal spending makes a difference (Economists Alan Blinder and Mark Zandi say that the program prevented 2.7 million public and private job losses), but it is less stimulative than spending totals make it appear. What will the federal government do as the stimulus program winds down?
At some point the President will almost have to propose another stimulus plan. That begs at least three key questions: the program’s structure, whether Congress will enact it, and how it will be funded. I think that a wisely structured and funded stimulus would be helpful in the short to intermediate term, but wouldn’t it be nice if the Administration also tackled the long-term, structural problems? Not very likely, since the Geithner/ Summers team talks as if it faces a “normal” cyclical downturn.
The Fed Can’t Help Much Either
So much for the components of GDP, on to the Fed. Like many others I expect that on August 10 the Fed will say that it will reinvest the proceeds of its maturing MBS rather than let its balance sheet shrink. But whether I am right or wrong, the Fed can no longer pump up the “real,” non-financial, economy by creating money. Banks don’t want to lend and few creditworthy customers want new loans.
Our economy is stuck and our government is clueless.