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(What’s Left of) Our Economy: Don’t Forget About the Quality of U.S. Growth

27 Thursday Dec 2018

Posted by Alan Tonelson in (What's Left of) Our Economy

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business spending, Financial Crisis, GDP, Great Recession, gross domestic product, growth, housing, inflation-adjusted growth, Obama, personal consumption, real GDP, recovery, Trump, {What's Left of) Our Economy

One of the biggest economic questions facing Americans this holiday season – whether they’re heavily into the roller-coaster stock market or not – is whether the nation will slide into recession. I’m skeptical on that score, but I’m still wondering more about what I’ve long regarded as an even more important question: Will the quality of America’s growth start improving meaningfully?

As I’ve often explained, I prioritize this issue because, as significant as maintaining economic growth is, not all growth is created equal. In particular, unhealthy growth eventually tends to produce terrible results – the prime lesson Americans should have learned since the bubble-ized expansion of the previous decade collapsed into a terrifying financial crisis and the worst recession since the Great Depression.

So this looks like a good time once again to check into whether the U.S. growth recipe has changed since then, and if so, how much. As known by RealityChek regulars, the main indicator is how heavily increases in the inflation-adjusted gross domestic product (the growth measure most widely followed by knowledgeable students of the economy) depend on personal consumption and housing. For these are the parts of the economy whose bubble-decade bloat directly sparked the crisis. And the big takeaway as of last week’s release of the final (for now) figures on third quarter GDP? The situation is turning around, but at supertanker-like (i.e., painfully slow) speed.

Specifically, what I’ve called the toxic combination of personal consumption and housing (parts of the economy dominated by spending and borrowing, rather than saving and investing) came in at 72.66 percent of real GDP in the third quarter. This means that it’s decreased consistently since the first quarter of 2017 – the first quarter of the Trump administration’s stewardship of the economy – when it stood at 73.01 percent. For the record, as of the last quarter of the Obama economy (the fourth quarter of 2016), this figure stood at 72.93 percent

So that’s cause for encouragement. It’s also crucial, however, to recall that at the start of the last recession – at the end of 2007 – personal consumption plus housing as a share of real GDP was 71.49 percent. As a result, over that key time-span, the economy has evolved exactly the way we shouldn’t want. But at least by this measure the economy isn’t nearly as bubbly as at its peak during that bubble decade – when the toxic combination reached 73.74 percent of after-inflation GDP.

Another measure of America’s progress toward recreating an “economy built to last” (a wonderfully on-target phrase used by former President Obama) is the share of real GDP devoted business spending. Here, however, the trends show some troubling recent signs of backsliding.

At the start of the current economic recovery, in the middle of 2009, such spending represented 11.19 percent of price-adjusted GDP. The annual numbers since then, through 2017, are presented below:

2010: 11.42 percent

2011: 12.22 percent

2012: 13.08 percent

2013: 13.37 percent

2014: 13.95 percent

2015: 13.80 percent

2016: 13.65 percent

2017: 14.06 percent

Through 2014, in other words, business spending (or investment, if you prefer) as a share of the economy rose healthily. But this growth shifted into reverse in 2015 and 2016, before rebounding in 2017.

For the third quarter of 2018, business investment as a share of real GDP reached 14.61 percent – which represents further improvement. But the quarterly story isn’t as positive:

1Q 18 14.48 percent

2Q 18 14.64 percent

3Q 18 14.61 percent

That is, business investment as a share of inflation-adjusted GDP dipped between the second and third quarters. Is this dip a blip? Or the start of a longer-term decline? I’m not in the crystal ball business; that’s why I’ll be watching these numbers closely going forward – and why I believe you should, too.

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Glad I Didn’t Say That: More Fake News on Trump Tariffs Fallout

04 Tuesday Sep 2018

Posted by Alan Tonelson in Glad I Didn't Say That!

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business spending, Catherine Rampell, core capex, Glad I Didn't Say That!, tariffs, Trade, Trump, uncertainty

“Threats of additional tariffs and lingering uncertainty over trade policy are also causing firms to reevaluate or delay investment, as University of Chicago Booth School of Business professor Steven J. Davis noted recently.”

– Catherine Rampell, The Washington Post, September 3, 2018

U.S. “core capex”* spending since first Trump non-trade law tariffs (late March): +0.92 percent

U.S. “core capex” spending during comparable (April-June) period, 2017:  -0.03 percent

U.S. “core capex” spending during same period, 2016: -1.63 percent

U.S. “core capex” spending, advance reading, June-July, 2018: +1.40 percent

*business spending on non-defense capital goods excluding aircraft

(Sources: “Trump promised farmers ‘smarter’ trade deals. Now he has to bail them out,” by Catherine Rampell, The Washington Post, September 3, 2018; New Orders, Nondefense Capital Goods Excluding Aircraft; Manufacturers’ Shipments, Inventories, and Orders, Time Series/Trend Charts, Business and Industry, U.S. Census Bureau; “Monthly Advance Report on Manufacturers’ Shipments, Inventories, and Orders,” Release Number: CB 18-118 M3-1 (18)-07, U.S. Census Bureau, August 24, 2018, https://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf)

(What’s Left of) Our Economy: First Quarter U.S. Growth was Encouraging Quality-Wise, Too

29 Sunday Apr 2018

Posted by Alan Tonelson in (What's Left of) Our Economy

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business spending, GDP, Great Recession, gross domestic product, housing, non-residential fixed investment, personal consumption, real GDP, recovery, {What's Left of) Our Economy

Last Friday’s report from the government on America’s economic growth generally was hailed by the conventional wisdom both for beating most economists’ expectations, and for breaking a two-year string of absolutely dismal advances in the price-adjusted gross domestic product (GDP) during the first quarter of the year. (Actually, three of the previous four first quarters saw lousy GDP reads, including 2014’s dip in the country’s real production of goods and services).

I see an additional reason for liking the 2.30 percent annualized figure: This first estimate showed that first quarter growth was considerably healthier than the American pattern during the current economic recovery.

As known by RealityChek regulars, this expansion, which began in the middle of 2009, is one of the longest on record. But in addition to growth being notably weak, it’s been largely driven by the same dangerous engines that inflated the credit bubble of the previous decade – whose bursting of course led to a frightening global financial crisis and the worst U.S. economic slump since the Great Depression of the 1930s. More specifically, growth has relied heavily on personal consumption and housing, which I’ve called the “toxic combination.”

On a standstill basis, the new figures show that the economy’s make-up is only slightly less dominated by these two components of the GDP than it was at the height of the bubble decade. As of the first quarter, personal consumption and housing combined accounted for 72.89 percent of real GDP, not too far short of the record of 73.27 percent that was hit in the third quarter of 2005.

At the same time, this share was lower than the 73.12 percent of the fourth quarter of last year, and is the second lowest since the third quarter of 2016 (72.71 percent).

Especially encouraging in this regard were the personal consumption results. Quarter-to-quarter, it fell from 69.62 percent of the inflation-adjusted economy (an all-time high) to 69.41 percent – the very lowest since that third quarter of 2016 (69.25 percent).

As for personal consumption’s growth role, the new numbers reveal that it made its smallest relative contribution to real GDP expansion in the first quarter (0.73 percentage points – or 31.74 percent – of 2.30 percent annualized growth) since the second quarter of 2012 (0.45 percentage points – or 2406 percent – of 1.87 percent annualized growth).

And partly as a result, a much better guarantor of healthy growth – business spending – made its best contribution to the real GDP’s advance in the first quarter in more than a year. Non-residential fixed investment fueled 0.76 percentage points (33.04 percent) of that 2.30 percent annual first quarter growth. In the first quarter of 2017, such business spending’s contribution was much bigger (71.66 percent). But annualized growth was only 1.23 percent.

What about housing? Its share of real GDP has fluctuated in a pretty narrow range over the last year or so – between 3.42 percent and 3.58 percent. But this share is so much smaller than that of personal consumption, and has stayed so much lower than during the bubble decade (when it peaked at 6.17 percent in the second quarter of 2005), that it’s just not moving the growth quality needle much.

There’s no guarantee that this mildly encouraging trend will continue. In fact, many prominent observers argue that personal consumption in the first quarter was simply taking a breather after a torrid fourth quarter of 2017, and expect a rebound to show up in the second quarter figures. But more consumer spending wouldn’t necessarily be bad for the American economy – provided that the healthy growth engines, like business spending (and better trade performances) aren’t once again completely lost in the shuffle.

(What’s Left of) Our Economy: Both Trump and Critics Could be Wrong About the Business Spending Rebound

02 Tuesday Jan 2018

Posted by Alan Tonelson in (What's Left of) Our Economy

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Barack Obama, business spending, Center for Economic and Policy Research, Dean Baker, energy, recession, regulation, Trump, {What's Left of) Our Economy

Economist Dean Baker of the Washington, D.C.-based Center for Economic and Policy Research has just performed a valuable service. He’s looked under the hood of U.S. economic data and found a major, under-reported feature of the economy’s business spending performance under President Trump so far: A lot of the improvement has come in the energy sector, and therefore stems from energy price increases that have little to do with Washington policy decisions.

And if the story ended there, Baker would be justified in dousing “Trump capex (capital expenditures) rebound” claims with lots of cold water. But it doesn’t.

As Baker points out, energy-related capital spending accounted for more than 40 percent of the total increase in all capital spending recorded in the official government data since last year. That is indeed big-time out-performance, and there’s no doubt that (like the energy-related business investment bust that began in late 2014) it’s largely due to energy price changes. When the price of oil and natural gas goes up, businesses (understandably) conclude that demand is rising, drill more, and need more drilling equipment and the like. When energy prices fall, this spending just as understandably tends to sink.

Even so, if you look at the policy landscape, there’s a case for giving the administration some credit for the energy investment recovery. Specifically, it’s rolled back some important regulations in the industry, and has spoken repeatedly of eliminating more. And interestingly, this latest increase in energy-related business spending has taken place much faster than the previous surge, under former President Barack Obama – who was not exactly a fossil fuels booster.

Yet developments outside the energy sector indicate even more powerfully that the economy could be seeing a Trump effect on capex. The key is examining spending on equipment. Whatever the effect of energy-related spending on the business investment totals, equipment’s is much bigger. Even after the latest spurt in energy, it still represents less than four percent of the business spending total (officially called non-residential private fixed investment). The latest figures show the equipment share is more than ten times larger – nearly 48 percent.

So although equipment spending has increased by only 5.93 percent during the Trump era, that rise amounts to just over $62 billion – much more than the energy-related spending increase. And more telling, this advance follows a 3.38 percent yearly drop in this spending category in 2016. In fact, equipment capex was down on net from the third quarter of 2014 through the fourth quarter of last year. The last time it fell for that long a stretch was during the last (historically terrible) recession (when the plummet was much greater and lasted considerably longer).

All the same, let’s not forget that the Trump administration is still only one year old. So a wait-and-see attitude is probably best for both sides of the Trump effect capex debate. And to the extent that any patterns can be discerned, not surprisingly, the truth so far seems to lie somewhere in between.

(What’s Left of) Our Economy: The Republican Tax Plans’ Biggest Flaw

06 Wednesday Dec 2017

Posted by Alan Tonelson in (What's Left of) Our Economy

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Alan Greenspan, Barack Obama, Bill Clinton, budget deficits, business spending, capital gains, corporate taxes, dividends, Federal Reserve, fiscal policy, George W. Bush, House, income taxes, monetary policy, multinationals, non-residential fixed investment, Paul Volcker, repatriation, Republican tax bills, Ronald Reagan, Senate, tax cuts, taxes, {What's Left of) Our Economy

The tax bills passed by the Republican-controlled House and Senate and strongly supported by President Trump (despite some important differences between them) can be fairly criticized for any number of big reasons: the mess of a drafting process in the Senate, the impact on already bloated federal budget deficits and the national debt, the cavalier treatment of healthcare reform, the seemingly cruel hits to graduate students and to teachers who buy some of their students’ school supplies.

My main concern is different, though. I could see an argument for the main thrust of the bills – even taking into account most of the above flaws – if they boasted the potential to achieve its most important stated aim. In Mr. Trump’s words, “We’re going to lower our tax rate to the very competitive number of 20 percent, as I said. And we’re going to create jobs and factories will be pouring into this country….” Put less Trump-ishly and more precisely, the idea is that by slashing tax rates for corporations and so-called pass-though entities, along with full-expensing of various types of capital investment, American businesses will build more factories, labs, and other productive facilities; buy more equipment, materials and software; hire more workers and increase their pay (since the demand for labor will soar).

Actually, since automation will surely keep steadily reducing the direct hiring generated by all this promised productive investment, let’s focus less on the jobs promise (keeping in mind that manufacturing in particular generates lots of indirect jobs per each direct hire), and more on the business spending that will boost output – since faster growth is the ultimate key to robust employment and wage levels going forward.

Unfortunately, after spending the last few days crunching some relevant numbers, I can’t see the GOP tax plans living up to their billing – which makes their flaws all the more damning.

What I’ve done, essentially, is look at inflation-adjusted business spending during American economic recoveries (to ensure apples-to-apples data by comparing similar stages of the business cycle) going back to the Reagan years of the 1980s, and examine whether or not individual and especially business tax cuts have set off a factory etc building spree. And I didn’t see anything of the kind, except possibly over the very short term. Moreover, even these increases may have had less to do with the tax cuts than with other influences on such investments – like the overall state of the economy and the monetary policies carried out by the Federal Reserve (which help determine the cost of credit).

Let’s start with the expansion that dominated former President Ronald Reagan’s two terms in office – lasting officially from the fourth quarter of 1982 through the second quarter of 1990 (by which time he had been succeeded by George H.W. Bush). The signature Reagan tax cuts, which focused on individuals, went into effect in August, 1981 – when a deep recession was still underway.

Interestingly, business investment kept falling dramatically through the middle of 1983 – when an even stronger rebound kicked in through the end of 1984. Indeed, that year, corporate spending (known officially as private non-residential fixed investment surged by 16.66 percent. But this growth rate then began slowing dramatically – and through 1987 actually dropped in absolute terms.

A major tax reform act was signed into law by the president in October, 1986, and individuals were its focus as well. Two provisions did affect business, but appeared to be at least somewhat offsetting in their effects, in line with the law’s overall aim of eliminating incentives and disincentives for specific kinds of economic activity. They were a reduction in the corporate rate and a repeal of the investment tax credit – whose objective was precisely to foster capital spending. Other provisions had major effects on business but principally by encouraging more companies to change over to so-called pass-through entities, not (at least directly) on investment levels. Business spending recovered, but its peak for the rest of the decade (5.67 percent of real GDP in 1989) never approached the earlier highs.

Arguably, fiscal and monetary policy were much more influential determinants of business spending, along with the recovery’s dynamics. The depth of the early 1980s recession practically ensured that the rebound would be strong, as did the massive swelling of federal budget deficits, which strengthened the economy’s overall demand levels, and their subsequent reduction.

Perhaps most important of all, the Federal Reserve under Chairman Paul Volcker cut interest rates dramatically from the stratospheric levels to which he drove them in order to tame double-digit inflation. And yet for most of 1984, when business spending soared, the federal funds rate (FFR) was rising steeply. Capex also strengthened between 1987 and mid-1989, which also witnessed a scary stock market crash (in October, 1987).

The story of the long 1990s expansion, which mainly unfolded during Bill Clinton’s presidency, was simultaneously simpler and more mysterious from the standpoint of business taxes – and macroeconomic policy. Following a shallow recession, Clinton raised both personal and corporate tax rates while government spending was so restrained that the big budget deficits he inherited actually turned into surpluses by the late-1990s. For good measure, the FFR began rising in late 1993, from 2.86 percent, and between early 1995 and mid-2000, stayed between just under six percent and just under 6.5 percent.

And what happened to capital spending? In late 1993, right after the tax-hiking, spending- cutting, deficit-shrinking Omnibus Budget Reconciliation Act was passed, and the Fed was tightening, businesses went on a capex spending spree began that saw such investment reach annual double-digit growth rates in 1997 and stay in that elevated neighborhood for the next three years.

It’s true that Clinton and the Republican-controlled Congress passed tax cut legislation in August, 1997, that among other measures lowered the capital gains rate. But the acceleration of business spending began years before that. And although we now know that much of this capital spending went to internet-centered technology hardware for which hardly any demand existed then at all, from a tax policy perspective, the key point is that this category of spending rose strongly – not whether the funds were spent wisely or not.

The expansion of the previous decade casts major doubt on whether any policy moves can significantly juice business spending. Just look at all the stimulative measures put into effect, tax-related and otherwise. The recovery lasted from the end of 2001 to the end of 2007, and during this period, on the tax front, former President George W. Bush in June, 2001 signed a bill featuring big cuts for individuals, and in May, 2003 legislation that sped up the phase-in of those personal cuts and added reductions in capital gains and dividends levies. For good measure, in October, 2004, the “Homeland Investment Act” became law. It aimed to use a tax “holiday” (i.e., a one-time dramatically slashed corporate rate) to bring back (i.e., “repatriate“) to the U.S. economy for productive investment hundreds of billions of dollars in profits earned by American companies from their overseas operations.

In addition, under Bush, the federal budget balance experienced its biggest peacetime deterioration on record, and starting in the fall of 2000, the Federal Reserve under Alan Greenspan cut the FFR to multi-decade peacetime lows, and didn’t begin raising until mid-2004.

The business investment results underwhelmed, to put it mildly. Such expenditures fell significantly throughout 2001 and 2002, and grew in real terms by only 1.88 percent the following year. Thereafter, their growth rate did quicken – to 5.20 percent rate in 2004, 6.98 percent in 2005, and 7.12 percent in 2006. But they never achieved the increases of the 1990s and by 2007, that expansion’s final year, business investment growth had slowed to 5.91 percent.

There’s no doubt that something needs to be done to boost business spending nowadays, which has lagged for most of the current recovery and turned negative last year – even though the federal funds rate remained near zero for most of that time and the Federal Reserve’s resort to unconventional stimulus measures like quantitative easing as well, despite unprecedented budget deficits (though they began shrinking dramatically in 2013), and despite the continuation of all the Bush tax cuts (except the repatriation holiday, and the imposition of a small surcharge on all investment income to help pay for Obamacare). Business investment’s record during the current recovery has been even less impressive considering a Great Recession collapse that was the worst in U.S. history going back to the early 1940s, and that should have generated a robust bounceback.

But if history seems to teach that tax cuts and even other macroeconomic stimulus policies haven’t been the answer, what is? Two possibilities seem well worth exploring. First, place productive investment conditions on any tax cuts and repatriation (the 2004 tax holiday act did contain them) and then actually monitor and enforce them (an imperative the Bush administration neglected). And second, put into effect some measures that can boost incomes in some sustainable way – and thus convince business that new, financially healthy customers will emerge for the new output from their new facilities. To me, that means focusing less on ideas like raising the national minimum wage to $15 per hour (though the rate should, at long last, be linked to inflation), and more on ideas like trade policies that require business to make their products in the United States if they want to sell to Americans, and immigration policies that tighten labor markets and force companies to start competing more vigorously for available workers by offering higher pay.

In that latter vein, the 20 percent excise tax on multinational supply chains contained until recently in the House Republican tax plan could have made a big, positive difference. Sadly, it looks like it’s been watered down to the point of uselessness, and the original has little support in the Senate. The House Republican tax plan also had included a border adjustment tax that would have amounted to an across-the-board tariff on U.S. imports (and a comparable subsidy for American exports), but the provision was removed from the legislation partly due to (puzzling) Trump administration opposition.

Mr. Trump clearly has acted more forcefully to relieve immigration-related wage pressures on the U.S. workforce, but it’s unclear how quickly they’ll translate into faster growing pay.  If such results don’t appear soon, and barring Trump trade breakthroughs, expect opponents of the Republican tax plan to keep insisting that it’s simply a budget-busting giveaway to the rich, and expect these attacks to keep resonating as the off-year 2018 elections approach.   

 

(What’s Left of) Our Economy: U.S. Growth is Better. It’s Quality? Not so Much

07 Tuesday Nov 2017

Posted by Alan Tonelson in (What's Left of) Our Economy

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business spending, consumption, Financial Crisis, GDP, gross domestic product, growth, housing, inflation-adjusted growth, real GDP, recession, recovery, {What's Left of) Our Economy

Since the crucial role played by low-quality (e.g., credit- and debt-fueled) growth in triggering the financial crisis and last recession keeps getting ignored even by most Americans who follow the economy professionally, I’ll keep posting on how well the nation has been faring in producing higher quality growth. Sadly, the new initial figures just in on gross domestic product (GDP) in the third quarter show that the answer remains “Not very well.”

The key measure I’ve been using is the share of the economy, adjusted for inflation, represented by personal consumption and housing combined. These two comprise the “toxic combination” that supercharged the debt boom during the last decade.

According to the first read on third quarter real GDP, the consumption share of the economy dipped – from an all-time record of 69.60 percent in the second quarter, to 69.49 percent. The housing figure shrank, too – from 3.49 percent to 3.41 percent.

As a result, the toxic combination total decreased slightly, from 73.09 percent to 72.90 percent. That’s below the all-time high for this pair – 73.27 percent, in the second quarter of 2005. But the difference is pretty modest.

And as suggested by the above, the big difference is in housing. It’s share of the economy after factoring out inflation peaked during the previous bubble decade at 6.17 percent.

Some good news might be emerging on the business investment front – though it’s far from conclusive and heavily dependent on the time frame examined. Corporate spending on plant and equipment and software and research and development is a much more durable foundation for growth (and prosperity) than personal consumption and home-buying. And there are signs that it’s becoming a more important growth engine once again. The best measure of this progress entails how much growth such spending is generating.

The results so far for this year? In the first quarter, business spending was responsible for a huge 71.67 percent of the economy’s modest (1.23 percent annualized) expansion in constant dollar terms. For the second quarter, the share was much lower – 26.45 percent of 3.03 percent total growth at an annual rate. And for the third quarter, 16.33 percent of 2.96 percent total annualized growth.

So the trend this year isn’t so encouraging. But compare it with last year. In 2016, business spending that fell in absolute terms subtracted 5.33 percent of the year’s 1.49 percent total growth. The previous year was better, but not as good as this year. In 2015, business spending only generated 10.34 percent of the year’s 2.86 percent real growth.

Earlier during the current recovery, most of the annual figures were much higher:

2010: 11.20 percent

2011: 53.15 percent

2012: 47.73 percent

2013: 25.29 percent

2014: 33.08 percent

The glass half-full interpretation? The previous two years were an aberration, and the growth role of business spending has resumed increasing. The glass half-empty view? During the last decade’s expansion, business spending’s spending’s contribution to growth was much higher in absolute terms, and accelerated impressively as the recovery continued. Here are those figures:

2001: subtracted 34.00 percent (the expansion officially began at year-end)

2002: subtracted 51.67 percent

2003: 8.21 percent

2004: 16.32 percent

2005: 25.15 percent

2006: 32.22 percent

2007: 42.22 percent

It’s surely too early to know which trend will prevail. Much more important is persuading American leaders to pay attention. For nothing will matter more in shaping the country’s economic future.

(What’s Left of) Our Economy: U.S. Growth’s Quality is Better, but Remains Far from Good

01 Sunday Oct 2017

Posted by Alan Tonelson in (What's Left of) Our Economy

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business spending, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, recession, recovery, {What's Left of) Our Economy

As indicated in yesterday’s post, the final (for now) returns are in on America’s economic growth for the second quarter, and as RealityChek regulars know, it’s a new occasion to look at the crucial and sorely neglected subject of the quality of American growth. What the figures show is that, despite some tiny signs of progress, nearly a decade after a terrifying financial crisis caused by bloated spending on personal consumption and housing, the U.S. economy is still heavily dependent on growing via bloated spending on personal consumption and housing.

First, let’s review the situation on a stand-still basis. For the second quarter, the share of inflation-adjusted gross domestic product (GDP) comprised by personal consumption came in at 69.60 percent. This figure – for the first full quarter of the year during which Donald Trump has been president – was slightly above the 69.56 percent for January-March quarter, and an all-time record.

The second component of what I’ve called the “toxic combination” is housing spending, which stood at 3.49 percent of real GDP. That’s lower than the 3.58 percent share for the first quarter, and (thankfully) well below the record of 6.17 percent set at the height of the previous decade’s housing bubble, in the third quarter of 2005.

Nonetheless, because personal spending has become so strong, the total toxic combination in the second quarter came to 73.09 percent of after-inflation GDP. That’s a bit below the 73.14 percent share for the first quarter but, more important, it’s just slightly less than the record 73.29 percent of real GDP set by the toxic combination set in the second quarter of 2005. So it’s difficult to argue that one of the biggest lessons of the financial crisis and ensuing recession has been learned.

The picture looks somewhat better lately when the economy’s main growth engines are examined – that is, when we analyze the economy on a dynamic, not a stand-still basis. During the second quarter of 2017, the toxic combination of personal and housing spending generated 64.03 percent of after-inflation growth. That’s less than half their share during the first quarter (140.65 percent – these numbers can be more than 100 percent because of the GDP components that subtract from growth).

It’s also a considerably smaller growth role than such spending has generally played since very early in the economic recovery. In fact, here’s how much constant dollar growth the toxic combination spurred, by year, from 2011 (when the economy was returning to normal following a deep slump and strong but largely incomplete initial snapback) to 2016: 97.50 percent, 60.36 percent, 79.17 percent, 80.16 percent, 98.25 percent, and 138.26 percent.

Even better, the growth role played by business spending – which creates productive assets like factories and labs, and also includes spending on research and development – could be on the upswing. The figures for the first two quarters of this year have been volatile, and in the wrong direction: 69.62 percent and 27.06 percent respectively.

But these numbers together so far have reversed the trend from 2011 to 2016 – when the share of growth accounted for by business spending plummeted from 53.75 percent to turning into a small growth drag.

The stand-still numbers, however, show that the U.S. economy remains so heavily skewed toward personal and real estate spending that only a major – and doubtless unprecedented – surge of business spending can start turning matters around. And the economy will remain far too fragile and crisis-prone till it does.

(What’s Left of) Our Economy: The Good Economic News that Trump Has Missed

01 Monday May 2017

Posted by Alan Tonelson in Uncategorized

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bubble, bubble decade, business spending, CNBC, Commerce Department, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, investment, Jeff Cox, personal consumption, real GDP, Trump, Wilbur Ross, {What's Left of) Our Economy

Here’s how badly the latest figures on U.S. economic growth (for the first quarter of this year) have been misunderstood: Even the Trump administration, which has displayed no hesitation to take credit for good economic news even when undeserved, failed to note a big possible silver lining.

As noted in last week’s coverage of these figures on gross domestic product (GDP), the inflation-adjusted growth figure reported by the Commerce Department in its initial read for the first quarter was a measly 0.69 percent. That’s the worst such performance since the 1.19 percent annualized contraction in the first quarter of 2014.

So it’s not entirely surprising that Commerce Secretary Wilbur Ross seized on this discouraging news to emphasize that “We need the President’s tax plan, regulatory relief, trade renegotiations and the unleashing of American energy sector to overcome the dismal economy inherited by the Trump Administration. Business and consumer sentiment is strong, but both must be released from the regulatory and tax shackles constraining economic growth.”

But especially given the rise in sentiment noted by Ross, it’s at least somewhat surprising that he didn’t make more of the strong rise in business spending revealed in the new GDP report. For it lends significant support to President Trump’s claim that his election is already liberated many of the “animal spirits” – i.e., a surge in business optimism – often needed to spur more hiring and especially more corporate spending on new plant and equipment.

For example, in absolute terms, such business spending rose sequentially by 9.1 percent at an annualized rate in the first quarter. That’s the fastest rate since the fourth quarter of 2013, when it jumped by 9.2 percent.

At the same time, back at the end of 2013, the economy expanded at a 3.90 percent real annual rate. In the first quarter of this year, after-inflation growth was only 0.69 percent annualized. So business spending punched far above its weight as a growth engine. As RealityChek regulars know, that’s an encouraging indication that the nation’s growth recipe is becoming more production oriented, and therefore healthier and more sustainable in the long run.

In fact, higher business spending accounted for all of the first quarter’s growth. (Other sectors of the economy contributed to and subtracted from the overall result, too, but their net effect was zero.) As a result, its relative contribution to expansion was its strongest since the first quarter of 2014, when such investment boosted real GDP by 0.84 percentage points but the economy actually contracted at a 1.19 percent annual rate.

And on a standstill basis, business investment in the first quarter represented its highest share of real GDP (13.34 percent) since the third quarter of 2015 (13.48 percent).

Not that one quarter’s results – which will be revised twice more in the next two months alone – are anywhere close to definitive. But the Trump administration had much more to crow about than it seemed to realize.

At the same time, the new GDP data showed that the economy remains way too personal consumption- and housing-heavy – the toxic combination whose bloat so powerfully inflated the bubbles that produced the previous decade’s global financial crisis.

As previously reported on RealityChek, at their pre-crisis peak, in the second quarter of 2005, the combined consumption and housing share of real GDP hit 73.27 percent. The comparable first quarter total was 73 percent even – not much lower. And that share was up slightly from the fourth quarter’s 72.95 percent.

So the United States is still a long way from achieving former President Obama’s goal of creating “an economy that’s built to last.” But from what we know of the first quarter’s growth this year, the economy made some progress that’s worth noting.

P.S. Partial credit for this post goes to CNBC’s Jeff Cox, whose report here first called my attention to the good business spending results.

(What’s Left of) Our Economy: Greek Lessons

29 Monday Jun 2015

Posted by Alan Tonelson in (What's Left of) Our Economy

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an economy built to last, big government, bubbles, business spending, Eurozone, Financial Crisis, GDP, Greece, gross domestic product, growth, housing, personal consumption, {What's Left of) Our Economy

RealityChek’s more discerning readers might recall that I spend a fair amount of time commenting on the quality of America’s growth and the makeup of its economy. The idea is that, although economic growth is economically good, all else equal, the way the economy grows is crucially important, and that it needs to result in a healthy balance between production and consumption. That lesson (should have been) brutally brought home for Americans by the financial crisis – which was preceded by several years of quasi-respectable but very low-quality growth. More specifically, that expansion was led by interlocking housing, borrowing, and personal spending booms, which lacked the underpinning of adequate output and income growth.

These days, the battered population of Greece is getting an even harsher tutorial on the imperatives of high quality growth and an “economy built to last.” But judging from the political tumult shaking the nation in recent days in particular, there’s little evidence that its population or leaders – or its creditors and the rest of the global economic policy – understands the message. 

The available economic data for Greece aren’t exactly the same as those I use to show the quality of America’s economic structure and growth, and they don’t cover all the bubble years, but they’re still awfully suggestive. In particular, they illustrate how during the global bubble decade, Greece’s economy and growth, too, were dominated by household spending, along with a lots of Big Government.

There’s no doubt that, viewed from 30,000 feet, Greece enjoyed banner years from 2000 to 2007. In inflation-adjusted its gross domestic product rose by 4.0, 3.7, 3.2, 6.6, 5.0, 0.9, 5.8, and 3.5% – much better than the performance of the rest of the Eurozone. Statistics from the Organization for Economic Cooperation and Development (OECD), however, indicate that throughout this period, Greece’s economy was incredibly household- and government spending-heavy.

According to the OECD, a grouping of high income countries, in 2006 and 2007 (the earliest available data years), household spending made up 56.33 percent and 54.99 percent of Greece’s gross domestic product. For those years, the averages for the Eurozone were 29.59 percent and 29.44 percent – a little over half of Greece’s levels. In 2006 and 2007, government spending comprised 17.87 percent and 16.66 percent of Greece’s economy. For the rest of the Eurozone, the figures were 13.97 percent and 14.04 percent. And whereas Greece’s corporate spending represented 25.8 percent and 28.4 percent of its GDP, the comparable Eurozone numbers were more than twice as great – 56.4 percent and 56.5 percent.

As numerous analysts have (correctly) noted, the United States isn’t Greece. Most important, Americans and their government can borrow in their own currency, and have substantial control over their financial fate. Yet even so, the U.S. economy has suffered painful and wrenching change since the financial crisis broke out roughly eight years ago, and the damage inflicted by that near-catastrophe is by no means completely fixed.

In other words, because the United States spent its first nearly 200 years generally managing its economy responsibly, it enjoys the wealth and creditworthiness that can long protect it from Greece-style tragedies. But even if a climactic Day of Reckoning never comes, America’s poor quality growth and subpar economic structure appears to have pushed it into a stretch of secular stagnation that should worry everyone.

(What’s Left of) Our Economy: The U.S. Recovery is Still Lagging and Low Quality

30 Friday Jan 2015

Posted by Alan Tonelson in (What's Left of) Our Economy

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an economy built to last, bubbles, business spending, consumption, GDP, growth, housing, Obama, recovery, Trade, {What's Left of) Our Economy

One of the great things about fourth quarter gross domestic product (GDP) statistics – even if they’re going to be revised at least twice more – is that they allow us to see how the economy performed over a full year. And as usual, some of the most important insights can be gleaned from some of the data that are most widely ignored.

This morning, I detailed the GDP-related news that trade flows were a total loser for the U.S. economy during the last three months of last year, the full year (for three of its four quarters), and for the entire economic recovery. When was the last time you saw or heard that in an article or speech or news program about the new trade deals President Obama is pursuing? And in about a week, I’ll be able to specify the growth hit from that portion of trade flows that are strongly influenced by trade deals – which will be much bigger, since this number strips out the revolutionary improvement we’ve seen in U.S. energy trade.

Consistent with the trade deficit surge, however, the new GDP numbers also told us that the nation is actually slightly further from achieving the president’s vitally important goal of creating “an economy built to last” than at the start of the last recession. As Mr. Obama has warned, if we’re to restore real economic health and prevent another financial catastrophe, it’s crucial to reorient the national business model away from borrowing and spending, and toward saving and producing.

My favorite way to measure steps forward or backward is to examine the share of the economy made up of personal consumption and housing combined. They after all comprised the toxic combination that poisoned growth during the bubble decade. Thanks to the new GDP numbers, we know that as a nation we’re still hooked on borrowing and spending. In 2007, the year the recession began, personal consumption and housing represented 71.91 percent of gross domestic product, adjusted for inflation. Last year, that number fell to 71.25 percent, which looks like (some) progress.

But if you look at the quarterly numbers, the story’s a little worse. The recession began in December, 2007 – and then, the personal consumption-housing share of real GDP was 71.16 percent. The new figures show that the fourth quarter 2014 figure was 71.23 percent. True, that’s not much worse. But it’s also been seven full years since we began suffering the consequences of our profligate ways.

Moreover, even though the quality of America’s growth remains dangerously low, the growth itself has been nothing special. In fact, last year’s inflation-adjusted 2.40 percent, while better than 2013’s 2.20 percent, was still below the recovery peak of 2.50 percent hit in 2010. So the economy is clearly flunking the test of returning to acceptable growth rates while simultaneously laying a more solid foundation.

Finally, the new GDP figures – plus the previous set – continue challenging the widespread belief that the U.S. economy’s financialization has helped addict America to bubbles by undermining business’ interest in building new factories and buying new machinery, and making other productive investments, in favor of fast-buck schemes. As I wrote for the Marketwatch.com website, the GDP numbers show that pretty much the opposite has happened.  Since financialization took off (as it unmistakably has), productive business spending has become a more important engine of overall growth, not a less important one.

This pattern held into the third quarter (the first data available since my article was published in late-September), with business spending generating 22 percent of inflation-adjusted growth. That share actually is a bit smaller than the 28 percent that had been holding so far during the current recovery. But it’s still more than twice the level of the pre-financialization period that preceded the 1980s.

In the fourth quarter, business investment’s growth contribution fell back into that pre-financialization range (to 9.23 percent). But for all of 2014, the figure was above the recovery norm – clocking in at 31.25 percent.

All the same, despite business investment’s health, the new GDP figures overall make for a description of American growth’s quality that sounds like college students’ description of campus food (back in my day): “It’s lousy and there’s not enough of it.”

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Current Thoughts on Trade

Terence P. Stewart

Protecting U.S. Workers

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So Much Nonsense Out There, So Little Time....

Alastair Winter

Chief Economist at Daniel Stewart & Co - Trying to make sense of Global Markets, Macroeconomics & Politics

Smaulgld

Real Estate + Economics + Gold + Silver

Reclaim the American Dream

So Much Nonsense Out There, So Little Time....

Mickey Kaus

Kausfiles

David Stockman's Contra Corner

Washington Decoded

So Much Nonsense Out There, So Little Time....

Upon Closer inspection

Keep America At Work

Sober Look

So Much Nonsense Out There, So Little Time....

Credit Writedowns

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So Much Nonsense Out There, So Little Time....

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So Much Nonsense Out There, So Little Time....

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RSS

So Much Nonsense Out There, So Little Time....

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So Much Nonsense Out There, So Little Time....

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