(What’s Left of) Our Economy: U.S. Consuming Can’t Restore Real Prosperity If Import Surge Continues

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cheap oil, energy revolution, free trade agreements, GDP, growth, imports, Obama, recovery, Trade, {What's Left of) Our Economy

Those U.S. gross domestic product (GDP) figures that came out on Friday teach a neat little lesson in how imports can undermine the economic growth so desperately needed by the United States – and, by extension, the good job creation.

Nobody was happy with the 2.62 percent inflation-adjusted annualized rate of expansion reported for the economy for the fourth quarter of last year. Even though the figure will be revised twice more in the next few months, and could actually move up, it’s still much lower than the growth recorded for the second and third quarters, and lagged economists’ forecasts.

Last Friday, I commented that the quality of fourth quarter growth was a problem, too, with the share of the economy made up of personal consumption and housing together remaining dangerously near levels reached during the last decade. Those two sectors of the economy, of course, represented the toxic combination that inflated the biggest financial bubble of all time, and the worst downturn since the 1930s, along with a dreary recovery, once that bubble burst.

The personal consumption/housing share of the economy stood so high largely because personal consumption in the fourth quarter increased at a 4.60 percent annualized rate. That was the fastest since the first quarter of 2006, and much stronger than in the second and third quarters, when growth advanced by 4.51 percent and 4.88 percent, respectively. So why did the expansion of the consumption-heavy overall economy weaken in the fourth quarter?

Look for much of the answer in America’s trade accounts. Between the second and third quarter, as I’ve described, the nation’s after-inflation trade deficit surged from an annualized $431.4 billion to $471.5 billion – the worst since the third quarter of 2010. And this deterioration occurred despite the crash in oil prices, which greatly reduced the nation’s oil import bill and therefore prevented the trade gap from getting much wider.

But here’s where cheap oil becomes a double-, and even triple-edged, sword. The United States of course has now become a major producer, thanks largely to the fracking revolution. And as I’ve pointed out previously, this development makes the American economy vulnerable on two fronts. First, less oil consumption now increasingly means less consumption of something produced domestically, not abroad. So that per se reduces growth. Second, as widely reported, when energy prices fall enough, producers start both closing down production facilities and cutting capital spending on exploration and new facilities. Both translate into less domestic output and less growth.

As a result, the trade deficit’s growth – which has occurred cumulatively since the current U.S. economic recovery technically began in mid-2009 – shows us that even as the nation has been consuming less increasingly domestically produced oil, it keeps consuming more foreign-made goods and services. These imports subtract from growth – and deserve major blame for the disappointing (so far) fourth quarter performance.

Indeed, the official data show that the growth of the trade deficit cut that 2.62 percent fourth quarter annualized real growth by 1.02 percentage points – i.e., by nearly 39 percent! In the third quarter, the deficit’s nice improvement (entirely due to oil – and then some) boosted the 4.88 percent annualized real growth by 0.78 percentage points – i.e., by just under 16 percent. For some reason, less attention has been paid to the full-year 2014 growth figures also reported Friday by the government, but they were shaped by the same trend.

And there’s every reason to think that trade will keep undermining America’s underwhelming recovery and preventing the nation from reaping the maximum benefits of the energy revolution. For President Obama is pursuing the same types of trade deals that have considerably boosted the deficit, and cut the U.S. growth rate, for decades. Whether he gets his way, or whether Congress checks these economically perverse ambitions, will go far toward determining how quickly, if ever, the economy truly heals from the financial crisis.

Following Up: How Falling Energy Prices Could Undercut America’s Productive Economy

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cheap oil, energy, Following Up, industrial production, manufacturing, prices, recovery, Wall Street Examiner

Here’s some more data reminding that much cheaper gasoline and overall energy prices could well be a decidedly mixed blessing for the U.S. economy.

As I pointed out last Friday, the recent energy price crash could well boost economic growth, at least over the short term, if Americans take the money saved on filling up at the gas station and heating their homes and spend it on goods and services that have originated in the United States. Given how imports dominate the U.S. consumer goods market, however, that prospect seems pretty far-fetched.

Moreover, the slightly-less-recent energy boom has spearheaded the rebound of the nation’s productive economy. As I also pointed out, relying more on production rather than consumption to generate growth is critical to achieving President Obama’s worthy goal of creating “an economy that’s built to last,” in which prosperity rests on a firmer foundation.

You can see how crucial energy output has been to the productive economy’s revival by looking at the Federal Reserve’s industrial production index, which gauges inflation-adjusted output for energy, manufacturing, and mining. Tables 1 and 2 of its historical data section show that, from 2007 (the year the Great Recession began) through 2011, energy increased from 24.52 percent of the total index to 27.70 percent. Manufacturing decreased from 73.88 percent to 71.31 percent.

These percentages have yet to be updated, but there’s no doubt that, through the latest (November, 2014) figures, this trend has continued. As made clear in the raw output data, since December, 2011, energy production after inflation has risen by 14.19 percent – faster than the 12.16 percent real output growth registered by manufacturing.

The lesson here isn’t that the American energy revolution shouldn’t have been encouraged, or that it’s a flash in the pan. Rather, it’s that the nation’s prosperity requires the broadest possible world-class productive base. Unfortunately, the near future is likeliest to show that that goal hasn’t been achieved yet.

Incidentally, similar data has been analyzed for quite a while by Lee Adler on his excellent Wall Street Examiner site, too. Click on this link for an example.

(What’s Left of) Our Economy: The Trickle of Savings from Cheap Oil

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an economy built to last, cheap oil, consumers, consumption, gasoline, GDP, growth, spending, {What's Left of) Our Economy

We just got some good news about the impact of cheap oil on American consumers in 2014, and the likely effects in 2015. In the process, we got an important lesson in presenting data in context.

According to no less than AAA, last year, cratering oil prices saved Americans $14 billion on motor fuel, and the total could reach $75 billion this year. What’s not to like?

But these figures also warn against viewing cheap gas as a game-changer for the U.S. economy.  The reason? In the third quarter of this year – during which the economy grew by an excellent annualized 6.27 percent before inflation – consumer spending was running at an annualized rate of just over $12 trillion. So the gasoline savings equaled less than 0.12 percent of that total.

Even if the gasoline savings do hit the AAA’s most optimistic $75 billion level, they would only amount to 0.62 percent of the 2014 consumer spending total. And if the growth of overall consumer spending matched this year’s 4.20 percent pre-inflation rate over the third quarter of 2013, the cheap oil effect will be even smaller proportionately.

The $75 billion in gasoline savings is of course a bigger (21.50 percent) share of the annualized $348.7 billion in consumer spending growth from quarter to quarter. But it’s only a little over a tenth of the $727.5 billion in total annualized growth during that period.

Moreover, the gasoline savings will only boost growth if they result in even more spending on goods and services generated domestically.  As indicated in this previous post, that’s far from the case.  In fact, even if consumers simply substituted non-gasoline spending for spending on other domestic output, the growth effect would be nil. And every dollar of imports bought with these savings, or put into the bank or under the mattress, actually slows growth.

Further, the gasoline bonanza may actually move America farther from President Obama’s goal of creating “an economy built to last” – i.e., less reliant on binge-borrowing and buying, and financial gimmickry, and more on turning out conventional goods and services. For although cheap gas might in theory boost spending on net on domestic goods and services, it’s at least as likely that it will reduce the value of domestic energy production – and leave the economy more consumption-heavy than ever.