(What’s Left of) Our Economy: Dangerous New Bubbles or a Virus Mirage?

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bubbles, business investment, CCP Virus, consumer spending, coronavirus, COVID 19, Financial Crisis, GDP, Great Recession, gross domestic product, housing, lockdowns, logistics, nonresidential fixed investment, real GDP, recession, recovery, reopening, Richard F. Moody, semiconductor shortage, toxic combination, transportation, West Coast ports, {What's Left of) Our Economy

Here’s a great example of how badly the U.S. economy might be getting distorted by last year’s steep, sharp, largely government-mandated recession, and by the V-shaped recovery experienced since then.as CCPVirus-related restrictions have been lifted. Therefore, it’s also a great example of how the many of the resulting statistics may still be of limited usefulness at best in figuring out the economy’s underlying health.

The possible example?  New official figures showing that, as of the second quarter of this year, the U.S. economy is even more dangerously bubble-ized than it was just before the financial crisis of 2007-08.

As RealityChek regulars might recall, for several years I wrote regularly on what I called the quality of America’s growth. (Here‘s my most recent post.) I viewed the subject as important because there’s broad agreement that a big reason the financial crisis erupted was the over-reliance earlier in that decade n the wrong kind of growth. Specifically, personal spending and housing had become predominant engines of expansion – and therefore prosperity. Their bloated roles inflated intertwined bubbles whose bursting nearly collapsed the U.S. and entire global economies, and produced the worst American economic downturn since the Great Depression of the 1930s.

As a result, there was equally broad agreement that the nation needed to transform what you might call its business model from one depending largely on borrowing, spending, and paying for them by counting on home prices to rise forever, to one based on saving, investing, and producing. As former President Obama cogently put it, America needed “an economy built to last.”

Therefore, I decided to track how well the nation was succeeding at this version of “build back better” by monitoring the official quarterly reports on economic growth to examine the importance of housing and consumption (which I called the “toxic combination”) in the nation’s economic profile and whether and how they were changing.

For some perspective, in the third quarter of 2005, as the spending and housing bubbles were at their worst, these two segments of the economy accounted for 73.90 percent of the gross domestic product (GDP – the standard measure of the economy’s size) adjusted for inflation (the most widely followed of the GDP data. By the end of the Great Recession caused by the bursting of these bubbles, in the second quarter of 2009, this figure was down to 71.55 percent – mainly because housing had crashed.

At the end of the Obama administration (the fourth quarter of 2016), the toxic combination has rebounded to represent 72.31 percent of after-inflation GDP. So in quality-of-growth terms, the economy was heading in the wrong direction. And under President Trump, this discouraging trend continued. As of the fourth quarter of 2019 (the last quarter before the pandemic began significantly affecting the economy), this figure rose further, to 73.19 percent.

Yesterday, the government reported on GDP for the second quarter of this year, and it revealed that the toxic combination share of the economy in constant dollar terms to 74.24 percent. In other words, the toxic combination had become a bigger part of the economy than during the most heated housing and spending bubble days.

But does that mean that the economy really is even more, and more worrisomely lopsided than it was back then? That’s far from clear. Pessimists could argue that recent growth has relied heavily on the unprecedented fiscal and monetary stimulus provided by Washington since spring, 2020. Optimists could point out that far from overspending, consumers have been saving massively. Something else of note: Business investment’s share of real GDP in the second quarter of this year came to 14.80 percent – awfully lofty by recent standards.  During the 2005 peak of the last bubble, that spending (officially called “nonresidential fixed investment”) was 11.62 percent. 

My own take is that this situation mainly reflects the unexpected strength of the reopening-driven recovery and the transportation and logistics bottlenecks it’s created. An succinct summary of the situation was provided by Richard F. Moody, chief economist of Regions Bank. He wrote yesterday that the new GDP data “embody the predicament facing the U.S. economy, which is that the supply side of the economy has simply been unable to keep pace with demand.” The result is not only the strong recent inflation figures, but a ballooning of personal spending’s share of the economy.

Moody expects that both problems will end “later rather than sooner,” and for all I know, he (and other inflation pessimists) are right. But unless you believe that West Coast ports will remain clogged forever, that semiconductors will remain in short supply forever, that truck drivers will remain scarce forever, that businesses will never adjust adequately to any of this, and/or that new CCP Virus variants will keep the whole economy on lockdown-related pins and needles forever, the important point is that these problems will end. Once they do, or when the end is in sight, we’ll be able to figure out just how bubbly the economy has or hasn’t grown – but not, I’m afraid, one moment sooner.

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(What’s Left of) Our Economy: The U.S. is Racing to the Bottom in Growth Quality Again

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Barack Obama, bubbles, Financial Crisis, GDP, Great Recession, gross domestic product, housing, personal consumption, Trump, {What's Left of) Our Economy

Although Thursday’s latest official report on U.S. economic growth was encouraging from a trade policy and national self-sufficiency perspective, as I contended, it was much less heartening from a quality of growth perspective. That, as known by RealityChek regulars, is the crucial issue of whether America’s output is being powered by the kind of engines that can last, or by the kinds (specifically housing spending and personal consumption) that tend to inflate bubbles and produce calamitous burstings.

Specifically, Thursday’s figures pegging a pretty solid rate of economic growth  both for the fourth quarter of 2019 (2.06 percent at an annual rate), and for the entirety of last year (2.33 percent least preliminarily), also made clear that way too much of this growth stemmed from housing and personal consumption – which I call the toxic combination because their combined and indeed intertwined bloat produced the last (terrifying) financial crisis and ensuing (punishing) Great Recession.

The highlights (lowlights?): On a quarterly basis, the toxic combination’s share of the total U.S. economy (technically, the gross domestic product, or GDP) in real terms (how all the following dollar figures will be presented) during the last three months of last year came to 72.91 percent. That’s nothing less than the highest such figure during the current economic recovery.

The personal consumption share alone totaled 69.78 percent of inflation-adjusted GDP and actually fell slightly from the third quarter’s 69.79 percent. Even so, that figure was the recovery’s second highest. The housing share of the after-inflation economy hit 3.13 percent – up from the third quarter’s 3.10 percent, but the highest total only since the fourth quarter of 2018 (3.16 percent). That’s an indication that housing spending has been notably subdued for about the last three years – and in fact that only personal consumption levels still deserve that “toxic” label.

On a yearly basis, the combined personal consumption and housing share of price-adjusted GDP climbed from 72.68 percent in 2018 to 72.90 percent in 2019 – the highest such level since the 73.04 percent of 2006, when the bubbles were about to burst. Personal consumption climbed from 69.45 percent in 2018 to 69.79 percent – its highest since 2004, when the previous decade’s bubbles were inflating strongly. De-toxified housing’s real GDP share fell from 3.23 percent in 2018 to 3.11 percent in 2019 – its lowest level since 2014’s 2.98 percent.

Another sign of some recent decline in the quality of U.S. growth: the combined personal consumption and housing share not of constant dollar GDP on a standstill basis, but on the economy’s annual real growth. In 2019, they powered 74.25 percent of a 2.33 percent expansion in after-inflation output. The previous year’s share was just 68.62 percent.

This performance still leaves Trump era price-adjusted growth less bubblier and higher quality by this measure than growth during Barack Obama’s presidency (as shown by the table below). But it’s a regression all the same – as growth itself slowed:

                                  Toxic combination share of total growth      Total growth

09-10:                                               46.92%                                       2.56%

10-11:                                               80.63%                                       1.55%

11-12:                                               60.91%                                       2.25%

12-13:                                               73.89%                                       1.84%

13-14:                                             117.22%                                       2.53%

14-15:                                              96.90%                                        2.91%

15-16:                                            130.00%                                         1.64%

16-17:                                               86.82%                                        2.37%

17-18:                                               68.62%                                        2.93%

18-19″                                              74.25%                                        2.33%

In fact, overall, 80.74 percent of U.S. inflation-adjusted growth during the 32 full quarters of the Obama presidency’s stewardship of the economy stemmed from the growth of personal consumption and housing. The figure for the eleven quarters of the Trump economy has totaled 74.12 percent. But that Trump percentage is gaining on the Obama figure, and this kind of race to the bottom in growth quality isn’t one the President and his supporters should want to win.

(What’s Left of) Our Economy: Trade War(s) Update

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Argentina, Bloomberg.com, Brazil, business investment, China, CNBC, consumption, currency manipulation, debt, Democrats, digital services tax, election 2020, EU, European Union, export controls, Financial Crisis, France, Huawei, internet, investors, manufacturing, production, steel, steel tariffs, tariffs, Trade, Trade Deficits, trade enforcement, trade war, Trump, Wall Street, Wilbur Ross, Xi JInPing, {What's Left of) Our Economy

The most important takeaway from this post about the current status of U.S. trade policy, especially toward China, is that it may have already been overtaken by events since I began putting these thoughts together yesterday.

What follows is a lightly edited version of talking points I put together for staffers at CNBC in preparation for their interview with me yesterday. I thought this exercise would be useful because these appearances are always so brief (even though this one, unusually, featured me solo), and because sometimes they take unexpected detours from the main subject. .

Before presenting them, however, let’s keep in mind this new Bloomberg piece, which came on the heels of remarks yesterday by President Trump signaling that a trade deal with China may need to await next year’s U.S. Presidential election, and plunged the world’s investors into deep gloom. This morning, however, the news agency reported that considerable progress has been made despite “harsh” rhetoric lately from both countries. It seems pretty thinly sourced to me, and the supposed course of the trade talks seems to change almost daily, but stock indices are up considerably all the same.

Moreover, even leaving that proviso aside, what I wrote to the CNBC folks yesterday seems likely to hold up pretty well. And here it is:

1. The President’s latest comments on the China trade deal – which he says might take till after the presidential election to complete – seriously undermines the claim that he considers a deal crucial to his reelection chances because it’s likely to appease Wall Street and thereby prop up the economy. Of course, given Mr. Trump’s mercurial nature, and negotiating style, this latest statement could also simply amount to him playing “bad cop” for the moment.

2. His relative pessimism about a quick “Phase One” deal also seems to reinforce a suggestion implicitly made yesterday by Commerce Secretary Wilbur Ross when he listed verification and enforcement concerns as among the obstacles to signing the so-called Phase One deal. I have always argued that such concerns are likely to prevent the conclusion of any kind of trade deal acceptable to US interests. That’s both because of China’s poor record of keeping its commitments, and because the Chinese government is too secretive and too big to monitor effectively even the most promising Chinese pledges to change policies on intellectual property theft, illegal subsidies, discriminatory government procurement, and other so-called structural issues.

3. Recent reports of the United States considering tightening (or expanding) restrictions on tech exports to Chinese entities like Huawei also support my longstanding point that the US and Chinese economies will continue to decouple whatever the fate of the current or other trade talks.

4. In my opinion, the President is absolutely right to play hard-to-get on China trade, because Chinese dictator Xi Jinping is under so much pressure due to his own weakening economy, and because of the still-explosive Hong Kong situation.

5. I’ll be especially interested to learn of the Democratic presidential candidates’ reactions to Mr. Trump’s latest China statement, as well as the announcement of the reimposed steel tariffs on Argentina and Brazil, and the threatened tariffs on French “digital services” [internet] taxes. With the exception of Massachusetts Senator Elizabeth Warren and Vermont Senator Bernie Sanders, the candidates’ China policies seem to boil down to “Yes, we need to get tough with China, but tariffs are the worst possible response.” None of them has adequately described an alternative approach. The reactions of Democratic Congress leaders Nancy Pelosi in the House and Charles Schumer will be worth noting, too. The latter has been strongly supportive of the Trump approach in general.

6. The new steel tariffs, as widely noted, are especially interesting because they were justified for currency devaluation reasons, with no mention made of the alleged national security threats originally cited as the rationale. Nonetheless, I don’t believe that they represent a significant change in the Trump approach to metals trade, because the administration has always emphasized the need for the duties to be global in scope – to prevent China from transshipping its overcapacity to the US through third countries, and to prevent third countries to relieve the pressures felt by their steel sectors from Chinese product by ramping up their own exports to the US. Obviously, all else equal, countries with weakening currencies (for whatever reason) will realize big advantages in steel trade, as the prices of their output will fall way below those of competitors’ steel industries.

7. Regarding the tariffs threatened in retaliation for France’s digital services tax, they’re consistent with Trump’s longstanding contention that the US-European Union (EU) trade relationship has been lopsidedly in favor of the Europeans for too long, and that tariff pressure is needed to restore some sustainable balance. In this vein, I don’t take seriously the French claim that the tax isn’t targeting U.S. companies specifically. After all, those firms are the dominant players in the field. Second, senior EU officials have started talking openly about strengthening Europe’s “technological sovereignty” – making sure that the continent eliminates its dependence on non-European entities in the sector (including China’s as well as America’s). The digital tax would certainly further the aim of building up European champions – and if need be, at the expense of US-owned companies.

By the way, this position of mine in no way reflects a view that more taxation and more regulation of these companies isn’t warranted. But it’s my belief that these issues should be handled by the American political system.

Also of note: Trump’s suggestion this morning that the French tax isn’t a big deal, and that negotiations look like a promising way to resolve the disagreement.

Finally, here are two more points I wound up making. First, I expressed agreement that the President’s tariff-centric trade policies have created significant uncertainties in the economy’s trade-heavy manufacturing sector in particular – stalling some of the planned business investment that’s essential for healthy growth. But I also noted that much of this uncertainty surely stems from the on-again-off-again nature of the tariffs’ actual and threatened imposition.

As a result, I argued, uncertainty could be significantly reduced if Mr. Trump made much clearer that, whatever the trade talks’ fate, the days of Washington trying to maximize unfettered bilateral trade and investment are over, and a new era marked by much more caution and many more restrictions (including tighter export controls and investment restrictions, as well as tariffs), is at hand.

Second, at the very end, I contended that President Trump deserves great credit for focusing public attention on the country’s massive trade deficits in general. For notwithstanding the standard economists’ view that they don’t matter, reducing them is essential if Americans want their economy’s growth to become healthy, and more sustainable. For as the last financial crisis should have taught the nation, when consumption exceeds production by too great a margin, debts and consequent economic bubbles get inflated – and tend to burst disastrously.

(What’s Left of) Our Economy: U.S. Growth Takes a Bubbly Turn

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Barack Obama, bubble decade, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, Trump, {What's Left of) Our Economy

As encouraging as last week’s official report on U.S. economic growth was – with the rate picking up even more than expected in the second quarter despite numerous forecasts of continued and even worsening slowdown – one big fly was visible in this ointment. The quality of the nation’s expansion has been weakening considerably this year, and as known by RealityChek regulars, growth overly dependent on the wrong engines can inflate the kinds of bubbles that burst so disastrously a decade ago, and triggered a frightful global financial crisis and a deep, punishing recession.

The specific internals of these reports on the gross domestic product (GDP) to track for signs of bubble-ization are personal consumption and housing. For their bloat provided most of the hot air during the 2000s (along with most of the actual growth). And the GDP report for the third quarter of this year (the most recent data available), as was the case since the second quarter, showed that these two GDP elements have driven growth much more powerfully than during that deceptively prosperous era. Further, during the last two quarters overall, growth has looked far bubblier by this measure than at any time during former President Barack Obama’s administration, with one exception. In fact, the second quarter of this year was the bubbliest ever. (More specifically, since 2002, when government figures enabled these calculations to be made.)

The table below shows the actual annual figures from 2002 through 2018 (leaving out only the recession years 2007-2008, and 2008-2009). The left-hand column shows how much total inflation-adjusted growth (the growth rate most closely followed by students of the economy) in each year was fueled by growth in personal consumption plus growth in housing. The center column shows the annual after-inflation growth rate for that year. And the right-hand column shows the difference between that toxic combination’s growth rate, and growth itself.

That ratio is important because it helps makes clear the relationship between growth’s health on the one hand and its rate on the other. Put differently, it makes possible answering the question of whether and when the U.S. economy has been growing acceptably without excessive contributions from the toxic combination.

                      percent of growth       actual growth rate          difference

02-03:                     91.11%                     2.86%             31.86 times greater

03-04:                     74.65%                    3.80%              19.64 times greater

04-05:                     79.25%                    3.51%              22.58 times greater

05-06:                    58.86%                     2.86%              20.58 times greater

06-07:                    27.01%                     1.88%              14.37 times greater

09-10:                    43.77%                     2.56%              17.10 times greater

10-11:                    82.80%                    1.55%               53.42 times greater

11-12:                   59.64%                     2.25%               26.51 times greater

12-13:                   71.58%                    1.84%               38.90 times greater

13-14:                   83.80%                    2.54%               32.99 times greater

14-15:                   96.58%                    2.91%                33.19 times greater

15-16:                127.04%                    1.64%               77.46 times greater

16-17:                  81.13%                    2.37%               34.23 times greater

17-18:                 69.55%                     2.93%                23.74 times greater

One conclusion that leaps out from these results: They bounce around considerably. But they show that growth during the Obama years was somewhat bubblier than during the previous and notorious bubble decade (even leaving out the huge jump in 2015-16), and that its health from that anomalous year steadily improved during the first two years of the Trump administration.

Especially noteworthy: The best Trump growth year (2017-18) was significantly less bubbly than the best Obama year (2014-15) even though that Trump year saw somewhat faster growth.

But what a turnaround since then! As the table below shows, major growth quality improvement continued into the first quarter of this year. Was the economy finally demonstrating the ability to grow strongly by using much safer engines? Unfortunately not, as growth’s quality simply collapsed in the second quarter, and even the third quarter improvement registered so far has kept it in the danger zone. 

                       percent of growth           actual growth rate           difference 

1Q 19:                   24.62%                            3.06%              8.05 times greater

2Q 19:                 150.42%                            2.00%            75.21 times greater

3Q 19*                102.70%                            2.11%            48.67 times greater

*still preliminary

On a standstill basis, the economy lately has looked bubblier than at any time during the Obama years, and in fact is approaching its bubble decade condition. During that period, personal consumption and housing combined regularly stayed above 73 percent of real GDP. Its annual peak came in 2005 – 73.50 percent.

The toxic combination’s share of the economy fell fairly steadily thereafter until 2012 – as did the growth rate itself – and then began rising again (while growth itself continued to slump) from 70.62 percent to 72.58 percent in 2016.

The trend continued into 2017 (72.96 percent) before the percentage dropped the following year to 72.69 – as growth itself picked up.

After falling further in the first quarter of this year (to 72.35) as growth itself rose further, the toxic combination’s role swelled to 72.90 percent in the third quarter – not far off the bubble decade levels. Unfortunately, growth itself has tailed off dramatically to 2.11 percent annualized.

Overall, the Trump economy still remains less bubbly

than the Obama economy. For the 32 months during which the former President was in charge of economic performance, the toxic combination generated 80.74 percent of total growth. During the nine months of Mr. Trump’s economic stewardship, that figure stands at 72.64 percent. But the gap has been closing this year, and as long as it keeps narrowing, President Trump’s economic legacy will remain very much up in the air.

(What’s Left of) Our Economy: Why Amazon.com Could Kill the Entire Economy

Tags

Amazon.com, bubble decade, bubbles, consumption, credit, Financial Crisis, gig economy, Great Depression, Great Recession, Henry George School of Social Science, housing, housing bubble, production, productivity, Robin Gaster, {What's Left of) Our Economy

Yesterday I was in New York City, on one of my monthly trips to attend board meetings of the Henry George School of Social Science, an economic research and educational institute I serve as a Trustee. And beforehand, I was privileged to moderate a school seminar focusing on the possibly revolutionary economic as well as social and cultural implications of Amazon.com’s move into book publishing.

You can watch the eye-opening presentation by economic and technology consultant Robin Gaster here, but I’m posting this item for another reason: It’s an opportunity to spotlight and explore a little further two Big Think questions raised toward the event’s end.

The first concerns what Amazon’s overall success means for the rough balance that any soundly structured economic needs between consumption and production. As known by RealityChek readers, consumption’s over-growth during the previous decade deserves major blame for the terrifying financial crisis and ensuing Great Recession – whose longer term effects have included the weakest (though longest) economic recovery in American history. (See, e.g., here.)

Simply put, the purchases (in particular of homes) by too many Americans way outpaced their ability to finance this spending responsibly, artificially and unprecedentedly cheap credit eagerly offered by the country’s foreign creditors and the Federal Reserve filled the gap. But once major repayment concerns (inevitably) surfaced, the consumption boom was exposed as a mega-bubble that proceeded to collapse and plunge the entire world economy into the deepest abyss since the Great Depression of the 1930s.

As also known by RealityChek regulars, U.S. consumption nowadays isn’t much below the dangerous and ultimately disastrous levels it reached during the Bubble Decade. And one of the points made by Gaster yesterday (full disclosure: he’s a personal friend as well as a valued professional colleague) is that by using its matchless market power to squeeze its supplier companies in industry after industry to provide their goods (and services, in the case of logistics companies) at the lowest possible prices, Amazon has delivered almost miraculous benefits to consumers (not only record low prices, but amazing convenience). But this very success may be threatening the ability of the economy’s productive dimension to play its vital role in two ways.

First, it may drive producing businesses out of business by denying them the profitability needed to survive over any length of time. Second, Amazon’s success may encourage so many of its suppliers to stay afloat by cutting labor costs so drastically that it prevents the vast majority of consumers who are also workers from financing adequate levels of consumption with their incomes, not via unsustainable borrowing. Indeed, as Gaster noted, it may push many of these suppliers to adopt Amazon’s practice of turning as much of it own enormous workforce into gig employees – i.e., workers paid bare bones wages and denied both benefits and any meaningful job security. And that can only undermine their ability to finance consumption responsibly and sustainably. 

I tried to identify a possible silver lining: The pricing pressures exerted by Amazon could force many of its suppliers to compensate, and preserve and even expand their profits, by boosting productivity. Such efficiency improvements would be an undeniable plus for the entire economy, and historically, anyway, they’ve helped workers, too, by creating entirely new industries and related new opportunities (along, eventually, with higher wages). Gaster was somewhat skeptical, and I can’t say I blame him. History never repeats itself exactly.

But to navigate the future successfully, Americans will need to know what’s emerging in the present. And when it comes to the economic impact of a trail-blazing, disruption-spreading corporate behemoth like Amazon, I can think of only one better place to start than Gaster’s presentation yesterday –  his upcoming book on the subject. I’ll be sure to plug it here on RealityChek as soon as it’s out.

(What’s Left of) Our Economy: Is Growth’s Quality Again Turning for the Worse?

Tags

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

“The consumer will save us,” or some variation thereof, has become a rallying cry for those believing that the U.S. economy will avoid recession, at least for the foreseeable future. For RealityChek regulars, however, it’s a red flag, possibly revealing that too many economy watchers have forgotten, or never learned, the most important lesson of the global financial crisis of the previous decade and the Great Recession it triggered: The quality of American growth matters at least as much as the quantity – and more specifically, economic expansion that’s too heavily reliant on consuming rather than producing is too likely to end in tears.

That’s why last week’s latest official report on America’s economic growth has me somewhat worried. It’s true, as I reported, that it contained some good news on the trade front, showing a continuing Trump administration trend of decent growth rates no longer tightly linked with huge, soaring trade deficits. But the figures (the second look of three looks at the second quarter’s performance – at least for the time being) also confirm major backsliding when it comes to the domestic determinants of healthy and unhealthy growth – a big surge in the role of consumption and housing combined as growth engines. That’s exactly the toxic combination that inflated the last decade’s historic bubble. And it could become a reversal of a positive Trump-period trend.

According to those official data, consumption and housing in the second quarter fueled 150 percent of that period’s 2.02 percent annualized inflation-adjusted growth – the most closely followed measure of change in gross domestic product (GDP – economists’ term for the economy as a whole). A figure greater than 100 percent, by the way, is possible because other components of GDP can subtract from growth – and in the second quarter, obviously did..

That 150 percent figure is the biggest by far since the third and fourth quarters of 2015. The only saving grace for that figure is that back in 2015, much stronger performance in personal consumption and housing was producing only roughly comparable overall growth.

The second quarter numbers are somewhat better on a standstill basis, but point in the wrong direction as well. From March through June this year, the toxic combination represented 72.67 percent of the economy in constant dollar terms. That’s the highest level since the fourth quarter of 2017 (72.87 percent). Moreover, back then, the economy was growing a good deal faster (at a 3.50 versus a 2.02 percent annual rate).

None of this means that the U.S. economy is now firmly on an unhealthy growth track. In fact, the worrisome second quarter “growth contribution” figures followed an especially good first quarter. From January through March, personal consumption and housing together produced only 23.87 percent of that stretch’s solid 3.01 percent annualized real growth – the lowest such figure since the fourth quarter of 2011 (16.38 percent of 4.64 percent annualized growth).

On a standstill basis, the last time that the toxic combination represented a lower share of the total economy in real terms was the fourth quarter of 2015 (72.15 percent). And during that period, there was almost (0.13 percent) real annualized economic growth.

Further, the Trump healthy growth record so far is better than the record during President Obama’s two terms in office. During the latter’s administrations, the toxic combination generated 80.74 percent of its $2.2537 trillion in after-inflation growth. Under President Trump, personal consumption plus housing has been responsible for 72.64 percent of $1.002 trillion of such growth. (Both calculations begin the these two administrations in the second quarter of their first year in office, since Inauguration Day doesn’t take place until January 20.)

Real growth, moreover, has been somewhat faster so far. Over 32 quarters, the U.S. economy grew by 18.44 percent after inflation under Obama. Over nine Trump quarters, the economy has become 5.56 percent larger – which translates into 19.80 percent growth over a 32-quarter stretch. All in all, that’s a pretty good reflection on this President’s performance.

Economically, though, the big question is whether it will continue. And politically, it’s whether it will suffice, in tandem with any other perceived strengths, to bring a second Trump term.

(What’s Left of) Our Economy: Could Main Street Have Done Better Than the Fed?

Tags

Ben Bernanke, bubbles, Federal Reserve, Financial Crisis, Great Recession, Lawrence Summers, Leonard Vincent Gilleo, recovery, secular stagnation, Washington Post, {What's Left of) Our Economy

If you’re seeking major insights into America’s recent economic and financial history, a barber’s obituary probably wouldn’t be the place you’d start looking. But if you checked out the notice placed in the Washington Post yesterday for Leonard Vincent Gilleo, you might rethink your assumptions. Because Mr. Gilleo plied his trade at the Federal Reserve. For decades. And although the bio written (presumably by his family) might have gotten a little tongue-in-cheek, it’s arguable enough that the Fed has helped make such a hash of the nation’s economy, especially for the last two decades, that a tantalizing claim in the obit deserves to be taken seriously.

According to the notice, Gilleo’s “clients included former Fed Chairmen Arthur Burns, Paul Volker [sic], Alan Greenspan and Ben Bernanke, as well as US Ambassadors, Secret Service brass, White House Press Secretaries, and hundreds of PhD economists and State Department personnel.”

And his customers, we’re told, didn’t let him just stick to his scissors: “Standing behind his barber’s chair, Lenny served as the common man sounding board to many economic policy decisions made by the Fed.”

Now comes the kicker: “In fact, had his layman’s advice been taken seriously, Black Monday, the bursting of the dot-com bubble, and the financial crisis of 2008 could have all been avoided.”

At first, this might look nonsensical – or the kind of good-natured fun that’s common when we want to remember the deceased fondly. But think of the economic news since Black Monday – the stock market crash of October 19, 1987. The nation experienced a short and relatively shallow recession around the turn of the decade; a strong but initially jobless recovery that turned into a record expansion fueled largely by a technology-driven stock market bubble; another short, shallow recession; a recovery that turned out to be another, much bigger bubble inflated by record levels of easy money supplied by (Alan Greenspan’s) Fed; a terrifying global financial crisis resulting from that bubble’s inevitable bursting; and the recovery from the ensuing Great Recession that began in mid-2009 – the weakest on record.

It’s true that Fed Chair Ben Bernanke in particular is credited by many with preventing the most recent financial crisis from becoming a catastrophic global depression – and rejecting the advice of politicians and economists who argued that the central bank was preventing a restoration of genuine economic health by providing crutches that were too strong for too long.

But it’s also clear that Bernanke, his successor Janet Yellen, and her successor Jerome Powell have chosen the easy way to end the crisis – simply flooding the economy with as much cheap credit as necessary to keep it afloat – and that they have no viable exit plan. It’s clear as well that Bernanke and his mid-2000s colleagues missed the glaring warning signs that the growth of the 2000s was dangerously unhealthy growth.

Less clear, but most important, the Fed’s response to the last financial crisis continued a practice of fostering acceptable levels of growth and employment by showering the economy with levels of stimulus that have been so excessive as to be unsustainable, and bound to risk damaging collapses.

Economist Lawrence Summers was the first to identify this pattern, which he calls secular stagnation.

I’m not saying that I believe Gilleo had better answers. I am saying that it’s not completely crazy to recognize how dreadfully these most credentialed of our economic experts have performed, and to suspect that less technical, academicky mastery and more real-world experience and common sense (plus some backbone) would have left the economy considerably better off than at present. And P.S.: I can think of worse uses of my time than contacting Gilleo’s family to see if they were serious, and if so, what his advice actually was.

(What’s Left of) Our Economy: New Reminders of Why Growth’s Quality Mustn’t be Ignored

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an economy built to last, business investment, capex, CBO, Congressional Budget Office, debt, Financial Crisis, GDP, growth, manufacturing, NABE, National Association of Business Economics, tariffs, Tax Cuts and Job Act, Trade, {What's Left of) Our Economy

For years I’ve been beating the drum about the need for American to pay as much attention to the quality of growth generated by the economy as they pay to the rate of growth itself. And in just the last 24 hours, two great examples have emerged of how ignoring the former can produce worrisomely off-base policy conclusions.

To repeat, the quality of growth matters because even growth that seems satisfactory, or even better, on a quantitative basis can be downright dangerous if its composition is wrong. Go back no further into the nation’s economic history than the last financial crisis to see why. Excessive reliance on intertwined housing, personal consumption, and credit booms nearly led to national and global meltdowns because, in former President Obama’s apt words, America became a “house of cards” overly dependent for growth on borrowing and spending. And he rightly emphasized the need to recreate an economy “built to last” – i.e., one based more on investing and producing.

In numerous posts, I’ve documented how little progress the nation has made in achieving this vital goal. And new reports by the Congressional Budget Office (CBO) and the National Association for Business Economics (NABE) valuably remind of one big reason why: This crucial challenge remains largely off the screen in government, business, and economics circles.

The new CBO study is its annual projection of U.S. federal budget deficits and federal debts, and the agency helpfully describes in detail the economic assumptions behind these forecasts. One key finding concerned the impact on American growth of the Trump administration’s various tariffs on certain products and U.S. trade partners.

Largely echoing the conventional wisdom, CBO predicted that if the levies remained unchanged, the tariffs would “reduce U.S. economic activity primarily by reducing the purchasing power of U.S. consumers’ income as a result of higher prices and by making capital goods more expensive. In the meantime, retaliatory tariffs by U.S. trading partners reduce U.S. exports.”

Specifically, according to CBO, “new trade barriers will reduce the level of U.S. real GDP by roughly 0.1 percent, on average, through 2029” – although its economists acknowledged that the estimate “is subject to considerable uncertainty.”

So that sounds pretty like a pretty counter-productive outcome for the President’s trade policies. But check out what else CBO said about the short-term impact of new U.S. tariffs. “Partly offsetting” the negative effects of those rising prices, along with the damage done by retaliatory foreign tariffs, the levies will also

“encourage businesses to relocate some of their production activities from foreign countries to the United States….In response to those tariffs, U.S. production rises as some businesses choose to relocate their production to the United States. In the meantime, tariffs on intermediate goods encourage some domestic companies to relocate their production abroad where those intermediate goods are less expensive. On net, CBO estimates that U.S. output will rise slightly as a result of relocation.”

In other words, the Trump tariffs will lower overall growth a bit, but more of that growth will be generated by domestic production, rather than by consumers and businesses purchasing more imports – primarily financed of course with more borrowing, and boosting debts. For anyone even slightly concerned with the quality of growth, that could be an acceptable price to pay for a healthier American economy over the long run.

Over the longer run, CBO speculates that the tariffs will reduce private domestic investment and productivity (and in turn overall growth), though it admits that this outlook is even more uncertain than that for the short run. Moreover, it’s easy to imagine public policies that could negate considerable tariff-related damage. For example, if the trade curbs do indeed undermine productivity in part by reducing the competition faced by domestic businesses – and therefore reducing their incentives to continue to improve – more overall competition could be restored through more vigorous anti-trust policies. So the tariffs could still result in growth that’s somewhat slower, but more durable.

The NABE’s January survey of members’ companies painted a pretty dreary picture of another Trump initiative – the latest round of tax cuts. As reported by the organization’s president, “A large majority of respondents—84%—indicate that one year after its passage, the 2017 Tax Cuts and Jobs Act has not caused their firms to change hiring or investment plans.”

As a result, even though the sample size was pretty small (only 106 companies responded to the organization’s questions), these answers significantly undercut tax cut supporters’ claims that the business-heavy reductions would lead to a capital spending boom.

Yet a closer look at the results offers greater reasons for (quality-of-growth-related) optimism. And they represent some evidence that the tariffs are achieving intended benefits as well. In the words of NABE’s president, “The goods-producing sector…has borne the greatest impact, with most respondents in that sector noting accelerated investments at their firms, and some reporting redirected hiring and investments to the U.S.”

This goods-producing sector includes manufacturing, and its outsized reaction to the tax cuts makes sense upon considering how capital-intensive industry has always been. In addition, manufacturing dominates U.S. trade flows, so it makes perfect sense that the tariffs’ jobs and production reshoring impact has been concentrated in this segment of the economy.

And once again, the bottom line seems to be more growth spurred by more domestic production – which can only improve the quality of the nation’s growth, and the sustainability of its prosperity.

Of course, the best results of new American economic policies would be the promotion of more and sounder growth. But as widely noted, big debt hangovers resulting from financial crises make even pre-crisis growth rates difficult to achieve even when quality is ignored – as the specialists quoted in this recent New York Times article appear to admit. So in order to achieve the best long run results, Americans may need to lower their short-term goals and expectations somewhat. That greater realism – and sharper focus – will surely come a great deal faster if important institutions like the CBO and the NABE start paying them at least some attention.

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

Tags

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.

Following Up: Woodward’s Globalist Bias

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Alan Greenspan, Bob Woodward, economists, establishment, Fear, Financial Crisis, Following Up, globalism, Mainstream Media, manufacturing, North Korea, nuclear weapons, Robert Costa, South Korea, steel tariffs, Trade, Trump, Washington Week

I’m a long-time admirer of Bob Woodward, and so it’s disappointing to say the least that he’s just provided more evidence that his sensational (literally) new book Fear is as much of a Hail Mary to restore the (deservedly) shredded reputation of the nation’s bipartisan globalist policy establishment as an effort to portray “the real inside” story of the President Trump’s White House.

At this point, I should confess that I still haven’t read the book. But enough of it had come out through about a week ago that I felt justified in analyzing Woodward’s treatment of Korea-related trade and security issues and arriving at the above conclusion. The new evidence comes from the long-time Washington Post reporter’s interview this past Friday night on PBS’ Washington Week talk show, so it seems as an equally sound basis for judging Woodward’s thinking.

Korea issues again come into play, but so does the President’s recent decision to impose tariffs on most of the foreign steel attempting to enter the U.S. Market. Let’s look at Woodward’s assessment of the steel situation first.

The author’s first problem with the levies is his belief that they represent an instance of Mr. Trump’s alleged habit of “just [doing] what he wants; and he’ll listen up to a point, then he will dismiss….” This disquiet is easily dismissed itself, as it sounds like the President seeks advice from his advisers and then, after a finite period of time, decides what course he’ll take. What does Woodward think Mr. Trump is supposed to do? Listen indefinitely? Or until he’s convinced he’s wrong?

But the Woodward’s second problem with the steel tariffs is much more revealing of his own blinders – and therefore much more disturbing. Here it is:

“Now, if you took a thousand economists and say do steel tariffs make sense – and I quote a document in the book where experts on the left, the right, the economists, Nobel Prize winners, Alan Greenspan, Ben Bernanke, leading Democratic and Republican economists, send him a letter saying don’t do this; this will not work.  And, of course, he does it….

“But now we are in the world of these trade wars, which he says he thinks he can win.  Wow.  Danger, danger.”

In other words, Mr. Trump’s great crime is failing to listen to the supposed experts. I say “supposed” because the two he mentioned specifically – former Federal Reserve Chairs Alan Greenspan and Ben Bernanke – have little enough claim to minimal competence in their own economic specialty, monetary affairs. The former spearheaded the disastrous monetary and regulatory policies that helped trigger the world’s worst financial crisis and depression in decades. The latter was caught with his pants below his ankles when the crisis struck, and “solved” it by flooding the economy with so much new credit that it was bound to stay afloat. You needed a Ph.D. to pretend that money “does grow on trees”?

But according to Woodward, the President should have followed their recommendations on trade policy, about which they have no special credentials? For good measure, Greenspan knows about as much about manufacturing industries like steel as Hillary Clinton knows about winning presidential elections. After all, he’s the genius who once referred to manufacturing as “something we were terrific at fifty years ago,” and “essentially a nineteenth- and twentieth-century technology.” So please, Mr. Woodward, spare us the experts worship.

By contrast, Woodward’s latest Korea example warrants more concern about the President’s competence on the job and knowledge of the issues – but unwittingly exposes the status quo as just as worrisome. Woodward had reported that last December, Mr. Trump wanted to tweet that the dependents of the 28,000 U.S. troops stationed in South Korea would be evacuated. The problem with this tweet? In th author’s words:

“[J]ust at the time, the top North Korean leader had sent a message through intermediaries to H.R. McMaster, the national security adviser, on December 4th of last year saying if you start withdrawing dependents, we will take that as a signal that war is imminent.  Now, you have a volatile leader, Kim Jong-un.  He’s got these nuclear weapons and there’s no predictable path for understanding how he might respond.  And the Pentagon leadership went nuts about this and just said, you – and the tweet never went out, but had it, you know, God knows.”

If you actually start thinking about the Korea crisis, however, you recognize that the current situation is even more dangerous. For as I’ve repeatedly written, these U.S. forces are deployed to South Korea not to help South Korean forces repel a North Korean attack. They’re deployed to South Korea to serve as a tripwire whose impending defeat will create overwhelming political pressure on an American president to save the day by using nuclear weapons. And the presence of these soldiers spouses and children is being counted on to make this pressure completely irresistible.

As I’ve also written, when North Korea was unable to strike American territory with nuclear weapons of its own, this strategy arguably made sense. For the nuclear threat was likely to succeed in preventing that North Korean attack in the first place because carrying it out pose no risk to America’s core security.

Now, with the rapid recent (and apparently continuing) development of North Korean nuclear forces capable of reaching North America, those days of U.S. invulnerability are unmistakably nearly over, and the American troops’ presence in South Korea are putting U.S. cities in the line of nuclear fire. Worse, they are the only recognizable source of this danger – unless you believe that North Korea has a reason to launch an unprovoked nuclear attack on the United States, and sign its literal nuclear death warrant.

In other words, because the Korean peninsula remains such a powderkeg, and because the North’s leaders are so little known and unpredictable, the danger that Woodward’s Pentagon sources allegedly are so terrified President Trump might have created exist right now, have existed ever since North Korea’s progress toward producing nuclear weapons platforms with intercontinental capabilities became known, and will continue to exist as long as Mr. Trump keeps following the Pentagon’s advice and keeps any American military presence on the peninsula.

Ironically, moreover, the best guarantee of preventing a North Korean nuclear warhead from landing on American city or two is for the President to follow his instincts, pull the troops and their dependents out, and let the local countries take the lead in dealing with North Korea’s nuclear ambitions.

Something else disturbing about the Woodward Washington Week interview: Anchor the clear reverence for the globalist Washington establishment demonstrated also by the show’s moderator, Robert Costa, who, like Woodward, works for the Washington Post. It came through when Costa told Woodward that what most surprised him about the book was “the effort that’s being made by so many people around him to bring him back into the mainstream, back towards certain norms.” It came through in his reference to “keeping President Trump in line” and “keep Trump moving toward the center.” And it came through in his question to Woodward,

“Do the people around [Trump] who are taking documents off of his desk, different trade agreements the president’s trying to rip up, do they see themselves, when you talk to them, as heroes?  Or do they know they are, in a sense, mounting, as you call it, an administrative coup d’etat?”

What Costa, Woodward – and so many other Mainstream Media journalists – need to understand is that the “norms” reportedly being protected in Woodward’s book aren’t the Ten Commandments or any other code of decency, justice, or democracy. The administration officials reportedly defying the President’s wishes aren’t some modern collective embodiment of Moses. And the center isn’t ipso facto the location of policy wisdom, or even sanity.

Instead, the norms are positions developed by flawed and often self-interested human beings. More specifically, the administration’s Never Trump-ers could also be motivated by simple desires to protect and restore the positions of power, privilege, and wealth their kind enjoyed almost unchallenged until the Trump Revolution. And fetishizing the center amounts to judging these positions only by their relationship to other alternatives that may be widely voiced but also equally off-base, not by their relationship to realities on the ground.

That is, Woodward’s globalist sources for Fear need to be scrutinized just as thoroughly as the President they oppose – especially since their often catastrophic failures did much to put Mr. Trump in power. You could even write a book.