(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.

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(What’s Left of) Our Economy: More Evidence that U.S. Growth is Healthier Under Trump

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

The current U.S. economic recovery has lasted so long (at more than ten years old, it’s already tied with the 1990s expansion as the longest on record), that anxiety about how long it might last, and when a new recession might begin, is entirely understandable. Yet what most economy watchers keep missing is what RealityChek regulars have understood for years – the quality of America’s growth matters at least as much as the quantity.

As a result, the latest government report shedding light on this growth – the preliminary look at the gross domestic product (GDP) for the first quarter of this year – was important not only for revealing that the economy expanded at a healthy 3.21 percent at an annual rate. It was also important for showing that by several crucial measures, the growth recipe was by far the healthiest since at least the period during which United States enjoyed its last period of robust expansion – back in 2014 and 2015.

The definition of healthy growth used by RealityChek is growth that depends relatively little on increases in personal consumption and housing investment. Those segments of the GDP and their bloat were most responsible for inflating the previous decades’ bubbles that burst so disastrously in 2007 and 2008, nearly blew up the entire global economy, and triggered the worst national economic downturn since the Great Depression of the 1930s. Fortunately, the GDP data compiled by the Commerce Department make it easy to calculate how their current growth contribution compares with their past record. And, as with the latest trade figures, they show that progress towards improving growth’s health has been dramatic so far during President Trump’s administration.

In particular, during that previous high growth period (under President Obama), the economy’s quarterly expansion ranged from 2.60 percent at an annual rate to 3.81 percent after inflation. But the growth contributions made by personal consumption and housing (which I’ve called a “toxic combination”) generally ranged from 62.86 percent to 79.70 percent (with one outlier quarter – the fourth of 2014 – coming in at nearly 187 percent, meaning that other elements of the GDP worked to shrink the economy).

During the high growth period under President Trump, which began in the first quarter of 2018, inflation-adjusted quarterly GDP has actually risen by a somewhat slower pace: between 2.58 percent annualized and that 3.21 percent rate of the first quarter of this year. But the contributions made by the toxic combination have ranged only from ten percent to 67.27 percent. And the figure for that high-growth first quarter of this year was only 22.19 percent.

Also worth noting are the growth rates during the Obama years when the role of the toxic combination was within that Trump range. They were somewhat lower.

Principally, in the second and third quarters of 2014, the toxic combination’s combined real growth contribution was 65.69 percent and 62.86 percent, respectively. Annualized constant dollar growth during those quarters was 2.60 percent and 3.04 percent. Those are solid results, but not quite as good as those from the second, third, and fourth quarters of 2018. Then, the toxic combination’s growth contribution ranged between 60 percent and 67.27 percent, and growth ranged from 2.87 percent to three percent.

As indicated above, these results can be pretty volatile from quarter to quarter. But smoothing them out by using annual figures tells a story even more favorable to the Trump record. Here are those annual figures starting with 2009-10, the first recovery year.

From left to right, the columns represent the personal consumption contribution to after-inflation growth measured in percentage points (e.g., the very first figures shows 0.99 percentage points of 1.80 percent growth), the housing contribution, the total percent – not percentage points – of growth they fueled, and the growth rate for the year in question.

09-10:          1.20/2.60       -0.08/2.60         1.12/2.60         46.92%         2.56%

10-11:          1.29/1.60        0.00/1.60         1.29/1.60         80.63%         1.55%

11-12:          1.03/2.20        0.31/2.20         1.34/2.20         60.91%         2.25%

12-13:          0.99/1.80        0.34/1.80         1.33/1.80         73.89%         1.84%

13-14:          1.97/2.50        0.12/1.80         2.09/1.80       116.11%         2.45%

14-15:          2.50/2.90        0.33/2.90         2.83/2.90         97.59%        2.88%

15-16:          1.85/1.60        0.23/1.60         2.08/1.60      130.00%         1.57%

16-17:          1.73/2.20        0.13/2.20         1.86/2.20        84.55%         2.22%

17-18           1.80/2.90      -0.01/2.90         1.79/2.90        61.72%          2.86%

From left to right, the columns represent the personal consumption contribution to after-inflation growth measured in percentage points (e.g., the very first figures shows 0.99 percentage points of 1.80 percent growth), the housing contribution, the total percent – not percentage points – of growth they fueled, and the growth rate for the year in question.

As with the quarterly figures, during the Obama years, when the growth contribution of the toxic combination was low, so was growth.  During the two full Trump data years, as growth itself sped up, the toxic combination’s contribution has plummeted to multi-year (at least) lows.

But a big question remains unanswered: When, under the Obama administration, the economy did manage to grow satisfactorily with a relatively small contribution by the toxic combination, this health growth recipe didn’t last. Indeed, by the third quarter of 2015, growth itself began slowing markedly, until it bottomed at 1.30 annualized in the second quarter of 2016. And it never broke two percent again. But the toxic combination’s contributions during that decelerating growth period ranged from 91.05 percent to a stunning 430 percent (in the fourth quarter of 2015).

The Trump years’ much better performance in this respect has lasted only two years. Only if this strengthening proves to have legs will it be legitimate to start considering the economy genuinely Great Again.

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

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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.

(What’s Left of) Our Economy: Raging Tariffs-Led Inflation Still Isn’t a Thing – or Even Close

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aluminum, Canada, household appliances, housing, inflation, metals-using industries, Producer Price Index, producer prices, softwood lumber, steel, tariffs, Trump, washing machines, {What's Left of) Our Economy

Good luck to everyone trying to find some signs in this morning’s producer price report of President Trump’s tariffs igniting ruinous, raging inflation throughout the U.S. economy. How come? Because they aren’t there. Yet again.

Let’s quickly examine some of the main products in the tariff spotlight, starting with washing machines, imports of which were slapped in February with levies aimed at countering sharp surges of product streaming into U.S. markets that harm domestic producers (called “safeguard tariffs).

Even though this Producer Price Index (PPI) data from the Labor Department focus on inflation or lack thereof for wholesalers, it does contain information on the consumer goods in which wholesalers deal. This morning’s report shows that prices for “household appliances” (including several products aside from the tariff-ed washing machines) rose by 4.1 percent from September, 2017 to September, 2018. That’s higher than the 2.7 percent year-on-year overall advance for such goods less the volatile food and energy sectors. But it’s anything but the steepest price rise in this category.

Moreover, on a monthly basis, household appliance prices don’t seem to be going anywhere lately. Between June and July, they actually fell by 0.2 percent. From July to August, they dipped another 0.1 percent. From August to September, they increased by 1.3 percent. Again, that’s greater than the 0.1 percent average for “Final demand goods less foods and energy.” But not excessively so. P.S.: Household appliance prices are affected by many factors other than tariffs.

How about steel and aluminum, where a series of tariffs began to be imposed in late March? Steel mill product prices did indeed jump by 18.1 percent year-on-year in September. But here are the last three monthly prices changes: +1.6 percent, +2.6 percent, and zero percent. So let’s hold off on the inflation alarmism here, too. And don’t forget: Thanks to Chinese and other foreign subsidies, steel prices have long been depressed for reasons having almost nothing to do with free market forces. So the tariffs have mainly been encouraging the restoration of accurate price signals – something that all free market supporters should regard as key to long-term economic health and prosperity.

The ebbing of inflation is even more striking when it comes to aluminum mill shapes. In September, their prices rose by a sharp 10.1 percent on an annual basis. But over the last three months? They’ve actually fallen significantly – by three percent, 2.1 percent, and 0.3 percent, sequentially. So thanks to the tariffs, normality seems to be returning to the aluminum market, too.

Much the same story is being played out in metals-using sectors – where reports of tariffs-caused devastation have been widespread. The pricing developments in fabricated structural metals products are a typical example: up 8.3 percent year-on-year in September, down sequentially by 0.6 percent in July, up by 0.2 percent in August, up by 0.5 percent in September.

Softwood lumber from Canada is another important economic input being tariff-ed by President Trump – this time since last November. Of course, they resulted in forecasts of impending disaster for the U.S. housing industry. But the PPI report shows that softwood lumber prices were up only 5.4 percent on year in September, and have been dropping sharply on month since July – by 2.5 percent, 9.6 percent (I repeat: 9.6 percent!), and 0.4 percent. That looks like deflation, not inflation.

To repeat a point I’ve made often, it’s entirely possible that these pricing trends could reverse themselves in the months ahead. But since we’ve seen nothing of the kind so far, it’s also entirely legitimate to suppose that current trends will continue – and important to start examining possible reasons why. Even though such an exercise will doubtless be more difficult and less fun that repeating forecasts of Tariffs-mageddon.

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

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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: America’s Growth and Savings Dilemma in a Nutshell

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bubbles, Financial Crisis, GDP, gross domestic product, housing, Maurie Backman, personal consumption, real GDP, recovery, The Motley Fool, USAToday, {What's Left of) Our Economy

An intriguing op-ed in USAToday provides a great opportunity to return to an important subject RealityChek has neglected a bit in recent weeks – the quality of America’s economic growth.

The article, by Maurie Backman of the Motley Fool investing website, does a fine job of scolding Americans for not saving enough – and of debunking many of the excuses heard for their lack of thrift. One of his especially interesting arguments: No matter how little one earns, it’s always possible to save something.

This is literally true, although economists widely agree on the seemingly commonsense proposition that (all else equal, of course!) the less you earn, the harder you’ll find saving, and in fact the less you’ll save. But what I immediately began thinking about is a major implication of this pattern. Namely, if Americans started saving even a little more, wouldn’t future economic growth be even slower than it’s been? At least unless the country found some other engine of growth – like investment or trade?

The light shed by the latest data on America’s growth shows just what an enormous transition this will entail. These numbers come from the government’s second read on the gross domestic product for the fourth quarter of last year and how its changed. (We’ll get one more fourth quarter figure next week and that will be the final result for that period – until a more comprehensive set of revisions is released a little further down the road.)

What they reveal is that the economy nowadays has never been more consumption-heavy. In fact, it’s even more consumption-heavy than at its peak during the mutually reinforcing credit and housing bubbles of the previous decade – which eventually collapsed into the worst financial crisis to hit the United States and the world since the 1930s.

During the fourth quarter, personal consumption as a share of the inflation-adjusted gross domestic product (GDP) hit 69.64 percent. That slightly eclipsed the former record of 69.60 percent – which dates only from the second quarter of last year.

So is it time to hit the economic panic button? Not (quite?) yet. Because housing – the second part of the toxic combination that helped trigger the crisis – still remains depressed compared with the previous decade’s levels. Housing’s share of real GDP peaked in the second quarter of 2005 at 6.17 percent. During the fourth quarter of last year, it was a relatively subdued 3.52 percent.

As a result, the toxic combination’s total share of the economy after adjusting for prices stood at 73.16 percent. That’s a bit lower than the old combined record of 73.27 percent (during the third quarter of 2005). But it’s only a bit lower.

And therein lies the biggest dilemma facing American policymakers – whether in the White House or the Congress or the Federal Reserve: Spending-based growth is unhealthy and unsustainable – and the story usually ends very badly. But reorienting the country’s national business model and turning it into “an economy built to last” looks to be disruptive enough to exact major short-term costs.

(What’s Left of) Our Economy: Welcome Signs of Healthier U.S. Growth

Tags

business investment, Commerce Department, GDP, gross domestic product, growth, housing, inflation-adjusted growth, Obama, personal consumption, real GDP, Republicans, tax reform, {What's Left of) Our Economy

With the Commerce Department having issued last week its second read on U.S. economic growth in the third quarter of this year, RealityChek can update its ongoing examination of a major but sorely neglected economic issue: Is the quality of America’s growth improving or worsening? That is, has the nation managed to generate more output in ways that will make a repeat of the last decade’s financial crisis and ensuing Great Recession likelier? Or is it still relying excessively on the same unsustainable growth engines that made the crisis inevitable?

Happily, the news here is pretty good. Not earthshaking, to be sure. But the new statistics confirm that, so far during 2017, the nation has made gradual (though by no means adequate) progress toward former President Obama’s essential goal of creating “an economy built to last,” rather than one dependent on spending and housing bubbles.

As suggested by that last sentence, RealityChek measures the health of growth by looking at the share of the inflation-adjusted gross domestic product (GDP) made up of consumer spending and housing – the toxic combination whose bloat let to the previous decade’s near meltdown.

These two sectors’ combined share of the after-inflation economy peaked in the third quarter of 2005, at 73.27 percent. Last week’s GDP statistics pegged it at 72.85 percent – the lowest since the 72.70 percent in the third quarter of 2016.

In the fourth quarter of 2016, this figure rose to 72.94 percent, and increased again to 73.14 percent in the first quarter of this year. But since then, it’s dipped for two straight quarters – the first such sequence since the first half of 2014.

The big change hasn’t come from personal consumption. In fact, it’s share of real GDP hit its all-time high in the second quarter of this year: 69.60 percent. And the latest third quarter figure is a still elevated 69.43 percent. What’s happened has been a dramatic shriveling of the housing sector. It peaked as a share of real GDP in the second quarter of 2005 at 6.17 percent. The new GDP report pegs it at just 3.42 percent

Business investment – another pillar of solid, healthy growth – may have picked up in the third quarter, too. The quarter’s first estimate of GDP judged that such spending accounted for 16.33 percent of its 2.96 percent annualized constant dollar growth. That would have continued a string of declining relative importance that began in the second quarter. But the newest data revises the business investment contribution upward to 18.10 percent of a (higher) 3.26 percent annualized price-adjusted growth rate.

This hardly a sterling performance. And it hasn’t lasted very long. But these results are considerably better than those for 2016 (when business spending actually subtracted 5.33 percent from the year’s 1.49 percent real growth) or for 2015 (when such investment’s role was positive, but it fueled only 10.34 percent of that year’s 2.86 percent real growth).

In addition, they could set the stage for an interesting test of the Republican party’s fundamental tax reform strategy: Use tax cuts to put more money into the pockets of businesses and wealthier Americans to encourage the building of more factories and labs and other kinds of productive facilities at home. If the Republican approach survives Congress intact, the GDP numbers will be a big help in seeing whether its promise of producing better and healthier growth is kept.

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

Tags

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

Tags

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: America is Still Missing the GDP Goal that Counts

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Barack Obama, economic growth, GDP, Great Recession, housing, personal consumption, recovery, Trump, {What's Left of) Our Economy

Although the economics world has been consumed lately with debating whether President Trump can really boost America’s economic growth rate to three percent (for what it’s worth, the consensus seems to be that he can’t), RealityChek regulars know that this question is beside the point – at best. For as the nation should have learned, considerably faster growth is all too easy to generate. All Washington needs to do is flood the system with cheap credit and thereby inflate spending bubbles.

What really counts is the quality of growth, and by that standard, even the news reported Friday that the inflation-adjusted gross domestic product (GDP) expanded by a seemingly impressive annual rate of 2.54 percent is seriously wanting. For the internals of the GDP release (which included revisions going back to 2014) containing the first estimate of second quarter growth show that this improved performance (final, for now, first quarter growth was only 1.23 percent) depended too heavily on personal consumption – one of the “toxic combination” of GDP components (along with housing) whose outsized surge during the previous decade set the stage for the financial crisis and ensuing Great Recession.

In fact, the second quarter figures showed that, on a standstill basis, the economy has become nearly as consumption- and housing-heavy as during its pre-crisis peak, and that its consumption share has hit a new all-time high. These data also show that the economy is even more distorted in this manner than at the outset of the recession, by which time the housing collapse was in full swing.

That record personal consumption share of real GDP for the second quarter came to 69.60 percent – just slightly higher than the revised first quarter level. By comparison, consumption’s peak pre-crisis share of the economy was only 63.27 percent – in the first quarter of 2007. Three quarters later, as the recession officially began, it had risen to 67.25 percent, again, largely because housing was imploding (and had sunk to 3.91 percent of the after-inflation economy from 4.83 percent in the first quarter).

As for the toxic combination’s share of real GDP, it climbed to 73.10 percent in the second quarter of this year. That’s still short of the record 73.27 percent, from the second quarter of 2005. But it’s not far off. Further, the second quarter figure is a good deal higher than it stood when the last recession started at the end of 2007 (71.16 percent).

As I keep reminding readers, former President Obama stated that the real lesson of the financial crisis and recession was that America needed to create “an economy that’s built to last” – one much less reliant for growth on borrowing and spending, and more reliant on earning and producing. He was right. And the new GDP figures reveal that, some ten years after a generational slump began, macroeconomic progress toward preventing a repeat has been reduced to practically nothing.