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(What’s Left of) Our Economy: The Crucial Trade War Message of the New U.S. Economic Growth Report

27 Wednesday Nov 2019

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

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Boeing, business investment, capex, exports, GDP, gross domestic product, imports, inflation-adjusted growth, non-residential fixed investment, real GDP, real trade deficit, services trade, Trade, trade deficit, {What's Left of) Our Economy

Everyone hoping for the U.S. economy to perform well had to be cheered by this morning’s look at economic growth in the third quarter – the second of three such reports on the time period for the near future. And special bonus: The results significantly strengthen the case that the United States can absorb hits from even a long China trade conflict with room to spare.       

On top of beating expectations on its headline figure (which showed 2.11 percent annualized inflation-adjusted growth for July through September), a key internal indicator showed unexpectedly showed improvement as well – business investment.

What companies spend on plant, equipment, computers, research and development and the like is always closely watched because increases on these scores are (rightly) deemed the healthiest source of growth and better living standards. More recently, it’s been (rightly) seen as a test of the Trump tax cuts (which were mainly aimed encouraging such expenditures) as well as (less clearly) of the Trump trade policies (because of how they’re supposedly paralyzing corporate executives with uncertainty). And the results so far this year on the “capex” (capital – or business – spending) front certainly have been worse than last year’s excellent performance.

According to the new GDP report, real “non-residential fixed investment” still declined sequentially for the second straight quarter. But the decline was less (0.67 percent) than first estimated (0.75 percent). At the same time, pessimists could point out that the second quarter’s dip was considerably smaller (0.26 percent), so it remains far from clear that this valued growth engine is out of the woods.

Superficially, the trade results as such of the new GDP read looked poor as well, as the after-inflation overall deficit hit a new record. At an annualized $988.3 billion, it bested the previous all-time high of 983.0 billion of last year’s fourth quarter, and the $986.4 billion figure from last month’s first estimate of third quarter growth.

Think a bit, though, and the impact of Boeing’s aircraft safety woes represent a big part of the explanation – and a big part that can’t be blamed on President Trump’s tariffs-heavy trade policies. And even given the near halt in orders of its popular but troubled 737 Max model, the new numbers for total after-inflation total U.S. exports were slightly higher than those of the third quarter’s first read ($2.5231 trillion annualized versus $2.5222 trillion) and those of the second quarter ($2.5175 trillion).

Moreover, the “Boeing effect” apparently will need to be kept in mind a good deal longer, as suggested by this new report of major problems with another popular model.

Nevertheless, even constant-dollar merchandise (goods) exports keep trending up. True, at $1.7842 trillion annualized as of this morning, they remain less than the quarterly record of $1.8141 trillion, set in the second quarter of last year. But the new results exceeded those both for the second quarter ($1.753 trillion) and for the third quarter’s initial estimate ($1.7823 trillion).

Further, some more of the recent weakness in U.S. trade accounts looks attributable to another sector of the economy that has little or nothing to do with the trade wars, either – at least not directly, in the sense of provoking retaliatory tariffs. That’s America’s services trade.

The new GDP report’s statistics on these trade flows were worse than those of the second quarter and of the first third quarter estimates both on the exports side and on the imports side. Indeed, price-adjusted services exports fell deeper into worst-since-the-second-quarter-of-2017 territory (coming in at $745.7 billion annualized versus the earlier number of $740.7 billion. And at $563.5 billion, real services imports rose higher into all-time record territory (with the second worst such total being the $558.1 billion during the first quarter of this year).

Since President Trump has blown so hot and cold on his China tariffs – and shows signs of doing the same on threatened separate automotive tariffs – Washington-related trade developments seem likely to keep distorting the GDP figures (including by inhibiting some business investment) and the trade figures for the foreseeable future no matter what happens with Boeing or U.S. services industries.

At the same time, the new GDP report underscores a point often lost in the understandable and volatile flood of headlines and forecasts: Even though changing the fundamental course of American trade policy is a thoroughly disruptive undertaking, with transition-related efficiency-reducing adjustments inevitable, the U.S. economy looks to be passing this test, including with China, pretty handily.  Better still:  Modest signs of further improvement are visible. In other words, and especially considering the failure of pre-Trump approaches, there’s here’s every reason for the President to stay his new course on trade.

And one more point:  If we don’t communicate before, Happy Thanksgiving to you and yours!

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

29 Sunday Apr 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

06 Wednesday Dec 2017

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

≈ 1 Comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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Current Thoughts on Trade

Terence P. Stewart

Protecting U.S. Workers

Marc to Market

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

Alastair Winter

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

Smaulgld

Real Estate + Economics + Gold + Silver

Reclaim the American Dream

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

Mickey Kaus

Kausfiles

David Stockman's Contra Corner

Washington Decoded

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

Upon Closer inspection

Keep America At Work

Sober Look

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

Credit Writedowns

Finance, Economics and Markets

GubbmintCheese

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

VoxEU.org: Recent Articles

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

Michael Pettis' CHINA FINANCIAL MARKETS

RSS

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

George Magnus

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

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