Is the U.S. Economy Growing?
Raymond Richman, 2/5/2010
With great fanfare, government officials and stock market pundits reported that real U.S. Gross Domestic Product in the fourth quarter of 2009 grew $182 billion or 1.4 percent compared with the third quarter. Were this rate to continue for three additional quarters, the rate of increase during the year would be 5.7 percent. Hence the reported annual rate was roughly 5.7%, obtained by multiplying the quarterly growth by 4. The 5.7 percent annual rate assumes that the economy will continue to grow during the next three quarters at 1.4 percent per quarter.
Examining the data casts doubt that the economy will grow at all. The commentators took pride in the increase in personal consumption expenditure $45.9 billion accounting for 25 percent of the growth; in private fixed investment, $13.9 or 7.6 percent, and increased inventories $105.7 or 58 percent, and in net exports, $16.4 or 9 percent. The trouble is that the growth in the factors that economists believe grow the economy, private fixed investment and net exports, accounted for only $30.3 billion or 16.5 percent of the growth, a 0.23 rate of growth in the fourth quarter. Multiplying 0.23 by 4 indicates an annual rate of growth of 0.92 percent not 5.7 percent. .
The only group in the population that can be relied on to consume more in future quarters are those making money in the stock market or in the population working for the government, universities, in the health professions and some others. These are the eighty percent still fully employed. For the last month, the stock market has been in decline, not a good augury for increased growth of consumption from that source. Non-farm employment decreased between the third and fourth quarters so no increase in personal consumption can be expected from that source either.
Nearly all of the increase in the earnings of corporations was accomplished by laying-off workers. Future layoffs can only make the economic situation worse by creating falling family income. The only way for profits to grow is by increased private investment in factories and equipment. That creates enduring jobs and really has a multiplier effect. Unfortunately none of the trillions spent to stabilize and grow the economy has paid off in enduring jobs. As we showed on our blog a number of times, increased government expenditures has no Keynesian multiplier effects because only if jobs created can be expected to be permanent will it have a multiplier effect. Government expenditures that create temporary jobs increase GDP temporarily by the amount spent but the increase ends as soon as the stimulus ends. Only private investment has multiplier effects because it creates jobs that can be expected to be permanent. Government subsidies like the “Klunkers” subsidy, tax credits to buy new homes, or to insulate buildings, etc. work only as long as the subsidies last. When they end, the “growth” disappears and we are left only with the government debt that financed the programs.
The private investment that has positive implications for future growth is fixed investment in structures, including factory and office building and houses and investment in equipment and software. During the fourth quarter the amount spent on structures declined 4.1 percent. Investment in equipment and software was positive, 27.9 billion, 6.9 percent of 2009 GDP.
The change in inventories declined by $105.7 billion. Pundits gave this a great deal of attention. When positive inventory chanage is good or bad depending on whether it was intentional or unexpected. Intentional is good; it means more goods in process of manufacture and on retail shelves. If it is not intentional, it means that expected sales did not materialize. Can one count on this repeating for three more quarters? We believe not. Inventory changes are likely to be caused by growth not to be a reliable cause of growth.
A positive change in the trade balance is good and causes growth. Like the change in investment in factories and equipment, net exports increased by 16.3 billion, nine percent of the GDP. The trouble with taking this increase as a positive indicator, it is the result of the dampening effect of the recession on both imports and exports. When, as, and if, personal consumption increases, will we go back to the huge deficits we were experiencing in which the excess of imports over exports was over $700 billion? Nothing has really changed excepting only the decline in the value of the dollar against the Euro and some other countries but not against Japan and China and a few others. Our imports from China during the first three quarters of 2009 increased faster than our exports to China with no indication that the deficit will diminish. To the contrary, China is investing a huge proportion its GDP on factories and equipment compared to the insignificant amount we are expending. Their exports are likely to increase, ours to stagnate. We see no stimulus to growth without a change in our national policy from “Free Trade” to “Balanced Trade.” There are 3 to 7 million jobs that could be created by balancing trade.
We had an increase in GDP last quarter largely as the result of government subsidies and private investment that stimulated personal consumption. Increased government spending and subsidies would increase GDP, but without a multiplier the increase would fade away when the spending and subsidies end. In our opinion, there is no reason to assume the economy will increase much, if at all, next quarter, let alone the next three quarters.