Economic data reported in recent weeks show the global economy is slowing rapidly across all segments. Nearly the entire European Union, including its core economies of Germany, France, and the United Kingdom are all now clearly mired in recession. The Euro southern periphery is in a bona fide depression. Japan has entered its third recession since 2008. China, India, and Brazilian growth rates have fallen by half. And the US in the fourth quarter 2012 has come to a virtual economic standstill, the second time in two years in which a quarterly GDP recorded virtually no growth.
One consequence of the now clearly emerging new crisis is the global economy finds itself on a ‘tipping point’ and on the verge of a renewed ‘currency war’ that was temporary averted in 2010-11. Competitive currency devaluations are a sure sign of a qualitatively deteriorated economic state of affairs. During the global depression of the 1930s ‘devaluation by fiat’ played a key role in deepening and ensuring the duration of the depression. In 2010-11 the then incipient drift toward currency war took the form of driving down wages to gain a cost advantage for export sales. Today the driver is global quantitative easing, QE, policies that have been implemented and are intensifying by central banks around the world, from the US Federal Reserve, the Bank of England, the European Central Bank, Bank of China, and most recently, the Bank of Japan.
Capitalist policy makers globally have bought into the false idea that monetary policy—i.e. injecting massive amounts of liquidity into their respective banking systems—will stimulate recovery. Historically this has never worked, and it has not been working as well since 2008. Injecting money into banks, shadow banks, and speculators have resulted only in creating incipient bubbles in the stock markets, junk bond markets, and other financial securities. The real economies have benefited little if any from this form of stimulus.
Believing QE is the answer to recovery, the same policy makers have opted for a severe contractionary fiscal policy in the form of ‘austerity’ programs—massive cuts in public spending, mass layoffs and privatization in the public sector, and tax hikes on the middle class to offset the anticipated inflationary effects of the QE and money stimulus—inflation which has not appeared as deflationary forces continue to grow as the real economies of their countries continue to slow and stagnate. The dual strategy of capitalists politicians across the globe—of QE and money injections into the banks and financial system combined with austerity for the rest—has clearly failed and will continue to fail even more visibly.
Meantime, the global economy continues inexorably to slow, drifting toward the ‘double dip’ recession this writer has predicted on various occasions in the recent past, in my 2010 and 2012 published books (Epic Recession: Prelude to Global Depression, 2010, and Obama’s Economy: Recovery for the Few, 2012) and numerous articles in ‘Z’ magazine and elsewhere.
The locus of the debate on the near-term economic future in the US economy is now concentrated on whether the recent 4th quarter US GDP , which fell to -0.1%, is just an aberration and will be reversed in the first half of 2013 or whether it is a harbinger of a further slowdown. This writer’s view is that it is the latter, as has been predicted in a series of analyses of US GDP over the past five quarters, from the last quarter of 2011 through the last quarter of 2012’s recent GDP data.
Data now coming in for the US show that consumer spending on the holidays was noticeably weak except for auto sales driven by discounts. It is now weaker in 2013, as payroll taxes have risen, health insurance companies are gouging households with premium increases of 10-20%, gasoline prices are rising rapidly once more, and real disposable household income for 80% of families continues to decline. On the business spending side, business inventory accumulation is slowing rapidly, small business confidence is falling, forecasts of business operating revenue show a major slowing, productivity is collapsing, and export sales will decline as the currency war drives up the value of the US dollar in global markets. The remaining ‘engine’ of GDP, government spending, is also in reverse as the debates on ‘fiscal cliff: Parts 2 and 3’ and federal spending cuts continue and the states and cities continue to reduce spending and raise taxes. Nevertheless, polyannish mainstream economists continue to predict a rapid recovery from the 4th quarter GDP collapse into 2013—as they have erroneously for four years now.
What follows is this writer’s analyses of the details of GDP results for the past 15 months, that were published on his blog, jackrasmus.com, and other public blogs. The reports are in reverse chronological order, with the latest 4th Quarter 2012 US GDP first, followed by consecutive past quarters, concluding with the analysis of the 4th quarter 2011 GDP.
Readers interested should continue to follow the blog, jackrasmus.com, for regular updates on the US and global economy, as well as the writer’s weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network, 2pm eastern time, out of New York. Announcements of forthcoming articles, blog entries and shows on the US and global economy are provided via the writer’s twitter account at #drjackrasmus.
“4th Quarter 2012 US GDP:
On the Road to Double Dip?”
Dr. Jack Rasmus
Copyright February 2013
US GDP data released on January 30, 2013 for the fourth quarter 2012 showed a decline in GDP of -0.1% for the last three months of 2012, thus raising the specter of the US economy, facing still further deficit spending cuts in 2013 amidst declining consumer confidence, may be on track for a possible double dip recession in 2013 or 2014 along with other economies in Europe, the UK, and Japan.
In the fourth quarter GDP numbers, government and business inventory spending led the decline. To the extent consumer spending played a positive role at all in the 4th quarter, it was largely driven by auto sales—stimulated by auto dealers offering buyers deep price discounts, virtually free credit with near 0% auto loan interest rates, as well new auto purchases in the northeast as a result of Hurricane Sandy’s destruction of existing auto stock. 2012 Holiday season retail sales data, in contrast, were otherwise not particularly notable and would have been much worse without the auto sales exception. How much longer auto companies can continue the deep price discounts and free credit remains a question going forward. Net export sales continued to sag in the last quarter, as the slowdown in world manufacturing and trade continued. And, as others have noted, an important source of past consumer spending and GDP growth—i.e. health care services—began to slow ominously at the end of 2012 as well, promising to continue that trend into 2013.
This weak scenario in the fourth quarter 2012, and the virtual absolute stop to US economic growth, was predicted on this writer’s and other public blogs in a piece entitled “US 3rd Quarter GDP: Short Term Myopia vs. Long Term Realities” last October 2012 (see jackrasmus.com, as well as in this writer’s April 2012 book, ‘Obama’s Economy: Recovery for the Few’).
Last October 2012, it was noted that the 3% growth rate in the preceding 3rd quarter, July-September 2012, period was artificially produced by record levels of one-quarter federal defense spending accounting for more than one third of total GDP growth in the quarter. That government spending surge was preceded by more than two years of federal government spending reductions, and thus the third quarter defense-government spending acceleration represented previously held back government spending, to be released right before the November 2012 elections. It was predicted in the above blog commentary on GDP 3rd quarter results that government spending therefore would decline sharply in the following fourth quarter—which it did. It was further noted business inventory spending was on a track to decline as well in the fourth quarter, and that US net exports, having turned negative in the third quarter, would continue to decline in the fourth quarter—all of which also occurred in the latest GDP report. The true US GDP growth trend for July-September was therefore not the 3% reported, but only around 1-1.5% for the third quarter when the appropriated adjustments are made. And that 1.5% or so been the average GDP rate for more than two years. Then the bottomed dropped out in the fourth quarter, as GDP collapsed to -0.1%.
So what’s going on? Is the fourth quarter GDP an aberration? A temporary one time event? Or a harbinger of a still further slowing US economy, moving more in line with global economic trends indicating a slow but steady further slowdown?
In the first quarter 2013, a number of negative developments in the fourth quarter will likely continue, along with new negative developments, together suggesting the first quarter 2013 GDP will at best look much like the fourth quarter—and could even prove worse.
First, more than $100 billion has been taken out of the economy with the end of the payroll tax cut last January 1. Second, consumer sentiment and spending is showing a definite sharp decline in the early months of 2013. Deficit cutting will intensify with a deal on the ‘sequestered’ $1.2 trillion agreement that will occur in March in Congress. Defense spending cuts projected will be reduced, but non-defense spending will occur and perhaps even rise. Consumer spending on autos, which has been a plus in 2012, cannot continue at the prior pace. Health care spending will likely continue to slow, as health insurance premiums of 10-20% continue to be imposed in the new year by price gouging health insurance companies looking to maximize their returns in 2013 in anticipation of Obamacare taking effect in 2014. Business spending that occurred in the fourth quarter to take advantage of tax laws will almost certainly slow in the first quarter. Industrial production and manufacturing will add little, if anything, to the economy and housing will contribute to growth through apartment construction only. In short, the scenario is one of continued very slow growth.
It is not the deficit that faces a ‘cliff’; it is the US economy. As this writer has repeatedly written since last November, the ‘fiscal cliff’ was mostly an economic farce. Real forces were further slowing the real US economy. Those real forces are once again reasserting themselves. However, should Congress proceed with continued deep spending cuts in 2013, should the Euro economies, UK, and Japan continue to weaken, and should China-India-Brazil not succeed in reversing their economic slowdowns significantly—then the odds of a double dip in the US will rise still further in 2013-14, as this writer has repeatedly predicted.
The strategic question is ‘Why is the US economy so fragile and weak? Why has it been unable to generate a sustained economic recovery from ‘Epic’ recession since 2009? Why now, after five years since the onset of recession in late 2007, has the US economy stagnating and collapsed to virtually zero growth, once again? ‘
The answers to this are not all that difficult to understand. First, despite $13 trillion in free, no interest money given to banks, investors, and speculators by the US federal reserve for five years now, the banks still continue to dribble out lending to small-medium US businesses. No loans mean no investment mean no hiring mean no income growth for consumption, which is 70% of the economy. Similarly, large non-bank corporations continue to sit on more than $2 trillion in cash. Like the banks, they too refuse largely to invest in the US to create jobs, preferring hold the cash, or use it to buyback stock and pay shareholders more dividends, to invest it offshore, or to invest it in speculating with financial instruments like derivatives, foreign exchange, commodities futures, and the like.
At the same time, the bottom 80% of households, more than 110 million, are confronted with 5 years now of continuing real disposable income stagnation or decline. This income stagnation and decline translates into insufficient income to stimulate consumption spending, which makes up 71% of the US economy. What spending exists is fundamentally credit driven, not income driven. Thus car loans, student loans, credit cards, and installment loans rise and with it household ‘debt’.
The problem with the US economy therefore is fundamentally twofold: not only insufficient income but growing household debt. Together they result in consumption becoming increasingly ‘fragile’ (an income to debt ratio term), and therefore unable to play its historic role of generating a sustained economic recovery. Together, fiscal-monetary policies are rendered increasingly ‘inelastic’ in generating recovery as ‘multipliers’ collapse—to use economic jargon. The outcome of all this is ‘stop go’ recoveries, bumping along the bottom, or what this writer has called an ‘epic’ recession.
“U.S. 3rd Quarter 2012 GDP:
Short Term Myopia vs. Long Term Realities”
Dr. Jack Rasmus
Copyright October 2012
The third quarter (July-Sept.) U.S. GDP figures released last Friday, October 26, estimated the US economy grew by 2%. That compares to an average growth for the first nine months of 2012 of an historic low of 1.7%. The 2% reflects, at best, a continued stagnation of the economy and, in all likelihood, an actual continuing decline for the economy over a longer run.
Here’s why: to begin with, the 2% is an initial ‘advance’ estimate. Advanced estimates recently have tended to be reduced significantly in the 2nd and 3rd revisions. To recall, the previous 2nd quarter GDP also initially came in at 1.5% but was then reduced to 1.3%. It is quite likely therefore the third quarter’s 2% will be revised downward 0.1-0.2%, which will put it almost exactly at the past year’s 1.7% average.
Secondly, every four years just before national elections politicians typically turn on the spending spigots in the third quarter to get a brief boost just before the national election. And so it was this past third quarter. The Federal government in particular accelerated Defense spending. It appears this was done by deliberately holding back defense allocations in the previous quarters in order to have an especially large impact just before the national elections in the third quarter. Federal defense spending fell by-7.1% and -0.4% in the first and second quarters of this year. In other words, it appears defense spending was slowed in the first half of the year in order to get the bigger third quarter boost just before the elections. In fact, the third quarter’s big bulge in spending –attributable virtually all to defense—was the first time in two and a half years that government spending did not decline in every consecutive quarter! The two and half years of decline in federal spending, combined with the big declines in the same the first two quarters of 2012, suggests the third quarter’s inordinate surge in defense spending was consciously planned. Federal spending in the third quarter thus amounted to a a huge third, 0.7%, of the 2.0% reported GDP growth last quarter. It is highly unlikely any such additional surge in defense, or government spending in general, will follow this fourth quarter or subsequently in 2013. So this 0.7% is a one time event and the 2% (or revised lower) third quarter GDP number is actually less than 1.5% when the one time surge is backed out of the trend. That would mean the US economy continued to slow last quarter when considered in the context of a longer term trend.
The second big contributor to the third quarter’s 2% initial growth was consumer spending. It reportedly contributed 1.4% of the 2% total for the third quarter GDP. But one needs to look at the composition of such spending in order to determine if it too will be sustained, or whether temporary forces are at work here as well.
Consumer spending is being driven not by fundamentals of real household disposable income growth, but by temporary factors as well. This past year much of consumer spending has been driven by the top 10% wealthiest households, whose spending in turn is driven largely by stock market returns. And stocks have done extremely well in 2012, boosted in particular by the Federal Reserve’s early 2012 ‘operation twist’ quantitative easing program, and over this summer by investors’ anticipation that ‘quantitative easing 3.0’ would follow, which did. Federal Reserve QE is directly correlated with surges in stock prices, as banks and investors take advantage of the free Fed money and lend it to professional investors who in turn drive up stock prices by speculating. That brings more money into the stock markets, driving up stock prices and returns to wealthier households. Returns on corporate bonds have also boosted wealthy household earnings. It is not surprising then that the top 10% households, doing very well, are in turn driving much of consumer spending, or at least inordinately so. The remaining 90% households appear to be spending in the third quart—but not based on real income gains. Their spending is being driven by a surge in credit card issuance by banks, and usage, on the one hand, and by spending down savings on the other. Savings rates have fallen over this past summer. High on the spending list for the bottom 90% appears to continue to be auto sales, as auto companies, with bloated over production and inventories and still not fully recovered from the recent recession, compete more intensely with each other. Much of auto sales are due to deep discounting and purchase deals amounting to no interest loans stretched out over 60 months and more. But this kind of discounted sales, combined with credit and dissaving based spending cannot continue. Nor may even the stock market driven consumption of the top 10% households. In short, a scenario of declining consumer spending is likely, and this writer predicts it will begin in the present fourth quarter 2012 period once the national elections are over and the unnatural optimism of the US consumer hits a wall of reality immediately after the elections.
A third, much less important, contributor to the 2% GDP initial number is housing. Much is made of a nascent housing recovery. But there is little evidence of such. Housing will continue to ‘bump along the bottom’ for months to come, and likely for years. What indications of housing growth that has appeared last quarter is mostly ‘multifamily’ units, i.e. apartment building, as the 12 million homeowners foreclosed over the crisis are forced to rent.
Offsetting these ‘one time’ and weak factors behind the 2% GDP number are several serious negative areas in the economy that show every sign of getting worse.
After growing at a nearly 20% annual rate in the fourth quarter of 2011, business investment has declined precipitously every quarter. Spending on equipment and software in the third quarter collapsed to zero, and business spending on buildings turned a negative -4.4% last quarter. These figures represent a clear 12 month rapid decelerating trend. Fourth quarter will be no doubt negative again. Some pundits argue this is the business community registered its uncertainty and concern over the ‘fiscal cliff’ coming January 1, 2013. This writer disagrees. It is due to two factors: first, the rapid slowdown of the global economy now underway which is beginning to impact the US economy with a lag. That slowdown, moreover, shows all the signs of continuing. Second, it is due to an emerging ‘capital strike’ sending a message to Congress that business and investor tax cuts must be continued ‘or else’. Continuing, and deepening business tax cuts, of course will make the ‘fiscal cliff’ worse. So it is not a question of concern about the deficits; it is a question of business insistence upon more and more tax cuts.
Another negative area for the economy to come is reductions underway in business inventory spending. Still another is the sharp drop off in US exports (and thus manufacturing activity) as the aforementioned global economic slowdown continues to deepen. In the third quarter, US exports turned negative for the first time in more than three years—for the first time since the spring of 2009 in the midst of the last recession quarter. Something very serious therefore is now beginning to take place in global trade, US exports and therefore US manufacturing activity not seen for more than three years.
To summarize, the ‘positives’ in the third quarter GDP numbers are extremely tenuous and temporary, while the negatives in terms of business real investment, exports, trade, and global economic slowdown all appear to have long term ‘traction’ and staying power. It will be interesting to see if those politicians elected in November 2012 are able to accurately access the long term trends of importance to the US economy, or whether they are myopically intent on ensuring a collapse of consumer and government spending in 2013 while guaranteeing the wealthy continue to get their historically generous tax cuts for another decade.
“2nd Quarter 2012 U. S. GDP:
Why U.S. Slowdown Will Continue”
Dr. Jack Rasmus
Copyright July 2012
On Friday, July 27, 2012 the US Department of Commerce released its report on Gross Domestic Product (GDP) results for the 2nd quarter for the US economy, with GDP revisions for the economy as well from 2009 through 2011.
Last winter the broad consensus among mainstream economists, politicians and the press was the US economy was finally on the way to recovery. Economic indicator after indicator was flashing green, they argued, proving recovery was in full swing. GDP for the 4th quarter 2011 recorded a moderately healthy 4% growth rate and was predicted by widespread sectors of the media would continue. But GDP numbers just released on July 27, 2012 show that 4% growth dropped precipitously by half, to only 2%. And in the latest report issued last week, 2nd quarter 2012 GDP continued to fall further to only 1.5%.
GDP for the first half of this year therefore has averaged about 1.7%–which is about the same 1.7% GDP growth for all of 2011. The US economy, in other words, is not growing any faster this year than it did last year. It is essentially stagnant, unable to generate a sustained recovery despite $3 trillion in spending and tax cuts over the past three and a half years. This scenario will at best continue, and may alternatively even worsen in the coming months; and if not worsen this year, certainly so in 2013.
This rapid slowing of the US economy in 2012 was predicted by this writer early last December 2011, in a general economic forecast for 2012-13 that appeared in the January 1 issue of Z magazine. Contrary to the 4th quarter 4% GDP trend, in December 2011 this writer contrarily predicted “the first quarter of 2012 will record a significant slowing of GDP growth” and “the US economy will weaken further in the second quarter, 2012”.
The US economy has been essentially stagnant for at least the past two years, bumping along the bottom at a sub-par 2.5% GDP growth rate. The economy needs to grow in excess of 2.5% for net job creation to occur. Given the economy’s longer term 1.7% growth rate, it is not surprising net job growth the past three months has averaged barely 80,000 a month—i.e. well below the 125,000 or more needed just to absorb new entrants into the labor force. So we are in fact losing jobs again this year, 2012, despite what the official unemployment rate says.
Readers should note this 1.7% sub-par GDP growth the past 18 months has occurred despite the $802 billion tax cut passed by Congress in December 2010, virtually all of which was tax cuts for businesses and higher income household investors. In fact, it was more than $802 billion if further tax cuts for small businesses over the past 18 months are also factored into the total. Perhaps as much as $900 billion in pro-business/investor tax cuts have been passed, which have had minimal to zero impact on the economy and job creation. So much for that myth, and conservative-corporate ideology constantly pushed by politicians and the press, that ‘tax cuts create jobs’. Readers should keep that factual absence of any positive relationship between tax cuts and jobs and economy in mind, when more tax cuts for corporations and the wealthy are proposed by both parties once again as part of the year end deal coming immediately after the November elections. Expect both sides, Republicans and Democrats alike, to agree on reducing the top bracket tax rate on personal and corporate income both, from current 35% to at least 28% (the old Reagan years rate).
1st Quarter GDP: Temporary Growth Factors Disappear
While the hype about economic recovery was in full swing last winter, this writer pointed out in various publications that the 4th quarter GDP numbers were based almost totally on one-off developments that would disappear by mid-year 2012. At least half of the 4th quarter’s 4% growth rate was due to business inventory spending, making up at year end for the collapse of the same in the preceding 3rd quarter. Auto sales driving consumer spending was also noted as a temporary effect, given they were based on deep discounting and temporary demand that would not continue. Business spending that surged in the 4th quarter was also identified as temporary, as it was driven by year end claiming of tax credits, while manufacturing export gains in late 2011 would soon diss