posted June 8, 2013
U.S. GDP–A Longer Term Trend Analysis

Nearly daily in recent weeks, indicators of the US economy have fluctuated wildly. One day reports of manufacturing and factory orders show a declining economy, another day housing prices and residential home building appear to rise; the next day purchasing managers show a services (88% of the economy) employment trend of absolutely no gain in job creation, followed by a monthly jobs report from the Bureau of Labor Statistics that 170,000 jobs were created in May 2013. What to make of these conflicting indicators?

Stock and bond markets and investors—especially the average ‘herd’ mentality driven average types—become schizophrenic, buying one day and selling off the next. A true sign that the so-called ‘experts’ have no idea what’s coming next and that the US economy is churning and ‘frothing’, a sign of instability that could flip either way—toward more growth or toward a major relapse of the same.

As this writer has argued on numerous past occasions, the ‘experts’—whether of the business press or professional economist variety—tend to focus and hype the most recent report and indicator as revealing the ‘true’ emerging trend. But a better view is to consider the longer term trends behind the daily numbers and latest report. Furthermore, to factor in to this purely economic data analysis considerations of government (US and global) economic policy shifts, as well as highly potential ‘tail risk’ developments (a bank crash, a ‘Cyprus’ event, intensification of a currency war, etc.).

With that in mind, what follows is this writer’s analysis of the ‘longer term’ apparent trend in the US economy over the past year—as reflected in US Gross Domestic Product (GDP) numbers. However, US GDP is notoriously insufficient to fully reflect the US economic trend, for various reasons that will not be discussed here, except for two points: one is that US GDP does not accurately reflect the rate of inflation and therefore the proper adjustment for inflation to get ‘real GDP’. It underestimates inflation, thereby overestimating real GDP. It also fails to account for population growth and therefore real GDP per capita, which is the real estimate of how well the economy is doing. There are other major issues with GDP calculation that result in its overestimate of real US economic growth, that will remain unaddressed for now.

Despite its limitations, however, GDP is still the best of the worst indicators of the general state of the US economy. What follows, therefore, is an ‘intermediate’ term analysis of US GDP, over the past four quarters since summer of 2012. What it reveals is that the US economy is not accelerating onto a path of more sustained growth; to the contrary, that growth is slowly declining, which means all the hype based on short term, monthly reports and indicators should be considered with a good dose of skepticism.
Over the past year, July 2012 to June 2013, it appears US GDP has been fluctuating between virtually zero growth and 3%. But when special one-time, one off factors are adjusted for, the average growth rate is actually no more than 1.5% on average—or about the same average growth in 2012 and 2011. In other words, the economy has remained stuck in an historical, well below average recovery for the past two and a half years. Moreover, when properly further adjusted for actual inflation and for population growth, the US growth rate is averaging well less than 1% annually—i.e. has been stagnating for some time.

For example, in the 3rd quarter 2012 GDP rose by 3.1%. But the growth was heavily determined by a one time major surge in government spending, largely defense expenditures. Politicians typically concentrate spending before national elections and 2012 was no exception. That one time surge in defense federal spending was clearly an aberration from the longer term government spending trend since 2010, which has been declining since 2011 every quarter. The same pertains to state and local government spending.

The 3rd quarter 2012 defense spending surge reverted back to its longer term trend in the 4th quarter 2012. The economy and GDP then quickly collapsed to a meager 0.4% GDP rate, after being upward revised from a -0.1% actual decline. Whether -0.1% or 0.4%, when averaged with the preceding quarter’s 3.1%, the result was about 1.7%–which has been the average annual growth for the past two and half years.

The 4th quarter would have been even lower were it not for a surge in business spending on equipment in anticipation of a possible tax hike with the ‘fiscal cliff’ negotiations scheduled to conclude on January 1, 2013. But that late 2012 business equipment spending surge has also proved temporary as well, flattening out and declining in 2013. Another one off event then occurred in the 1st quarter 2013: a rise in business inventory expansion, which account for a full 1.5% of the total 2.5% of the 1st quarter 2013 GDP. And that one time exceptional event disappeared too in the 2nd quarter. So when the temporary, one off effects of pre-election government defense spending, business equipment spending at year end, and inventory surge in early 2013 are ‘backed out’ of the longer term trend, that longer trend is a GDP growth of no more than 1.5%–or about half that normally at this stage, five years after the recession.

As noted previously, moreover, even that is an overestimation. What’s important is real GDP, not just price increases for goods and services. So adjustment is typically made for inflation. But the official inflation index used to calculate real GDP is called the ‘GDP Deflator’, the most conservative measure of inflation; that is, the index that minimizes inflation the most. And by minimizing inflation, the result is to maximize real GDP, making GDP appear larger than it actually is. For example, both the Consumer Price Index (CPI) and the Personal Consumption Expenditure Price Index (PCE) record a significantly higher inflation rate than the GDP Deflator, and therefore a significantly lower real GDP than the Deflator index. Using the CPI, the average for GDP since July 2012 through March 2013 would be well below 1.5% and likely closer to 1% average growth. Finally, when population growth is taken into account and ‘per capita GDP’ is considered—i.e. the real effect of growth on real people—than the growth rate is adjustable further by another 0.5%. We’re now talking about US GDP and economic growth at a sub-par less than 1%. That’s economic stagnation and an economy drifting toward, and teetering on the edge, of another recession—a condition of fragility that would take little to push over the edge into another, ‘double dip’ recession.

For the past 18 months this writer has therefore been predicting that a double dip recession in the US is quite possible, and even likely, somewhere in the late 2013 or early 2014 timeframe should the two following conditions occur: first, the continuation of government program spending cuts and, second, a new eruption of a banking crisis in Europe which is today the weakest link in the global economy. This prediction is reiterated, adding now a third possible major disruptive factor: a shift in Federal Reserve Monetary policy (slowing or stopping its current $85 billion per month ‘quantitative easing’ (QE) money injection into the economy) that would result in a sharp upward rise in general interest rates in the US.

Stated alternatively: given the slowing global economy and the deepening recession and financial instability in Europe, should the US continue to implement additional fiscal spending cuts (aka ‘austerity American style’) late in 2013 and, simultaneously, have the Federal Reserve act such that interest rates continue to rise—then the probability is high the US economy will slip into another ‘double dip’ recession.

Perhaps anticipating this possibility, the US government agency responsible for calculating GDP, the Bureau of Economic Analysis, is planning this summer 2013 to significantly revise the way it does so. That revision will increase GDP by as much as $500 billion, according to a report by the global business daily, The Financial Times, this past April 2013. Already a relatively weakly accurate indicator of the performance of the US economy, GDP will likely soon become even more so.
In other words, while an actual double dip recession may occur later in 2013-14, especially when properly adjusted for inflation and population growth, it may nonetheless be conveniently ‘defined away’ by the forthcoming changes in its method of calculation.

Jack Rasmus, June, 2013

Jack is the author of the 2012 book, “Obama’s Economy: Recovery for the Few?; host of the weekly radioshow, ‘Alternative Visions’, on the Progressive Radio Network; and ‘shadow’ chairman of the Federal Reserve in the recently formed Green Shadow Cabinet in the US. He blogs at:, and his twitter handle is: #drjackrasmus.

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