This past week the US government announced the US economy rose in the January-March 2016 at a mere 0.5% annual growth rate. Since the US, unlike other countries, estimates its GDP based on annual rates, that means for the first quarter of 2016 the US economy grew by barely 0.1% over the previous quarter in late 2015.
Growth this slow indicates the US economy may have “slipped into ‘stall speed’, that is, growth so weak that the economy loses enough momentum and slides into recession”, according to economists at J P Morgan Chase.
Has the US economy therefore come to a halt the past three months? If so, what are the consequences for a global economy already progressively slowing? What will an apparently stagnating US economy mean for Japan, already experiencing its fifth recession since 2008? For Europe, stuck in a long term chronic stagnation? And for emerging market economies, struggling with collapsing commodity prices and currencies, rising unemployment, and long term capital flight trends? Once heralded as the only bright spot in the global economy, the US economy now appears to have joined the slowing global trend.
Some Interesting Trends
Last quarter’s 0.5% US GDP may indicate the US economy is even weaker than it appears. The US economy’s recent 0.5% growth rate is the latest in a steady declining US GDP growth trend over the past year. In the previous fourth quarter 2015, the US economy grew 1.4%, which was down from the preceding quarter’s growth of 2% and before that 3.9%. So the US economy appears to be slowing rapidly over the past year.
Over an even longer period of more than eight years, since the previous peak growth in late 2007, the US economy has grown by a cumulative total of only 10.1%. That’s a paltry annual growth of only 1.2% a year on average for the past 8+ years.
But even those figures are over-estimated. In 2013 the US redefined the way it estimated GDP, adding categories like R&D expenses and other intangibles that artificially boosted US GDP estimates simply by redefining it. That ‘economic growth by redefinition’ raised GDP by around 0.3% annually, and in dollar terms by roughly $500 billion annually. So the real US GDP may be actually growing by less than 1% on average per year since 2007; and the most recent quarter, January-March 2016, may not have grown at all, but may have stagnated, come to a halt.
Behind the Wizard’s Curtain
The media and press like to define recessions as two consecutive quarters of negative GDP growth. Actually, US economists tasked with declaring when a recession has begun or has ended don’t rely totally on GDP estimates, which are notoriously inaccurate and have become increasingly so, given US and other governments’ penchant for changing how they define GDP.
Redefining GDP to boost the appearance of growth is not just a problem in the US in recent years. For example, there are few independent research arms that think China is growing at its officially announced 6.8% GDP rate. To note but a couple, both Capital Economics and Lombard Street research estimate that China GDP is growing at only around 4-4.5% based on close examination of other indicators like electricity usage, power generation, local transport volumes, and so forth. In recent years India officially nearly doubled its GDP overnight by redefining it. So did Nigeria. India bank researchers whom this writer has talked to have a rule of thumb: take the official government GDP rate and half it and that’s probably close to India’s actual GDP. In Europe, a number of economies, including Britain, desperate to raise their GDP in recent years, now include drug smuggling and prostitution services in their estimates of their GDP. How they come up with such estimates and the pricing of such services is, of course, interesting.
Not satisfied with the media-press definition of a recession as two consecutive quarters of negative GDP, US economists at the National Bureau of Economic Research, who are tasked with declaring the beginning and end of a recession, look at various economic indicators—like industrial production, retail sales, exports-import trends, and other sources. A recession may occur in just one quarter; or may require more than two.
Looking at these other indicators for this past January-March 2016 period, the US economy appears even more likely headed for a recession sooner rather than later.
US industrial production (manufacturing, mining, & utilities) declined at an annual rate of -2.2% this past quarter, after having declined -3.3% the preceding quarter in late 2015. Industrial production has fallen six of the last seven months. US industrial capacity is now at its lowest point since 2010.
Business investment is another trouble spot. Investment in business structures fell by -10.7% and investment in new equipment by -8.6%, the latter the biggest drop since the 2007-09 recession. Business inventories rose barely, by the smallest amount in two years, continuing a slowing trend of the past nine months.
And what about consumption, which constitutes about two thirds of the total US economy? Consumer spending was growing at a monthly rate of only 0.1%. Retail sales, the largest element of consumer spending has fallen every month on average during the period. And after having sustained retail sales in previous years, auto sales, a large component of retail sales, declined for the second consecutive quarter during the January-March period. The outlook for consumer spending recovery is also not bright. A recent Gallup poll reported that 60% of those interviewed indicated the US economy was ‘getting worse’. Reflecting the poor demand for consumer goods, US consumer prices now hover on the brink of deflation, falling at an average monthly rate of -0.1% for the quarter.
What’s a Relapse?
The performance of the US economy this past January-March, a trend that appears is continuing into April, represents what this writer has called an ‘economic relapse’. A relapse is a collapse of economic growth for a single quarter, to near zero or even negative growth.
The US economy has experienced now five such single quarter relapses since the 2007-09 recession was officially declared over. The economy collapsed to 0.1% in early 2011, to 0.2% in late 2012, declined again by -2.2% in 2014 and collapsed to 0.2% in 2015.
Relapses are the consequence of ‘epic’ recessions such as occurred in 2007-09, which are typically characterized by short, shallow recoveries that slip repeatedly into periodic bouts of renewed stagnation. They are the result of near total reliance on central bank monetary policies that are designed to boost stock, bond and other financial markets—and thus the incomes of rich investors—but which fail to generate a sustained real economic recovery. Fiscal policies designed to stimulate consumption and good paying jobs are rejected. That almost perfectly describes US economic policy the past eight years.
Despite the facts, US government politicians and Federal Reserve bank officials continue to run around publicly declaring that the US economy is performing well. They like to cite the 200,000 jobs allegedly created in recent months. But a closer examination shows the jobs being created are part time, temp, contract, low paid, no benefit service jobs. Jobs that generate no overall wage increase for the economy and no real income gains for working people.
Young workers 30 years old or less are especially hard hit by this ‘well performing US economy’. A recent study by the Center for American Progress, for example, showed that 30 year old workers earn today the same pay, adjusted for inflation, that 30 year olds earned back in 1984.
Despite all that, President Obama continues to tour the country complaining that he doesn’t get enough credit for bringing the US back from the worst recession since the 1930s depression. He should tell that to the millions of millennial young workers, with low paid crappy service jobs, with no medical insurance, having to live at home with relatives because they can’t afford to rent an apartment, and with no prospects for meaningful change on the horizon. No wonder they’re rallying around Bernie Sanders, who continues to capture 85% of their votes in the presidential primaries. Obama (and Hillary) will have a hard time convincing them all is well—and an even harder time getting them to vote Democrat in the coming election in November.
Jack Rasmus is author of the recent, 2016 book ‘Systemic Fragility in the Global Economy’, by Clarity Press, soon translated into a Chinese edition, and the forthcoming June 2016 book, ‘Looting Greece: The Emerging New Financial Imperialism’, also by Clarity Press. Jack blogs at jackrasmus.com.