In January, when the Bureau of Economic Analysis released its GDP data for the fourth quarter of 2011, I explained that it was…
…bad news for the American people. And it is scathing evidence that Obama’s and the Democrats’ big-government spending policies, including the ARRA “Stimulus bill”, have been a complete disaster and a reckless waste of money. Year-to-year growth, from 2010 to 2011, was a minuscule 1.7 percent, adjusted for inflation. This number alone shows that the enormous deficit-driven government spending since 2009 has done absolutely nothing to put the economy back on track. The private sector is in as big a mess as it could be. Business investments, which according to established theory and historic evidence should be recovering by now, are almost in a state of depression. The echoes of the stimulus bill are bouncing off the walls of empty office buildings and closed-down factories across America.
I also noted that private consumption figures were well below their long-term average, and that the pattern of private consumption was still at classic recession levels. In other words, no recovery in sight.
Now the BEA has released its GDP data for the first quarter of 2012, and my verdict from January still stands.
To begin with, year-to-year inflation-adjusted growth is down. In the first quarter of 2011 the U.S. economy grew by 2.2 percent over the first quarter of 2010. In Q1 of 2012 the year-to-year growth rate is 2.1 percent. If Obama’s recovery policy had worked and put us on a traditional recovery path, we should have at 3+ percent growth by now. We are at the very least one full percentage point below where we should be, provided again that we were on a recovery path.
Since the GDP growth rate has actually slowed down marginally, we now have yet another round of GDP data that confirms the utter failure of the Obama administration’s anti-recession policies.
The largest variable in GDP is private consumption. Year-to-year growth war 2.8 percent in Q1 of 2011 over Q1 of 2010, but only 1.9 percent in the first quarter of this year. Every main category – durable goods, non-durable goods and services - is down. Services, which make up 64 percent of private consumption, is growing at a scant 1.3 percent (1.5 percent a year ago). Non-durable goods, representing just over one fifth of private consumption, has come to a virtual standstill at 0.6 percent (2.7 a year ago).
Non-durables are sensitive to inflation. This is the category where much of our daily expenses shows up. As the BEA notes in a separate commentary, inflation is disturbingly high and resilient above 2.5 percent. Even after energy prices are removed, consumer price inflation still lands at 2.2 percent. This is a figure we should be seeing in a strong growth phase, not at this point in a recession. Nevertheless, inflation explains the depressed nature of non-durables consumption, which in turn reflects a relatively pessimistic mood among consumers.
Gross fixed private investment, popularly known as business investments, is a category that spans across all sorts of expansion of real capital: from private residences to computer equipment and software. In fact, computer equipment and software now constitute 62 percent of all gross fixed investment in the United States, which is both good and bad. The upside is that we are a still a high-tech nation and home to tech-savvy businesses; the downside is that computer equipment and software are much easier to move from one location to another – even overseas – than, e.g., a manufacturing building.
This is important to keep in mind when we note that investments in computer equipment and software increased 7.8 percent from Q1 in 2011 to Q1 in 2012. This is a high figure, but a year earlier it was 13.4 percent.
Total private investment was still up 8.7 percent, a healthy figure in itself and higher then the 7.4 percent from a year before. This remains the only really good spot in the economy, and not even that is necessarily a sign of economic strength for America. It coincides well with the rapid growth in exports over the last two years: in Q 1 of 2011 exports of goods were up 8.9 percent; in Q1 of 2012 goods exports are up 4.1 percent. With a total growth in goods exports of 13.4 percent in two years manufacturers do need to invest in new facilities. That said, exports go to foreign markets and do not necessarily multiply (“transmit” for Keynesophobes) to the rest of the economy. European countries that have promoted exports for a long time – Belgium, Netherlands, Ireland and Sweden are good examples – have not seen their domestic sectors, or their standard of living, rise even closely on par with the rise in exports.
In other words, we cannot hinge a recovery on rising exports. The slowdown in the growth rate of goods exports also indicates that we might see the beginning of the end of a brief export boom. If so, private investments will fall again soon.
Finally, time for some joy. This table reports the change in government spending:
|2012 over 2011, first quarter|
|Government consumption expenditures and gross investment||-2.1%|
|State and local||-1.9%|
This is the second year in a row with falling government spending. It is good news on a short-term basis because it shows restraint at, especially, the state and local levels. However, there are two reasons to take these numbers with a grain of salt. First, they do not reflect entitlement spending. When government gives away money in the form of entitlements, it hands out cash that does not pay for any good, service or work. That transaction does not count toward GDP and can therefore increase rapidly without being seen here. This has nothing to do with flaws in the way GDP is counted – it is simply a matter of how GDP is defined and what it is designed to tell us.
Secondly, entitlement spending is rising in America, and when this coincides with a drop in government consumption and investments we have a situation that is potentially precarious. When an economy enters a debt crisis of the kind seen in Greece, one of the first signs is a shift in the composition of government spending from consumption and investments over toward entitlements. My upcoming research paper on austerity – will be on SSRN early next week – explains this mechanism in more detail; for now, let me issue a note of caution and return to it when the second quarter figures are published in July.
Overall, the GDP data for the first quarter of 2012 confirms that we are stuck in a recession and that nothing the Obama administration has done has helped put the economy into recovery mode. Unless a miracle happens in the next three months, we won’t see a recovery until we have a fundamental change in economic policy. It is safe to say that this won’t happen under the current administration.