Waist Deep in Stagnation
“We emphatically view present conditions as being among the most negative subset we’ve observed in the historical record.”
– John Hussman Ph.D., Hussman Funds
The weakest recovery in the post-war period, is getting weaker. The Commerce Department reported on Friday, that US Gross Domestic Product (GDP) in the first quarter (Q1) slowed to an anemic 2.2 percent annual rate, a sharp dropoff from the previous quarter’s 3 percent. While the headline number portends deepening economic stagnation, the immediate concern is the steady decline in government spending and business investment. Total government spending contracted for a 6th straight quarter and subtracted 0.6 percent from first quarter growth. At the same time, business investment fell at a 2.1 percent annualized rate, indicating an unwillingness on the part of US corporations to deploy their record $3 trillion war chest. Forecasts for the second half of the year will have to adjust for shrinking disposable income, an unexpected slide in 5 of 6 manufacturing indices, and the declining vitality of the underlying economy.
Here’s a more background from The New Yorker:
“If you delve into the Commerce Department report, you can find some even more disappointing numbers. Setting aside the production of inventories—goods that companies add to their stockpiles in anticipation of selling them later—the economy grew by just 1.6 per cent in the quarter. Capital investment, which should be surging at this point in the recovery, hardly rose at all. And personal disposable income—the amount of money people have to spend after paying taxes—expanded by just 0.4 per cent.
On the face of it, these figures suggest that the recovery, which began in the summer of 2010, is faltering badly. Skeptics who have long cast doubt on the U.S. economy, even raising the possibility of a double-dip recession, seized upon the details of the figures. “For how long can consumption grow much faster than income and households run down their savings as income growth in Q1 was very mediocre?” Nouriel Roubini (a.k.a. “Dr. Doom”) tweeted.” (“G.D.P. Puzzle Holds Key to the Election”, John Cassidy, The New Yorker)
Although the real rate of growth is just 1.6%, some analysts still question the way the Commerce Department makes its calculations. The BEA uses so-called “deflaters” to figure the rate of inflation which it pegs at 1.54%. Rick Davis of Consumer Metrics Institute, has a problem with that as he explains in a recent post on his blogsite:
“If the raw “nominal” numbers were instead “deflated” by using the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period, nearly the entire headline growth rate vanishes — and the resulting growth rate would have been a minuscule 0.08% with “real final sales” contracting.
And real per capita disposable income actually shrank during the quarter — even using the BEA’s optimistic “deflaters.” Real-world households likely felt the pinch even more.” (“Breaking Down First Quarter 2012 GDP Numbers”, Rick Davis of Consumer Metrics Institute)
By Davis’s calculations, the economy is growing by less than 1 percent, which means there is really no recovery at all. The US economy is essentially DOA and could slip back into recession by early summer. Here’s more on that topic by John P. Hussman, of Hussman Funds:
“My impression is that investors and analysts don’t recognize that we’ve never seen the ensemble of broad economic drivers and aggregate output (real personal income, real personal consumption, real final sales, global output, real GDP, and even employment growth) jointly as weak as they are now on a year-over-year basis, except in association with recession. All of these measures have negative standardized values here. My guess is that we’ll eventually mark a new recession as beginning in April or May 2012.” (“Run, Don’t Walk”, John P. Hussman, Ph.D., Hussman Funds)
The economy has been on life support for 4 years and is still unable to stand on its own. The signs of weakness are visible everywhere, from the disappointing durable goods report, to the higher initial weekly jobless claims, to faltering industrial
production, to the ongoing depression in the housing sector. Here’s a clip from a post by Comstock Partners at Pragmatic Capitalism titled, “The stock market is at risk a major selloff”:
“The Chicago Fed National Activity Index (CFNAI),has declined for three consecutive months and entered negative territory in March. From what we see so far in the current numbers, another drop is likely in April as well. The significance of the above data is reinforced by ECRI Weekly Leading Indicator. On December 10th the ECRI dropped to 5.25% below a year earlier, a level that indicates a high probability of recession. In fact, since 1968 the ECRI leading indicator has declined to that level or below only six times, and each time a recession began either a few months before or a few months after. There has never been a false call, and this is the first negative call since January 2008. Since most serious investors follow the same economic releases that we do, they must be aware of the fragility of the current recovery, particularly given the household debt burdens and the problems in Europe and China as well as the so-called “fiscal cliff” awaiting the U.S.” (“The stock market is at risk a major selloff”, Comstock Partners, Pragmatic Capitalism)
Stocks should fall sharply as high unemployment and declining business investment put pressure on earnings and send investors fleeing for the safety of US Treasuries. Up to this point, the Fed has been able to buoy stock prices by pumping liquidity into the financial system via Quantitative Easing (QE). But each round of bond purchases has had less impact then the one before. A third round of easing, will likely precipitate a selloff as conditions in the real economy progressively deteriorate. Analysts are now worried that the Fed’s actions will have “unintended consequences” that will be harmful to its reputation as well as damaging to the economy. Here’s an excerpt from a Bloomberg interview with Mohamed El-Erian, chief executive officer of Pacific Investment Management Co, who expresses his reservations about the Fed’s unconventional liquidity interventions and the way they are exacerbating inequality while increasing systemic risk:
“…El-Erian said central banks may be nearing the limits of their ability to spur growth and suggested that the “collateral damage” their policies are having on the economy and financial markets may soon outweigh the benefits.
“The unusual activism of central banks may, at the margin, have worsened further wealth distribution,” said El-Erian, whose company is manager of the world’s largest bond fund. “To the extent that such policy activism succeeds in bolstering asset values, but not the real economy, the rich benefit disproportionately.”…
“Central banks in advanced economies needed — and need — help from other policy-making entities to deal with the twin unfortunate reality of too much debt and too little growth,” said El-Erian.” (“Fed May Have Aggravated Income Inequality, El-Erian Says”, Bloomberg)
While quantitative easing has restored bank balance sheets to health, it’s done nothing to help consumers and households shed the debts they accumulated in the lead up to the Crash of ’08. In theory, QE is supposed to lower the cost of credit by reducing the supply of financial assets. While the program has doubled stock prices in the last 3 years, it has not ignited another credit expansion. In a liquidity trap, the demand for credit remains weak regardless of how low rates are. Deeply indebted people look for ways to “minimize their debts, not maximize their profits.” (Richard Koo). That’s why QE has failed, because it doesn’t address the core issue which is personal debt. It merely provides more reserves for financial markets that are already swimming in liquidity.
The real problem is not the availability of credit, (as Fed chairman Ben Bernanke believes) but the lack of income growth. Three decades of flatlining real wages have led to chronic overproduction and weak demand. Here’s how economist Henry C.K. Liu sums it up in an article titled “Stagnant Worker Wage Income Leads to Overcapacity”:
“In the economics of development, there is an iron-clad rule that “income is all”. The rule states that the effectiveness of developmental policies, programs and measures should be evaluated by their effect on raising the wage income of workers; and that a low-wage economy is an underdeveloped economy because it keeps aggregate consumer demand below its optimum level, thus causing overcapacity in the economy that needs to be absorbed by export.
Workers income is the key factor in generating national wealth in a country. Export through low-wage production is merely shipping under-priced national wealth outside the national border without adequate compensation, by under-pricing labor within the nation…..
This “income is all” rule has been mostly obscured in recent decades during which globalized foreign trade promoted by neoliberals has pre-empted domestic development as the engine of economic growth in all market economies around the world. In today’s game of globalized international trade, the new operative rule is that “profit is all” and that high profit in competitive export trade requires low domestic wages, even if low local wages retard domestic economic development by reducing aggregate purchasing power in the domestic market to cause overcapacity that rely on export.” (“Stagnant Worker Wage Income Leads to Overcapacity”, Henry C.K. Liu website)
The Fed has done nothing to strengthen demand or put the economy back on solid footing. Economic policy should focus on increasing wages, which is the easiest way to rebalance supply and demand, reduce widening inequality, and boost growth. Wages should be pegged to gains in productivity so that workers get a bigger share of the income. With more money in their pockets, and guarantees on health care and retirement, workers will be able to spend freely keeping the economic flywheel spinning at full-throttle. Unfortunately, policy is headed in the opposite direction as this report by the Economic Policy Institute suggests: ”
“Productivity in the economy grew by 80.4 percent between 1973 and 2011 but the growth of real hourly compensation of the median worker grew by far less, just 10.7 percent, and nearly all of that growth occurred in a short window in the late 1990s. The pattern was very different from 1948 to 1973, when the hourly compensation of a typical worker grew in tandem with productivity.
Reestablishing the link between productivity and pay of the typical worker is an essential component of any effort to provide shared prosperity and, in fact, may be necessary for obtaining robust growth without relying on asset bubbles and increased household debt. It is hard to see how reestablishing a link between productivity and pay can occur without restoring decent and improved labor standards, restoring the minimum wage to a level corresponding to half the average wage (as it was in the late 1960s), and making real the ability of workers to obtain and practice collective bargaining.” (“The wedges between productivity and median compensation growth”, EPI)
The current policy is not designed to stimulate demand, reduce unemployment, or increase productivity. The real objective is to shrink government so that private industry can grab a larger share of the national income. Austerity measures merely provide ideological cover for this ongoing process.
When federal, state and local governments trim their spending during a deleveraging super-cycle, overall activity sputters, leading to less business investment, fewer jobs, smaller incomes, and slower growth. And that’s why GDP is 2.2 percent. It’s the policy.
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). He can be reached at email@example.com.
1—See how cutbacks in “Real Government Consumption” have exceeded those in Europe: http://fatasmihov.blogspot.com/2012/04/euro-and-us-coordinating-austerity.html
2—Worse than Bush: More public employees have lost their jobs under Obama than under “you know who” http://krugman.blogs.nytimes.com/2012/04/25/american-austerity/
3–Manufacturing improved in April—ISM Manufacturing Survey registered 54.8 percent, an increase of 1.4 percentage points from March’s reading of 53.4 percent. The report contrasts with regional reports from Dallas, Kansas City, Empire State, Philly Fed Survey and Chicago PMI, all of which showed activirty had slowed in the last month. http://pragcap.com/manufacturing-indices-turn-sharply-lower