Should we get used to slower growth?

Yesterday's GDP report indicated that growth slowed to 2.1% in 2019:4.  This is basically the same rate as prevailed in the last two quarters.  Most economists believe this indicates the long term growth potential for the US because (1) the economy is at full employment, (2) labor force growth is likely to remain modest because of population aging and immigration restrictions, and (3) declining productivity growth.

Will this be the new normal?  It is clear that the cut in corporate taxes in 2017 so far has not launched the GOP-promised surge in corporate investment.  The stimulus from the household tax cuts is in the rear-view mirror.  As for the Fed, it is hard to cut interest rates when rates are near zero.

Coronavirus may very well result in a dip in GDP growth in 2020:1 and election uncertainty could be a drag for the coming year.  On the plus side, 3.5 percent unemployment has resulted in rising incomes for those who have not fared well since the Great Recession.  Continuing that trend would be no small accomplishment.

Happy days are here again?

Well maybe we should not put the champagne on ice quite yet, but there were two very good bits of news today.  One day after being unable to agree to meet for a pre-summit summit, the European Union has come up with a plan to (hopefully) deal with the sovereign debt crisis.   Greek bond holders are going to take a 50% hit, European banks will need to raise new capital, and there is now a bigger fund to try to stop the Greek crisis from spreading to other countries.  We will need at least 48 hours to digest all of the details of this deal, but at least they came up with something. 

The other good bit of news is the third quarter GDP report which showed a decent 2.5 percent growth rate.  Given all of the fears of a double dip recession, this is about the best we could hope for.  Consumer spending and business investment both picked up. 

The stock market celebrated with a 3 percent increase.  Let's hope it sticks

Feldstein: Economy is even worse than recent numbers indicate

Not-so-cheery WSJ op-ed from Marty Feldstein earlier this week.  Of the anemic 1.8% GDP growth number for the 1st quarter, 2/3 of the growth came from increased inventories.  Also March was the only month with any significant growth.  Feldstein criticizes the stimulus package, fears of impending tax increases associated with Obamacare and the possible end of the Bush tax cuts in 2013, lack of progress on the debt, and concerns about the future value of the dollar.  Marty's preferred cure: tame the deficit by cutting government spending and eliminating certain deductions and exemptions from the tax code, a decrease in corporate and individual tax rates, and serious reform of Social Security and Medicare. 

Third quarter GDP growth lags again

Another disappointing (but not surprising) GDP report for the US in the 3rd quarter: up 2%, slightly better than 1.7% in the 2nd quarter but nowhere near the 3% plus rates needed to bring down unemployment.  WSJ reports that much of the growth came from businesses expanding inventories, investing in equipment and structures.  Household consumption grew 1.8 percent, the highest rate since 2006.  For more details, see the press release from the Bureau of Economic Analysis. 

German GDP growth surprises

Today's second quarter GDP growth report for the European Union is a mixed bag overall, but contains very good news for Germany which had its fastest growth since reunification.  German growth in 2010: 2 increased by 2.2 percent compared to 2010:1; most forecasts predicted a 1.3 percent increase. 

This is noteworthy for two reasons: (1) Germany is Europe's largest economy so more rapid growth there should help other EU nations and (2) many US economists have criticized the Germans for not doing enough to stimulate their economy.  To get some perspective, the German stimulus package was 50 billion euros, roughly 1.6% of GDP, whereas the US stimulus package in the same year was $787 billion, which clocks in at about 5.5% of GDP.  There are some differences in the timing of the stimulus in each country, with 71% of the German stimulus hitting in 2009 and the rest hitting in 2010.  In comparison, about 15% of the US stimulus went into effect in 2009, 30% in 2010 and the rest in 2011 through 2019. 

Bottom line: expect the German report to stimulate mucho discussion about the effectiveness of the US package.  Warning label: do not read too much into numbers from one quarter. 

Today's GDP report

The headline is not encouraging -- growth in 2010:2 was 2.4 percent, well below the 3.7 percent of 2010:1 and the 5 percent at the end of last year.  The NYT writeup is pretty pessimistic for the second half of the year, as concerns mount about Chinese bubbles, Greek defaults, and Washington's phaseout of federal stimulus spending. 

There was some encouraging news: nonresidential fixed investment (mostly buildings and equipment) increased by 17 percent in 2010:2.  This means that businesses think there are growth opportunities in the future.  It also could reflect recent legislative changes:

... you can understand that businesses don’t have to pay health care on equipment and software, and these get better tax treatment than you get for hiring people. If you can get away with upgrading capital spending and deferring hiring for a while, that makes economic sense, especially in this uncertain policy environment.

Why some expect a slow recovery

I do not normally link to op-eds by politicians, but last week's WSJ piece by GOP Reps. Hensarling and Ryan is noteworthy for some of the points that they make about government policies and incentives. Hensarling and Ryan are pessimistic about the recovery because (1) the Obama stimulus package did not create any new incentives to work or invest (of course neither did the Bush stimulus a year earlier), (2) the Bush tax cuts expire in 2011, (3) in the takeover of GM and Chrysler the government stiffed secured creditors (e.g., bondholders), and (4) expected future taxes associated with health care and climate change legislation. The combination of higher taxes, uncertainty about regulatory outcomes and massive deficits imposes a huge drag on the recovery. On top of that I would add these considerations: small and medium sized businesses with solid financials still cannot get access to credit and households are reluctant to take on more debt. What Hensarling and Ryan do not mention is that most of the federal stimulus has yet to arrive and the Fed is keeping short term interest rates quite low.

Too much pessimism?

Interesting column in today's NYT from David Leonhardt about the prospects for a robust recovery. Most prognosticators (yours truly included) are not very upbeat about the odds of a quick bounce-back. Many solid businesses are still having trouble raising funds and the bailouts are unlikely to last forever; so what will kick in? Leonhardt cites four possible scenarios for a GDP jump start: (1) China revalues its currency and encourages more domestic consumption; (2) American shoppers cannot stay hunkered down forever; (3) more stimulus (next year is an election year); and (4) the unknown -- no one saw the internet coming in the 1990s, after all. The latter angle is the one that I find most intriguing; we should never underestimate the impact of innovation and technical change.

China closing in on Japan -- what does it mean?

Story in today's NYT reports that China will soon overtake Japan as the world's 2nd largest economy. This is happening for two reasons: (1) economic growth has resumed its rapid pace in China and (2) Japan's economy will flatline as rising standards of living are offset by depopulation (low birth rate and virtually zero immigration).

What does this really mean, however? Some caution is warranted -- after all, what did being the world's biggest auto company do for General Motors? It does mean that China will play an increasingly important role in global trade and finance. The US continues to be a significant borrower, so it would be wise to maintain good relationships so that the Chinese continue to buy dollar-denominated assets. A sharp rise in interest rates or a quick drop in the dollar would not help at this time.

On the other hand, everyone would do well to keep in mind that Chinese standards of living lag significantly behind those in Japan or even Taiwan. Click on the graph that accompanies the Times article to see how far China has to go in this dimension. American visitors see the modern marvels of the cities, which makes it easy to forget that China remains primarily agricultural.

No green shoots in retail

Most economists, including myself, are fairly confident that the economy has at least bottomed out. The report on retail sales that came out yesterday (WSJ gated, NYT ungated) indicates that the recovery is not going to start with a consumer rebound. No retail sector seems immune; Target down 6%, Saks down 15%. Retail execs do not expect matters to improve for another year; some chains are cutting back further on inventories and cutting back holiday orders.

The other candidates for driving the recovery are investment, exports and government. Investment has three major components: plant and equipment, housing, and inventories. Housing has been doing slightly better the last three months, but I would not place any bets on a housing resurgence any time soon. Will firms be willing to invest in big ticket items and inventories if consumer spending stays flat? Don't count on it. As for exports, they are driven by GDP growth in other countries (which actually is looking up) and the exchange rate. This has some potential.

The stimulus package will start kicking in later this year and next, so we can count on government spending to give a short term boost to the economy. But looking at the last 80 years of macroeconomic data, I cannot find any instances of a sustained economic recovery driven by government other than possibly World War II. Let's hope for better news from consumers soon!