Not only debt ceiling deal but worsening trade deficit negative for US growth

By John Ross

Numerous commentators have analysed the negative implications for US growth of the debt deal between President Obama and Republican leaders in the US Congress – this is considered below. But an aspect which should be integrated into analysis is that the drag on growth represented by the cuts in government spending in a debt deal will interact with another negative trend – the widening US trade deficit.

The primary causes of slow growth of the US economy are domestic – above all failure to overcome the severe fall in fixed investment which occurred during the ‘Great Recession’. However a secondary lowering of US growth is being created by its trade position - despite hopes that the decline in the exchange rate of the dollar would boost US net exports.

Instead of assisting US growth the US trade deficit has been widening – i.e. net exports are falling. The US trade balance, having reached a low of $25.5bn in May 2011, increased to $50.2bn in May 2011 - the latest month for which data is available. This is shown in Figure 1. Figure 2 shows the same data expressed as a three month moving average in order to remove the effect of shorter term fluctuations.

As a percentage of GDP, the deficit on US net exports has increased from a low of 3.4 per cent of GDP in the 4th quarter of 2010 to 3.9 per cent of GDP in the 2^nd quarter of 2011 – as shown in Figure 3. Over that period this represents a 0.5 per cent of GDP downward pressure on US growth. It is clear from Figure 3 that the gap is increasing.

Given these trends, at the best US net trade is therefore unlikely to increase US GDP growth and is more likely to reduce it. Any sources of US growth will therefore necessarily have to be domestically generated.

This evidently interacts with a debt ceiling deal. The reduction in projected US government spending in an agreement, others things being equal, will primarily reduce the increase in government and household consumption – the latter through cuts in social spending programmes. With this consequent downward pressure on the growth of consumption, and no boost coming from net exports, significantly higher US economic growth would require a large boost in the only remaining source of demand – investment. But no substantial measures are being taken by the US government to increase either government or private investment.

No boost from net exports, constrained consumption, and no measures to boost investment is simply to break down into components the constraints which now exist on US growth. Given both domestic and international trends, the long term slowing of the US economy previously analysed in greater detail by this blog will continue.

Figure 1

Figure 2

Figure 3

Weakness of the current US economic recovery compared to previous US business cyles

By John Ross

It has been pointed out that the present US economic recovery is the slowest since World War II. However the precise parameters of this are frequently not analysed nor are they placed in a longer term context. Both are significant as they show not only the cyclical situation but the continuation of a prolonged slowing of the US economy.

As regards the immediate weakness of the present recovery this is shown in Figure 1, which charts the course of US business cycles since 1973. The starting date in each case is the peak of the previous cycle and the numbers along the horizontal axis show the quarters since that peak. Also shown are a 2.6% growth trend line and a 1.6% trend line – these representing, as analysed below, 20 and 10 year moving averages for US GDP growth.

As may be seen not only was the downturn in US GDP in this recession deeper than in any previous one since World War II but recovery is far slower. The previous deepest decline in GDP in any US post-war recession was 3.2% following 1973 and by eight quarters after the previous peak in that cycle US GDP had regained its previous peak level. In the present cycle the maximum fall in GDP was 5.1% and 14 quarters into the cycle US GDP has still not regained its peak level. For comparison in the slowest previous US recovery, that following 1980, by 14 quarters after the peak of the previous business cycle GDP was already 4.9% above its previous peak level, whereas in this recession it is still 0.4% below it. In short this is both the deepest recession and slowest recovery in US post-World War II history by a considerable margin.

Figure 1

Even more significant strategically is the long term slowing of the US economy. This is illustrated in Figure 2, which shows a 20 year moving average for US growth with the latest data being for the 2nd quarter of 2011 – utilising such a long time frame removes the effect of purely cyclical fluctuations. The downward trend of US long term growth is clear. The annual average US GDP growth rate has declined from 4.3% in 1969, to 3.0% in 1990, to 2.6% by the 2nd quarter of 2011.

Figure 2

The current growth rate of the US economy is even lower if a 10 year moving average is considered. This is shown in Figure 3. By the 2nd quarter of 2011 the 10 year moving average of US GDP growth had fallen to 1.6%.

Figure 3

As noted, the 1.6% and 2.6% trend lines in Figure 1 therefore represent average 10 and 20 year growth rates for US GDP. As may be seen the recovery in the present recession is far lower even than these long term averages - which are themselves falls from previous levels.

In short the US economy is progressively slowing not only in cyclical terms but from a long term point of view. The present slow recovery is therefore not at aberration but a part of a long term trend.

Such a deep rooted slowing of the US economy clearly has major implications not only for the United States itself but for the pattern of development of the world economy.

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This article originally appeared on the blog Key Trends in Globalisation.

US GDP figures even worse than they look

By John Ross

The 2nd quarter 2011 US GDP figures, showing annualised growth of 1.3% in that quarter and a newly revised downwards annualised 0.4% in the 1st quarter of 2011, were interpreted as bad. But they are far worse even than they look at first sight.

First, the downward revision to the depth of the recession, to a trough of 5.1% in the 2nd quarter of 2009, means that instead of having already recovered its pre-recession GDP level the US economy remains 0.4% below its peak in the 4th quarter of 2007. This is shown in Figure 1.

Figure 1

Second, as shown in Figures 1, 2 and 3, it is misleading to draw attention to personal consumption expenditure, and its weak annualised 0.1 per cent increase in the 2nd quarter of 2011, as the key feature of the downturn. The really fundamental cause of the US recession is the collapse in fixed investment.

As may be seen from Figure 2, in the 2nd quarter of 2011 US GDP, in 2005 constant prices, was $56 billion below its peak level in the 4th quarter of 2007. However all major components of GDP except for fixed investment were already above their 4th quarter of 2007 levels – private inventories $37 billion above, government consumption $51 billion above, personal consumption $66 billion above, and net exports $159 billion above. However private fixed investment was $342 billion below its 4th quarter 2007 level – i.e. the entire decline in US GDP was due to the fall in fixed investment.

Figure 2

Nor was this decline in fixed investment entirely accounted for by the residential sector – see Figure 3. The overall fixed investment fall was divided essentially half and half between residential and non-residential fixed investment – the decline in residential fixed investment being $199 billion and the decline in non-residential fixed investment being $192 billion.

Figure 3

In short, as this blog has continuously pointed out, the core of the ‘Great Recession’ in the US, as in other countries, is not a decline in consumption but a huge fall in fixed investment. The ‘Great Recession’ is actually ‘The Great Investment Collapse’. Until this reality is grasped, and the policy consequences drawn, US GDP figures are likely to continue to surprise on the downside.

Meanwhile the latest US GDP data is shockingly bad - worse even than the features the official press release and initial press commentary concentrates on.

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This article originally appeared on the blog Key Trends in Globalisation.

Boris Johnson economic proposals should have put Londoners before bankers

Ken Livingstone has a new article taking apart Boris Johnson’s economic proposals, including the Tory Mayor’s call to get rid of the 50% top rate of income tax, on the Guardian's Comment is Free here.

It analyses ‘Boris Johnson's economic proposals, made following weak UK GDP figures this week and centring on cutting the top rate of income tax from 50%, are part of his campaign to be the next Conservative party leader. He is courting the Tory base, including its right wing. Proposing to cut income tax on those earning over £150,000 a year plays well with them…

‘Johnson's proposals… constitute part of his continuing policy of hitting Londoners in their pockets in pursuit of his political ambitions and record of backing bankers – the two coming together in Tory party politics. These proposals, however, are economically incoherent and uncosted…. Johnson's positions, both on tax and on fares, aid the best off. They do not help ordinary Londoners. The mayor should be putting Londoners first – not bankers or his political ambitions.’

BRICS say Greek bailout too soft on the banks

By Michael Burke

The rapid growth of the so-called BRIC economies (Brazil, Russia, India and China) is providing a global benefit in terms of economic growth. But their increasing weight in the world economy will also provide a growing benefit specifically to all the European economies, and most especially the majority of citizens in the most crisis-hit countries.

The latest example of this arises in relation to the Greek crisis. Because of their more rapid growth the BRIC economies subscription of the funds for the IMF are growing. Their weight in the IMF is growing as a result, where previously the interests of the US have always held sway. It is clear from a report in the Financial Times on July27th that representatives of the BRICs are unhappy with the term of the latest bailout involving Greece. The complaint is twofold - that the austerity measures imposed on Greece are too harsh and the level of losses imposed on the banks is too small.

According to the FT, ‘Paulo Nogueira Batista, who represents Brazil and eight other countries on the IMF’s executive board, said the Greek government’s austerity plan was too tough and the restructuring of Greek debt held by European banks was too small.

“Greece is not having an easy time,” he told the FT. “The mostly European private creditors of Greece have had an easy time.”’

Mr Batista also went on to argue that, while there were suspicions about bias towards European bondholders (EU banks), Christine Lagarde the new IMF MD and former French Finance Minister had the perfect opportunity to dispel such suspicions (by taking a tougher line on bank losses).

Further, the FT reports, ‘Arvind Virmani, the Indian executive director on the board, said the plan dealt with short-term cashflows but left Greece with a large and precarious sovereign debt stock, threatening further defaults.

“I am not convinced [the plan] addresses the basic problem of liquidity versus solvency,” he said, adding the fund had dodged the question for more than a year.’ The clear implication is that Greece requires further debt write-offs if it is to become solvent.

Both men also argued that the size of the IMF loan would be unacceptably large and would not have been made available to a developing country. The obvious implication is that either European taxpayers or bondholders should make a greater contribution- and it was clear that their preference is for the banks to take greater losses.

According to the latest official documents, the debt-reduction for Greece will be €26.1bn, less than 12% of total debt outstanding of €350bn. Clearly, this is a welcome first step but wholly insufficient to bring about solvency. Once all forms of ‘credit enhancement’ (very expensive insurance) on the debt being restructured are paid for, the total estimated debt reduction is actually smaller than the €28bn projected level of Greek privatisation receipts.

As the BRIC representatives say, the cuts are too harsh and the losses for bondholders too small. Politically, as well as economically, the rise of the BRICs is a major benefit. Progressive forces in Europe (including Britain) and elsewhere should increasingly look to them. Not only is it possible to learn from their rapid growth, but it is also very valuable to have them as allies in the interests of the overwhelming majority of the population of Europe, and against the interests of the bankers.