I am right, but I am not happy about it. It’s not fun to play the role of an economic Cassandra as people suffer horribly for bad decisions — that they did not make.
The parlous state of the U.S. economy has always been a theme of this blog. The very first entry in November 2009 expressed serious concerns that “negative shocks could significantly worsen the already weak economy.” (http://www.et1964.com/?p=12). This weakness has been fueled by high unemployment, high consumer debt, an insufficient and poorly designed stimulus package, budgetary problems in the states and overly cautious investors.
The alarm was repeated in September 2010 (http://www.et1964.com/?p=308) with two more added concerns — about likely Tea Party influenced spending cuts and the terrible housing market. My darkening view was, “Although other economists such as Paul Krugman and Nouriel Roubini have expressed concern about premature fiscal rectitude in the United States, my pessimism is even deeper than theirs. I am afraid that weak consumer demand, sluggish investment, falling housing prices and cutbacks in federal and state government spending could cause a full out depression. It’s still not the most likely outcome, but it’s becoming more probable. Although fiscal prudence is usually a virtue, this time it could lead to disaster.”
This warning was spelled out in stark detail in December 2010 with added concerns about the Euro, oil prices and continuing problems with education, health care, infrastructure and other competitiveness issues (http://www.et1964.com/?p=390). The title of the article was, “The Coming Depression”. The most recent article in this depressing series was posted on March 16, 2011 with predictions of annualized GDP growth below 1.0 percent (http://www.et1964.com/?p=519).
Unfortunately, the negative scenario outlined in March is coming true. This makes it very likely that GDP growth will dip below the current 1.8 percent to below 1.0 percent. Below is a breakdown of U.S. economic performance by consumption, investment, government, trade and other indicators:
Consumption, which is usually around 70 percent of the economy, is likely to stay weak. In May, the economy only created 54,000 jobs. As a result, after bottoming out at 8.8 percent in March, the official (U-3) rate rose two months in a row to 9.1 percent in May, 2011. The wider U.S. Bureau of Labor Statistics (BLS) measure of unemployment (U-6) that includes the unemployed, discouraged and underemployed was steady at just under 16 percent. Given the ruinous costs of unemployment to people and the economy, it’s hard to see this as good news.
The other data are not much better. BLS data show that nonfarm business sector labor productivity in the first quarter of 2011 grew only 1.8, down from by 2.6 percent during the last quarter of 2010. In addition, Gallup polling measures of unemployment rose to 10.3 percent — up from 10.0 percent in March. Underemployment, in which Gallup combines part-time workers wanting full-time work with unemployment, surged to a 19.9 percent, which is not much lower than the 20.4 peak in April 2010.
At the same time, long-term unemployment has become entrenched, making it harder for the jobless to preserve their skills and employability. BLS data show that the proportion of those unemployed more than six months rose to 45.1 percent of the unemployed, which is just shy of the 46 percent peak. The jobs recovery is dead.
These factors will likely keep consumption growth low — or may even push it into negative territory. Personal consumption in April 2011, grew at an anemic 0.4 percent rate. The most recent Conference Board Consumer Confidence Index fell sharply by 5 points to 60.8 in May, which is well below the 90 level that could signal a recovery. The consumer will not be driving this “recovery” soon.
Investment, which makes up 16 percent of the economy, is growing but at slowing rate. Fixed investment growth slowed to 3.4 percent in the first quarter 2011, down from 5.3 percent in the fourth quarter 2010 – and down again from a 10 percent rise in the third quarter 2010. Firms will likely to continue either hold substantial cash, bargain hunt or invest overseas. Domestic investment is headed to either weak growth or stagnation.
Government expenditures stand at 19 percent of the economy but could face significant cuts because of the Republican control of the House of Representatives. Federal government consumption expenditures fell by 7.9 percent in the first quarter 2011, compared with a decrease of 0.3 percent in the fourth quarter 2011. Since the Republicans are unwilling to countenance tax increases, spending reductions are likely to come in the most damaging ways such as reductions in safety net spending (which stabilizes demand), aid to the states and infrastructure. Distress in the state and local governments is already real. Real state and local government consumption fell by 3.2 percent in the first quarter 2011, compared with a decrease of 2.6 percent at the end of 2011. Further reductions of federal support will deepen poverty, undermine demand and worsen state government shortfalls of around $125 billion. This contractionary fiscal policy is a grave mistake given the weakness of the recovery. We may already be entering a double dip recession caused by a repeat of a 1937-style fiscal tightening.
Trade is the only bright spot, mostly because of the weak dollar. Exports of goods and services increased 9.2 percent in the first quarter 2011, compared with an increase of 8.6 percent in the fourth quarter 2010.
These factors don’t even include other issues such as the terrifying housing market, volatility in commodity prices and the dangerous brinksmanship over raising the debt ceiling (http://www.et1964.com/?p=590).
The pity is that this dismal scenario could have been avoided. If the stimuli has focused on recovery and employment, things could have been different. If taxes on the rich had risen and the wars had ended, the deficit would be so high — and there would be less desire to cut expenditures so much. If we had sent people to school, improved our infrastructure, supported state and local governments, improved public services and reduced the underwater mortgage problem, we might be in a much better place. None of these things happened — and we are much worse off for it.
Unfortunately, a timid Democratic administration and a reactionary Republican House are unlikely to make things better. The worst may be yet to come.
This article updates the economic situation outlined on March 16, 2009 at:
Some other earlier economics-related articles include:
http://www.et1964.com/?p=12 The Faltering Recovery
http://www.et1964.com/?p=249 America Falling
http://www.et1964.com/?p=308 The Coming Double Dip
http://www.et1964.com/?p=390 The Coming Depression
http://www.et1964.com/?p=519 The U.S. Economy – Recovery or Weakness?
http://www.et1964.com/?p=590 Hitting the Debt Ceiling
Policy-related articles include:
http://www.et1964.com/?p=99 What I Stand For
http://www.et1964.com/?p=155 In Praise of Taxes
http://www.et1964.com/?p=224 Liberalism Saved Capitalism
http://www.et1964.com/?p=231 Liberalism Saved Capitalism, Part II
http://www.et1964.com/?p=329 Beyond the Endless Darkness
http://www.et1964.com/?p=358 Progressive Pro-Business
http://www.et1964.com/?p=406 A Better Budget
http://www.et1964.com/?p=564 Where I am Conservative
http://www.et1964.com/?p=582 Jobs for the Future
http://www.et1964.com/?p=610 Creating Jobs in America, Part I
http://www.et1964.com/?p=614 Creating Jobs in America, Part II
http://www.et1964.com/?p=635 Building Social Welfare in America
A Tea Party Dystopia:
http://www.et1964.com/?p=262 Our Future, Darkly