Even official government statistics show the U.S. economy slowing down, if that phrase is the right way to describe ... what? An ongoing economic catastrophe? A bad joke? A malaise? A snafu? The BEA's second guess at Gross Domestic Product (GDP) was not revised up, so the annual growth rate in the first quarter remained at 1.8%. Rick Davis of the Consumer Metrics Institute tells us the real rate of growth would have been worse had they used a more realistic GDP deflator.
The importance of the price deflater used by the BEA cannot be overstated. In calculating the "real" GDP the BEA continued to use an overall 1.9% annualized inflation rate, which is substantially lower than the inflation rates being reported by any of the BEA's sister agencies.
The mathematical implications of the deflator are simple: a lower deflator creates a higher "real" GDP reading. If April's CPI-U (as reported by the Bureau of Labor Statistics) of 3.2% year-over-year inflation is used as the deflator, the reported 1.84% annualized growth rate shrinks to a 0.56% annualized rate, and the "real final sales of domestic products" is actually contracting at a 0.63% rate. If instead of the year-over-year CPI-U we were to use the annualized CPI-U from just the first quarter (5.7%), the "real" GDP would be shrinking at a 1.82% annualized rate, and the "real final sales of domestic products" would be contracting at a recession-like 3.01%.
Pay no attention to that man behind the curtain! The last year was disappointing, too.
In the longer view the BEA reported that the year-over-year (trailing twelve month) change in the "real" GDP was 2.3%, the lowest year-over-year growth rate reported since 2009. And governmental expenditures at all levels continued to shrink, with the new "austerity" at the Federal level (i.e., expiring stimuli) shaving 0.68% off of the overall growth rate, and genuine state and local frugality dropping the headline growth rate by another 0.39%.
And then there is the alternative estimate of GDP called the GDP(I), where I = income. As Justin Wolfers explains, The New GDP Data Is Bad. The Hidden Data Behind It Is Worse.
This morning the Bureau of Economic Analysis (BEA) released its latest estimates of GDP. And there’s bad news, hidden in the details. Most analysts are focused on the fact that GDP growth in the first quarter of this year was unrevised, remaining at 1.8%. But they’re focused on the wrong number.
National accounting aficionados know that hidden beneath the headline number is an alternative estimate of GDP. This alternative is often called GDP(I), because it is based on income data, rather than spending data. And GDP(I) is actually a more reliable estimate. Unfortunately, this more accurate indicator tells us that GDP grew by only 1.2%. That’s bad news.
In fact, this alternative indicator says that GDP is still below its level from late 2006.
Do you find it strange that the headline GDP number gets all the attention, even though the BEA calculates other, less rosy estimates? Will wonders never cease?
The question of the day is whether the U.S. (and global) economy is going to slow down further as 2011 grinds on. It is noteworthy that the anemic growth we have achieved so far this year, which is described in some detail by Comstock Partners, has occurred during the Fed's second round of quantitative easing (QE2). This led Comstock to note—
The stock market has now stalled for over three months and appears to be in the process making a top. The S&P 500 reached an intra-day high of 1344 on February 18th, backed off and then broke out to a new high of 1370 on May 2nd. It has since declined to well below the 1344 mark, a strong indication that the breakout has failed and that a new decline may be underway. This would be similar to the pattern of 2010, when the market dropped 17% following the end of QE1. That time the market was saved by the initiation of QE2. The Fed, however, is running out of ammunition, and we doubt that a QE3, if ever implemented, would be that effective.
Would another round of quantitative easing be ineffective? Is the Pope Catholic? Does a bear defecate in the woods? Do you believe inflating S&P stock values creates jobs? You do if you're wealthy and you're holding lots of stock!
Although the President is spending a lot of time ... acting presidential, and Congress has been busy renewing the Patriot Act, the government hasn't done much to spur job creation lately. Government inaction has made the New York Times' David Leonhardt worried about the future.
The latest economic numbers have not been good. Jobless claims rose last week, the Labor Department said on Thursday. Another report showed that economic growth at the start of the year was no faster than the Commerce Department initially reported — “a real surprise,” said Ian Shepherdson of High Frequency Economics.
Perhaps the most worrisome number was the one Macroeconomic Advisers released on Wednesday. That firm tries to estimate the growth rate of the current quarter in real time, and it now says annualized second-quarter growth is running at only 2.8 percent, up from 1.8 percent in the first quarter. Not so long ago, the firm’s economists thought second-quarter growth would be almost 4 percent.
An economy that is growing this slowly will not add jobs quickly...
So, David, what's the solution?
The most sensible response for Washington would be to begin thinking more seriously about taking out an insurance policy on the recovery. The Fed could stop worrying so much about inflation, which remains historically low, and look at how else it might encourage spending. As Mr. Bernanke has said before, the Fed “retains considerable power” to lift growth.
The White House and Congress, meanwhile, could begin talking about extending last year’s temporary extension of business tax credits, household tax cuts and jobless benefits beyond Dec. 31. It would be easy enough to pair such an extension with longer-term deficit reduction.
Any temporary measures will eventually need to lapse, of course. But the current moment remains a textbook time to use them — when the economy is struggling to emerge from the aftermath of a terrible recession...
Oh, my — the Fed should stop worrying so much about inflation! Leonhardt's not missing any meals or sweating prices at the pump, no siree. It's still a textbook time to apply neo-Keynesian stimulus.
Thus Leonhardt recommends more of the same policies that have failed miserably to date. Presumably this new application of the "More Is Better" rule would include a new round of quantitative easing, for the Fed still "retains considerable power" to lift growth, and we have just witnessed that considerable power in action. It is as though David Leonhardt lives in a reality-proof bubble, or perhaps the Times itself exists in such a bubble and it's no coincidence that Leonhardt, who prefers being reality-proof, works there.
Whatever the answer to that conundrum, it seems clear enough that our economy is going nowhere fast. Set your expectations accordingly.
Bonus Video — EuroPacific Capital's Michael Pento is not feeling good about our prospects.
The first step toward solving a problem is clearly defining the problem. As long as the problem is defined as 'not enough growth', we will just keep digging ourselves a hole. If you define the problem as 'the quest for growth at any cost is causing many negative side effects, most worse than the positive effects' maybe we will start to see the true reality of our situation.
Posted by: John D | 05/31/2011 at 10:23 AM