Yesterday (June 26, 2013), the – US Bureau of Economic Analysis – published the third estimates (revising the second estimates published in late April – US National Income and Product Accounts – for the March-quarter 2013. The substantive changes in the revisions are that the US economic growth rate has been revised down from 2.4 per cent to 1.8 per cent per annum once the more complete data has become available. Personal consumption spending has been revised downwards, and exports declined rather than the initial assessment of an increase. The second estimates revealed a slowing economy in the face of the fiscal drag coming from the government sector, principally the federal government. At the time of their publication, it was clear that the outlook was not optimistic given that this data seemed to exclude the impacts of the “sequester”. We considered that those impacts would manifest more clearly in the June-quarter data. The third estimates now confirm that the lag in the sequester impacts has been shorter than previously thought. The US economy clearly slowed quite sharply in the first-quarter 2013 under the weight of the fiscal drag. The output gap is now over 10 per cent with signs of deflation emerging. The danger is that the US will head towards zero growth as the sequester impacts become more pronounced. The US federal government should increase their net spending rather significantly at present to avoid this downward trend. The US just has to look across the Atlantic, where the data now shows the French economy is now back in recession as a direct result of fiscal austerity.
The BEA said in the release that:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the “third” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent … With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was less than previously estimated, and exports and imports are now estimated to have declined … The increase in real GDP in the first quarter primarily reflected positive contributions from PCE, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, state and local government spending, and exports. Imports, which are a subtraction in the calculation of GDP, decreased.
The following sequence of graphs updates the National Accounts outlook as presented in the third estimates.
The first graph shows the annual real GDP growth rate (year-to-year) from the peak of the last cycle (December-quarter 2007) to the March-quarter 2013 (blue bars) and the annualised last quarter growth rate (grey bars).
The year-to-year growth rate was only 1.6 per cent (revised down from 1.8 per cent) and the trend is falling. The annualised version of the March-quarter 2013 growth rate was 1.77 per cent (revised down from 2.4 per cent). There is considerable volatility in the data (partly due to Hurricane Sandy), which is smoothed out by the year-to-year growth calculation. Overall, the economy is maintaining below-trend growth but is facing contractionary forces.
In the blog – US national accounts – growth but for how long? – I discussed the release of the second estimates and my estimates of potential GDP and the Output Gap in the US. For a more detailed discussion of estimation techniques, please read this blog – US problems are cyclical not structural.
The average quarterly real GDP growth rate between 2001Q4 and 2007Q4 was 0.62 per cent per quarter. If the global financial crisis had not have occurred it would be reasonable to assume that the economy would have grown at this rate.
If we extrapolate that growth rate out from the most recent peak (December 2007), then we would can create a potential reaL GDP series to the present quarter.
The gap between actual and potential real GDP in the first-quarter 2013 that emerges is $US1,5273.5 (up from $US1,523.4 billion using the second estimates data).
The following graph shows the estimated percentage real output gap (percentage deviation of actual from potential real GDP) that is derived from the latest National Accounts data.
It is in fact more accurately called the incremental output gap because I would not presume that there was full employment in the December-quarter 2007. In other words, my incremental output gap depicts the increase in whatever gap existed at December-quarter 2007.
The Output Gap is 10.1 per cent of potential GDP and it is getting larger each quarter as real GDP growth flags. It constitutes a massive on-going permanent national income loss and provides significant scope for spending expansion.
It also demonstrates a cyclical problem. If the gap was due to structural factors then it not have fallen as sharply as it did in early 2008. Structural deterioration is gradual and cumulative not sudden and sharp.
Contributions to growth
The following Table shows the revised contributions to the March-quarter 2013 real GDP growth (percentage points except for the GDP estimate which is per cent) and the detailed changes between the Second Estimates (April) and the Third Estimates (June) for these expenditure contributions in the US National Accounts.
The headline news is that while growth is still coming from Personal Consumption expenditure, the strength of that component was much lower than previously thought.
The same goes for Private investment which fell from 1.56 points to 0.96 points.
Net exports were previously estimated to be responsible for a 0.5 points contraction was revised to a 0.09 points contraction. In the second-estimates for March-quarter 2013 published in April, exports were estimated to have contributed 0.4 points, while imports drained 0.9 points from real GDP growth. That would have reflected a strengthening of private spending overall.
But in the revised estimates yesterday, the position is more grave. Exports are now estimated to be draining growth (a variation of 0.55 points down from the second-estimates), while imports drained less than previously estimated.
Taken together than means that export revenue is now falling as is import spending – signalling a declining world environment and declining domestic income generation. Neither outcome is good.
Finally, the contraction of the government sector scythed 0.93 points off real GDP growth in the March-quarter 2013 rather than the previously estimated 0.8 points. The drain on growth from the Federal level was slightly worse than previously estimated (-0.68 rather than -0.65 points). The same goes for State and Local government contributions.
Overall, the revised estimates are bad news and suggest that the June-quarter outcomes will be even worse than previously expected.
The next graph compares the December-quarter 2012 contributions to real GDP growth at the level of the broad spending aggregate with the revised March-quarter 2013 contributions.
The next graph decomposes the government sector into its parts and reveals that it was the contraction in military spending that did the damage as in the December-quarter 2012.
Private investment spending was previously estimated to be strong in the March-quarter 2013 but the revised estimates are much weaker.
But as the next graph, which decomposes the spending categories that constitute total gross capital formation, shows the situation is worse than previously assessed.
While overall investment contributed to growth, fixed investment added 0.39 points (down from 1.69), non-residential added only 0.04 points (down from 1.28), structures dragged -0.26 points (down from 0.46), equipment and software added 0.31 points (down from 0.82), residential added 0.34 points (down from 0.41), and the change in private inventories added 0.57 points (up from -1.52).
So the investment growth recorded was all down to the big swing in inventories, which can be interpreted as an indicator of the start of an inventory cycle that reflects weak demand and a further contraction in output and income in the coming year.
I did some further analysis using – Table 5.6.5B. Change in Private Inventories by Industry – in the BEA’s Interactive Data. The data tells us that there was a huge swing in Farm inventories in the March-quarter 2013 (swing equalled 34.6.7 per cent) after many quarters of rundown. I cannot tell you which crops actually have been stockpiled.
Manufacturing inventories also rose by 11.1 per cent. Wholesale Trade inventories showed steady growth and down from early growth rates, whereas growth in Retail Trade inventories were also steady over the last 12 months in the 2011 there were several negative quarters.
What does it mean? Overall, it suggests some weakness which is consistent with consumption and investment spending being weaker than previously estimated.
A longer view of the data (see the analysis in the blog – US national accounts – growth but for how long?) shows that the US government sector consistently supported growth through the very deep 1982 recession (one quarter of contraction) and, importantly, maintained that support in the recovery phase.
That stands in stark contrast to the behaviour of the federal government in the current downturn and recovery.
Since late December 2010, the overall government sector in the US has been undermining real GDP growth. The US government overall started to drag on real growth almost immediately after it had begun. Overall real GDP growth turned positive again in September 2009.
The federal level has been a negative contributor to quarterly real GDP growth for 8 of the last 12 quarters. That should put in perspective the claims by conservative politicians and commentators along the lines that “we tried aggressive fiscal policy and it didn’t work”.
The correct statement is that the US government injected a stimulus throughout 2008 and maintained it until September 2009 and growth began to recover fairly strongly. Then it got pressured by conservative forces to cut back and growth faltered.
The situation is even worse at the State and Local government levels.
Since March 2008, state and local governments together have been negative contributors to real GDP growth in 16 of the 20 quarters, and every quarter since September 2010.
If you consider the previous recession periods, both levels of government were running counter-cyclical strategies (contributing positively to growth) in contrast to the present recession.
This is especially so when you consider the State and Local governments. However, in recent quarters it is the Federal government that is draining growth more than its state and local counterparts.
The revised data shows that the US recovery is far weaker than previously estimated. If we analyse all the recoveries since in the Post World War 2 period, we would conclude that is is one of the weakest recoveries, which explains why unemployment has persisted at very high levels for around five years.
How that squares with comments made by the central bank chairman last week that there was a need to cut back the stimulus program is an interesting question. What the Federal Reserve Bank does in that regard is relatively insignificant any way, given that its belief that the monetary policy changes had provided a significant stimulus was flawed from the start.
At least Dr Bernanke got one thing right – that the fiscal cutbacks are damaging for growth and that impact will worsen in the June-quarter.
The current real GDP growth rate is so weak that the output gap is expanding. It is also not strong enough to reduce unemployment and the broader forms of labour underutilisation in any significant way.
The US government is choosing to allow long-term unemployment to continue to rise. There is no fiscal justification for that. They should explain why they consider undermining growth and deliberately maintaining people in a state of unemployment is a sensible option for their nation.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.