Thursday, April 28, 2016

The weakest recovery continues

First quarter GDP growth was miserably weak, as expected. The economy grew at a 0.5% annualized pace, which means an expansion of only $22 billion in the past three months—equivalent to a rounding error. In the past six years, we've seen miserably slow growth in the first quarter four times now, which suggests that a statistical problem may be the culprit. Whatever the case, the economy grew 2.0% in the past year, which is only slightly less than the 2.1% annualized growth rate that has been sustained since the recovery got underway in mid-2009. So it's not unreasonable to think that nothing much has changed and that we will see stronger growth numbers for the remainder of this year.


The chart above shows the real and nominal annualized growth rates of the U.S. economy by quarter. Note the green circles which highlight unusually weak growth rates in the first quarter. When four of the past six first quarters show a similar pattern it suggests there is something wacky going on with the seasonal adjustment factors. 


The chart above shows the year over year growth rate of the U.S. economy. By this measure the past year was very much in line with previous years. Since the recovery began in mid-2009 the economy has growth at an annualized pace of 2.1%.


The chart above plots real GDP on a semi-log scale in order to better appreciate how the economy has underperformed relative to its long-term trend growth rate. By failing to bounce back to its trend growth path, and by growing only 2.1% a year instead of 3.1%, the economy is now almost $3 trillion smaller than it might have been had this been a typical recovery. We've never seen such miserably slow growth following a recovery, and the problem has persisted for almost seven years now.

What explains the persistence of slow growth? The two charts below suggest that the economy suffers from a failure to thrive because of a lack of investment. Risk aversion has held back entrepreneurship and risk-taking in general. For years I've explained that this has been a risk-averse recovery.


Capital goods orders, shown in the chart above, are a good proxy for business investment. In nominal terms, capital goods orders are no stronger today than they were prior to the last two recessions. In real terms, capital goods orders today are the same as they were in 1995. But of course the economy has grown by over 60% since then. Simply put, there has been a huge shortfall of business investment, especially if you consider that corporate profits today are about 9% of GDP, which is substantially higher than the 6.5% average of the past 57 years. 


The chart above, which shows fixed private domestic investment as a percent of GDP, tells the same story: investment has been unusually weak. 

Strong profits, weak investment: its a conundrum that is difficult to explain with confidence. But it's probably not a coincidence that for the duration of this unusually weak recovery we've seen a huge accumulation of public debt, a huge increase in regulatory burdens (e.g., Obamacare, Dodd-Frank), generally high and rising marginal tax rates, and a punitively high corporate tax rate. The rewards to risk-taking, and the burdens of running a business and complying with increased regulatory mandates have depressed the economy's animal spirits. The government is slowly smothering the private sector.

21 comments:

marcusbalbus said...

i demand more qe

Benjamin Cole said...

Surely less regulations... by the way, I think if California outlawed property zoning, the state economy would boom for decades. Newport Beach would be developed to the point where people would call it Miami Beach West.

You know, I am against Dodd-Frank and anything except a very simple but large reserve requirement, but the American Banking Association seems to have nearly embraced Dodd-Frank. That may be the worst news of all,
when you think about it. Regulatory capture.

I still contend this is a demand-side recession. Probably a few more trillion dollars of QE would help. Let it rip.

There is vast amounts of unused Global capacity in everything manufacturing, commodities, labor transportation.

steve said...

“I actually compare our economic performance to how, historically, countries that have wrenching financial crises perform,” he said. “By that measure, we probably managed this better than any large economy on Earth in modern history.” President Obama.

DELUSIONAL

Hans said...

Not a single 3% GNP growth year since the advent of Barocko.

Bulldogs said...

Do you have an updated copy of the US/Eurozone industrial production chart? Thanks for the great blog.

Chart reference:
http://scottgrannis.blogspot.com/2015/04/why-drop-in-industrial-production-is.html

Hans said...

Hear is some good news for food consumers.

http://www.bloomberg.com/news/articles/2016-04-29/u-s-cheese-inventories-soar-to-highest-since-1984

Sorry about this cheesy post. :<)

Hans said...

IA, can we settle in Rupees?

"Strong profits, weak investment: its a conundrum that is difficult to explain with confidence. But it's probably not a coincidence that for the duration of this unusually weak recovery we've seen a huge accumulation of public debt, a huge increase in regulatory burdens (e.g., Obamacare, Dodd-Frank), generally high and rising marginal tax rates, and a punitively high corporate tax rate. The rewards to risk-taking, and the burdens of running a business and complying with increased regulatory mandates have depressed the economy's animal spirits. The government is slowly smothering the private sector."

Again, a salient and powerful conclusion by the author. The most troubling aspect is
that the majority of the GenMe (Y2Kers) prefer the Socialist model over
that of a Capitalist (heretics) one. Our highest "education" system is emulsifying
logic and replacing it with a political doctrine of the proletarian.

As Mr Grannis stated, the Capitalist market and our freedoms are being
usurped by ever growing governmental units, whom are ill fit to preserve
an open market and individual liberties; GUs, only serve themselves through
the deconstruction of the latter.

terex said...

What explains the persistence of slow growth? A relevant question indeed, and while I agree to what you say Grannis I must add that there are some issues that I think distort your comparison. One is that today capital investmens are increasingly replaced with labour. Obviously much of innovation and added productivity stems from software and services these days. Usually these “investments” are treated as operational costs (especially in SME).

Add to the above the trend of off shore contracting for all types of production, where companies tend to hold on to vital/strategic elements (IPR, design, brand, formulas, etc) and treat the remaining part of production as a commodity up for “sale” to the lowest bid.

And add again, the fact that in a less capital intensive business environment you (the economy) tend to lend more for unproductive uses such as consumption and real estate. You can argue that this is alright since capital light business models still add the productivity required to bear this additional debt. But today’s “hot” areas of consumption such as eating out, buying consumables and already existing real-estate – and art – doesn’t much to capital investments.

And finally, general hardware deflation….

So, I think that underlying structural trends in production and business models adds much noise to a historical comparison of capital investments compared to GDP.

Hans said...

The Godless paper mills continue to advance brain & whitewashing
baccalaureates into society with deadly consequences.

http://www.npr.org/2016/04/30/475794063/why-are-highly-educated-americans-getting-more-liberal

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AutumnCote@WriterBeat.com

Benjamin Cole said...

Bloomberg said real US interest rates are falling since the Fed lift off.

Some people said the Fed can raise interest rates the way a kangaroo can fly.

Hans said...

Perhaps Mr Grannis could get on the list!

http://www.marketwatch.com/story/us-data-is-being-leaked-ecb-study-suggests-2016-05-02

I have applied for pre-leaks to get ahead of the crowd.

Lawyer in NJ said...

http://www.businessinsider.com/big-finance-names-want-fiscal-stimulus-2016-5

With big names including JPMorgan CEO Jamie Dimon and hedge fund billionaire Carl Icahn, it seems there is a growing chorus among the major players in finance that the government needs to spend more money.

Larry Fink, CEO of BlackRock, in an interview with Bloomberg Go last Wednesday said spending to build up infrastructure was a huge positive for the US economy.

"You are creating jobs, creating a better and more efficient grid, better and more efficient roads, ports, airports," Fink said. "So you can get a mileage out of it. So I believe that is what we need in this country."

Fink also said he thought such spending would have a meaningful impact on US gross domestic product.

Dimon, for his part, wrote that part of the solution to the "serious issues" facing the US was to increase federal investments.

Hans said...

Hear is the NOW real story about the Department of Debt
saving Fannie and Freddie.

Court revealed records show the lies and misconduct of governmental
unit employees and their attempts to conceal the truth from the taxpayer.

Do you remember the cries and screams by those proclaiming how the
central government saved both of these GSEs?

http://www.realclearmarkets.com/articles/2016/05/02/was_the_fanniefreddie_death_spiral_all_a_mirage__102147.html

Another trussed ganged of the opacity.

Scott Grannis said...

If infrastructure investment is needed, it is best done at the local level, not at the federal level.

Unknown said...

High profits and low investment can be explained by large incumbent semi-monopolistic enterprises using their market powers to milk the buyer.

That's a pretty standard argument.

More QE won't help anything, there is already too much money sloshing around (Those uninvested high profits). The American consumer is still strapped and underpaid. There are only so many yachts that someone like Mitt Romney can / will want to buy.

It's a demand problem, and as others suggest, infrastructure spending would be one way to help. And Tax cuts don't really stimulate demand as positively as say, building an Airport, I would add. Partly that's because the wealthy do pay most of the taxes, and the extra cash in their hands may just lead to more rent-seeking rather than consumption or investing.

Bob said...

If infrastructure needs improving then that is a reason unto itself to spend. But to say that it is a way to boost the economy is false narrative. Sure, there is a salutary effect initially, but rebuilding a bridge or paving highways is short term thinking in terms of economic stimulus. Once the bridge is built or the highway paved it's done. Nothing is created. The only way to stimulate economic growth is through a business friendly regulatory environment that allows entrepreneurs to innovate new business ideas that then create long term employment.

By the way Unknown you are completely and totally wrong to suggest that tax cuts don't stimulate the economy. Nothing stimulates the economy more than money in individuals pockets. Cutting taxes does two things, 1) puts more money in taxpayers wallets, and reduces the power of the oppressive Federal government to dictate policy to the citizens that elect them. Government, at best, is a necessary evil to a free people.

Unknown said...

"Once the bridge is built or the highway paved it's done. Nothing is created"

Dear Bob,

Please re-consider. Hoover Dan. Interstate Highway System. Tennessee Valley Authority, GI Bill. And please notice that the USA seems to no longer be willing to make these sorts of investments, which is sad.

Your overriding preference to have less (Federal) government is overriding any sense of Logic.

-->But - One of the least economically useful expenditures of the government is the military and that does fit your argument. Unlike that bridge or highway or Dam or school, the guns just sit there, and don't facilitate any future economic activity.

Bob said...

Unknown, Respectfully,

This is the age old argument about fiscal stimulus. My point is that I have nothing against infrastructure spending if it is needed. It will provide jobs and there is an ancillary benefit of jobs that would be required to maintain the dams, bridge, highways, etc. after completion of the projects. Then also there is the benefit to society at large for the projects that are completed. I won't digress at this point, however, about the cost overruns and red tape that increases costs due to government inefficiencies, and the inevitable graft that seems to always accompany government bidding. (I've had personal experience in this that I will not go into).

Ultimately though the stimulus to the long term growth of the economy is negligible. When I say nothing was created I don't mean a dam or a road, I meant new invention and new innovation that creates whole new industries that end up employing thousand and thousands of people and that advance us in new ways. This can only come from entrepreneurial activity. People with vision and inventiveness and innovation. People like Steve Jobs and many more like him. This is what propels our economy forward, not repaving highways and building bridges and dams. Those efforts are a reflection of the successes of the entrepreneur.

The GI Bill is not in the same catagory as the other programs you mentioned. The GI Bill is payment for services rendered.

My "overriding preference to have less (Federal) government" is completely logical IF one understands that the Federal government is a necessary evil and that private enterprise is much more efficient and capable of handling most of the overreach that the Federal government has imposed upon us.

Comparing money spent on the military with money spent on infrastructure is a nonstarter for me. It is comparing apples to oranges, and is a whole different topic

Unknown said...

"The GI Bill is not in the same catagory as the other programs you mentioned. The GI Bill is payment for services rendered"

This is nonsense.

Bob said...

Unknown,

In order for one to get the GI Bill one must have served in the military, hence it is payment for services rendered. How is that comparable to money spent on an infrastructure job?