The writing on the wall has been present for some time and now the signs have become clearer: the slowdown of the American economy that started in the middle of last year continues in 2016. After a meager growth of 1.4 % last fall, the Bureau of Economic Analysis published a preliminary estimate at the end of April for the first quarter of 2016: the American economy only grew by 0.5 % (see here). The economy nearly stagnated in the first quarter. Growth almost came to a standstill in the winter. Yet the risk of a recession is generally expected to be low. This may be true, but if no noticeable countermovement occurs soon, stagnation will become a reality.
The deterioration in economic development encompasses a broad spectrum of economic activity and it affects almost all expenditure components. Typically, the main driver of the US economy is consumer spending. It only grew by 1.8% on an annual basis. In fact, only the expenditure for services grew. Spending on durable consumer goods fell sharply. As in the previous two quarters, private investment shrunk and the decline stands now at an annual rate of 3.5 %. The slump in nonresidential construction was particularly strong. The investment in business equipment decreased almost at a double-digit rate and the investment in intellectual property products barely grew. Contrary to the general deterioration, there was growth acceleration in residential construction of almost 15 percent (annual rate). Many are putting their hopes on the continuation of this development. Unsurprisingly, US foreign trade continued to weaken; while imports stagnated, America’s exports fell at an annual rate of 2.6 percent. Government spending saw an overall slight growth, but this was driven by state and local governments. The expenditure of the Federal Government, on the other hand, fell, especially defense spending which commonly exhibit high volatility and had risen sharply in the previous quarter.
Figure 1: contribution to growth in the first quarter of 2016 (in percentages).
Figure 1 shows the economic development from 2013 in terms of contributions to growth. It shows which GDP components contributed to growth and by how much. Private consumption was the only noteworthy driver of growth, but it actually performed less than half of what can be ‘normally’ expected. The contribution of government spending was 0.2 percentage points – it was positive at the least, but hardly significant. Gross fixed investments and inventory investments and net exports, however, were down and acted as a brake on growth. The inventory destocking continues for nearly three quarters. The headwinds from foreign trade are nothing new. The positive trend in housing construction could not compensate for the sharp drop in business investment, which is concentrated in the energy sector, but which has recently been increasingly rampant.
Figure 2: Growth in the first quarter of 2016 (in percentages)
The economic outlook looks a little better when one compares the growth in the latest quarter with growth in the same quarter of last year, as it common in European research (see Figure 2). The growth in private consumption and total GDP confirmed the slowdown since the middle of last year, but remained stable compared to the previous quarter. Both investment and imports crashed. By contrast, the export figure stabilised at the zero line. The reversal in government spending (the slight growth from the end of 2014, after the previous shrinking), can be recognised especially well. However, the importance of government spending as a pillar of the economy ultimately remains low. The US government continues to neglect its responsibility and refuses to play a constructive role in economic development. The only difference with a couple of years ago is that the results of this failure are no longer so drastic.
Figure 3: economic impulses of fiscal policy according to the Brookings Institute.
This is confirmed by the most recent estimate of the Brookings Institute in Washington DC of the fiscal stimulus policy (see here). It shows, at last, a positive effect of fiscal policy to real GDP growth, although it is still minimal. Compared to the hasty austerity of previous years, one would at first sight almost like to express congratulations. Remember that the austerity measures from 2011 onwards have been enforced by the Republican majority in the US Congress. Some Republican representatives did not even bother to justify this policy in any constructive way; it was sufficient to them that their measures would prevent successful policymaking by the Obama administration. They were quite explicit about it. This is indeed a very strange form of patriotism, the pathology of which I will not analyse here.
Just compare these obstructions from the Republicans during the Obama presidency with the fiscal events during the years from 2002 to 2004 under the Republican President George W. Bush, which were based on war spending and tax breaks for the super-rich. No one heard the Republicans speak about the absolutely urgent matter of balancing the budget then. A Republican victory in November by Trump (and the same holds for his colleagues who have just withdrawn from seeking the nomination) would probably lead to a repetition of previous experiences and new tax breaks for their buddies of the billionaire class. I would prefer not to speculate about the risk of instigating new wars.
But would a U-turn in the tax and fiscal policy not represent a positive development? The recent ‘Strategic analysis’ of the Levy Economics Institute, which was published in March and was presented at the 25th Hyman Minsky Conference three weeks ago raises some doubts. The cyclical analyses of the Levy Institute are not an instrument of business cycle research in the narrow sense. In particular, they provide no short-term economic forecasts. Instead, the analysis is more oriented towards the medium term. The authors identify three main factors that likely will hold back US economic growth: 1) the weakening global economic environment; 2) the excessively rapid fiscal consolidation in recent years and the restrictive stance of fiscal policy today and 3) the stark rise in income and wealth inequality. As for foreign trade, in addition to a global economic recovery, only a depreciation of the US dollar could provide assistance. A more expansive fiscal policy would indeed appear necessary in principle, but if at the same time inequalities get magnified, the effectiveness of this policy would be undermined accordingly.
I share this assessment of the Levy Institute. Whether a new fiscal policy will be implemented next year is, of course, still completely unknown. My own advice would be for a massive public investment program. America’s infrastructure really urgently needs it. It should focus on ecological transformation of the energy and the transportation sector that is urgently needed and also concentrate upon education and research and development. However, it does not seem likely that this rational path will be followed, at least not before all sorts of unworkable projects have proved their uselessness through ‘trial and error’; Winston Churchill already remarked ‘You can always count on the Americans to do the right thing – after they’ve tried everything else first’).
Figure 4: GDP forecast of Atlanta Fed for 2016, Quarter 2.
A look at the newest ‘GDPNow’ forecast by the Federal Reserve Bank of Atlanta shows GDP growth of 1.7 percent for the second quarter. That would be at the bottom of the ‘Blue Chip Consensus forecast.’ Apparently these economic forecasters are still optimistic. I cannot quite share this optimism.
And so, in order to finish, just a few short notes on last week’s reports. March saw a further weakening of foreign trade. Imports fell particularly strongly. As such this factor would lead to an upward revision of GDP growth. However, lower imports also suggest domestic demand weakness. In contrast, the latest figures from the automobile industry were quite positive. Nevertheless, in my view, the past few months, taken as a whole, merely suggest a continuation of the high levels of last year, but no further growth. The most important news arrived last Friday: the employment report for the month of April shows that employment growth in the US economy significantly slowed down. Only 160.000 new jobs were created in April. The figures for the previous two months were revised downwards. This also gives little hope of a significant economic recovery in the current quarter. However, it increases the chances that the Federal Reserve will not raise the interest rates again next June. An economy at the verge of stagnation does not call for urgent interest rate hikes.