http://www.zcommunications.org/us-gdp-on-the-road-to-double-dip-by-jack-rasmus
US GDP—On the Road to Double Dip?
January 31, 2013
By Jack Rasmus
US GDP data released on January 30, 2013 for the fourth quarter 2012
showed a decline in GDP of -0.1% for the last three months of 2012, thus
raising the specter of the US economy, facing still further deficit
spending cuts in 2013 amidst declining consumer confidence, may be on
track for a possible double dip recession in 2013 or 2014 along with
other economies in Europe, the UK, and Japan.
In the fourth quarter GDP numbers, government and business inventory
spending led the decline. To the extent consumer spending played a
positive role at all in the 4th quarter, it was largely driven by auto
sales—stimulated by auto dealers offering buyers deep price discounts,
virtually free credit with near 0% auto loan interest rates, as well as
new auto purchases in the northeast as a result of Hurricane Sandy’s
destruction of existing auto stock. 2012 Holiday season retail sales
data, in contrast, were otherwise not particularly notable and would
have been much worse without the auto sales exception. How much longer
auto companies can continue the deep price discounts and free credit
remains a question going forward. Net export sales continued to sag in
the last quarter, as the slowdown in world manufacturing and trade
continued. And, as others have noted, an important source of past
consumer spending and GDP growth—i.e. health care services—began to slow
ominously at the end of 2012 as well, promising to continue that trend
into 2013.
This weak scenario in the fourth quarter 2012, and the virtual absolute
stop to US economic growth, was predicted on this writer’s and other
public blogs in a piece entitled “US 3rd Quarter GDP: Short Term Myopia
vs. Long Term Realities” last October 2012 (see jackrasmus.com, as well
as in this writer’s April 2012 book, ‘Obama’s Economy: Recovery for the
Few’).
Last October 2012, it was noted that the 3% growth rate in the preceding
3rd quarter, July-September 2012, period was artificially produced by
record levels of one-quarter federal defense spending accounting for
more than one third of total GDP growth in the quarter. That government
spending surge was preceded by more than two years of federal government
spending reductions, and thus the third quarter defense-government
spending acceleration represented previously held back government
spending, to be released right before the November 2012 elections. It
was predicted in the above blog commentary on GDP 3rd quarter results
that government spending therefore would decline sharply in the
following fourth quarter—which it did. It was further noted business
inventory spending was on a track to decline as well in the fourth
quarter, and that US net exports, having turned negative in the third
quarter, would continue to decline in the fourth quarter—all of which
also occurred in the latest GDP report. The true US GDP growth trend for
July-September was therefore not the 3% reported, but only around 1-1.5%
for the third quarter when the appropriated adjustments are made. And
that 1.5% or so has been the average GDP rate for more than two years.
Then the bottom dropped out in the fourth quarter, as GDP collapsed to
-0.1%.
So what’s going on? Is the fourth quarter GDP an aberration? A temporary
one-time event? Or a harbinger of a still further slowing US economy,
moving more in line with global economic trends indicating a slow but
steady further slowdown?
In the first quarter 2013, a number of negative developments in the
fourth quarter will likely continue, along with new negative
developments, together suggesting the first quarter 2013 GDP will at
best look much like the fourth quarter—and could even prove worse.
First, more than $100 billion has been taken out of the economy with the
end of the payroll tax cut last January 1. Second, consumer sentiment
and spending is showing a definite sharp decline in the early months of
2013. Deficit cutting will intensify with a deal on the ‘sequestered’
$1.2 trillion agreement that will occur in March in Congress. Defense
spending cuts projected will be reduced, but non-defense spending will
occur and perhaps even rise. Consumer spending on autos, which has been
a plus in 2012, cannot continue at the prior pace. Health care spending
will likely continue to slow, as health insurance premiums of 10-20%
continue to be imposed in the new year by price gouging health insurance
companies looking to maximize their returns in 2013 in anticipation of
Obamacare taking effect in 2014. Business spending that occurred in the
fourth quarter to take advantage of tax laws will almost certainly slow
in the first quarter. Industrial production and manufacturing will add
little, if anything, to the economy and housing will contribute to
growth through apartment construction only. In short, the scenario is
one of continued very slow growth.
It is not the deficit that faces a ‘cliff’; it is the US economy. As
this writer has repeatedly written since last November, the ‘fiscal
cliff’ was mostly an economic farce. Real forces were further slowing
the real US economy. Those real forces are once again reasserting
themselves. However, should Congress proceed with continued deep
spending cuts in 2013, should the Euro economies, UK, and Japan continue
to weaken, and should China-India-Brazil not succeed in reversing their
economic slowdowns significantly—then the odds of a double dip in the US
will rise still further in 2013-14, as this writer has repeatedly predicted.
The strategic question is ‘Why is the US economy so fragile and weak?
Why has it been unable to generate a sustained economic recovery from
‘Epic’ recession since 2009? Why now, after five years since the onset
of recession in late 2007, has the US economy stagnating and collapsed
to virtually zero growth, once again?
The answers to this are not all that difficult to understand. First,
despite $13 trillion in free, no interest money given to banks,
investors, and speculators by the US federal reserve for five years now,
the banks still continue to dribble out lending to small-medium US
businesses. No loans mean no investment mean no hiring mean no income
growth for consumption, which is 70% of the economy. Similarly, large
non-bank corporations continue to sit on more than $2 trillion in cash.
Like the banks, they too refuse largely to invest in the US to create
jobs, preferring to hold the cash, or use it to buyback stock and pay
shareholders more dividends, to invest it offshore, or to invest it in
speculating with financial instruments like derivatives, foreign
exchange, commodities futures, and the like.
At the same time, the bottom 80% of households, more than 110 million,
are confronted with 5 years now of continuing real disposable income
stagnation or decline. This income stagnation and decline translates
into insufficient income to stimulate consumption spending, which makes
up 71% of the US economy. What spending exists is fundamentally credit
driven, not income driven. Thus car loans, student loans, credit cards,
and installment loans rise and with it household ‘debt’.
The problem with the US economy therefore is fundamentally twofold: not
only insufficient income but growing household debt. Together they
result in consumption becoming increasingly ‘fragile’ (an income to debt
ratio term), and therefore unable to play its historic role of
generating a sustained economic recovery. Together, fiscal-monetary
policies are rendered increasingly ‘inelastic’ in generating recovery as
‘multipliers’ collapse—to use economic jargon. The outcome of all this
is ‘stop go’ recoveries, bumping along the bottom, or what this writer
has called an ‘epic’ recession.
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