It was the bad winter

US national output rose just 0.1% in the first quarter of 2014 – in effect, the US economy stalled.  This was well below forecast.  The US economy is now just some 2.3% larger after inflation than it was in the first quarter of 2013.  So the US economy continues to expand, but at a rate that is well below its trend growth rate before the Great Recession of 3.3% a year.

Even more dismal was national output per person.  GDP per capita fell 0.64% in the first quarter.  So, although US national output is now higher than it was before the Great Recession struck in 2008, GDP per-capita is still 10.8% below where it should be if there had been no slump.  Indeed, per capita GDP is at a post-recession low – see Douglas Short’s graphic below.

US real GDP

Now these figures were just preliminary ones and they are likely to be revised up a little during May.  But the lack of growth in the US economy is puzzling mainstream economists.   Atif Mian is professor of economics and director of the Julis-Rabinowitz Center for Public Policy and Finance at Princeton University.  Amir Sufi is the Chicago Board of Trade Professor of Finance at the University of Chicago Booth School of Business and co-director of the Initiative on Global Markets.  These economists commented: “over a longer horizon, there is something deeply puzzling about the GDP numbers, and economists everywhere should be staring at them and scratching their heads.” 

They presented a chart below. It plots real GDP for every US post-World War 2 recession for 26 quarters after the recession.  Each line is indexed to 100 in the quarter before the official NBER start of the recession; the steeper the line for the particular recession, the stronger the recovery.

US recessions

They go on: “It is true that the recovery in GDP has been steady over the past couple of years – but it’s been steadily disappointing. The recovery out of the Great Recession looks dismal compared to earlier recoveries–we aren’t even close to the recoveries we’ve seen before. The short-run gyrations are gone, but the longer run issue of dismal growth is as important as ever.”

What is the reason for this slow growth?  Apparently, we need more research.  “Why has the recovery been so dismal? This has to be one of the central research questions for macroeconomics going forward.”  The economists offer several candidates: (1) secular stagnation, (2) structural changes in the economy such as demographics (3) a Gordonesque pessimism on productivity growth (4) weak government spending, (5) heightened policy uncertainty, and (6) excessively tight monetary policy. “These aren’t mutually exclusive”, they add.

I have covered some of the explanations in various posts here.

John Cassidy in the New Yorker magazine also considered the puzzle (
and got closer to an answer, in my view.  See my post

Cassidy points out that in the first three months of the year, gross private domestic investment—the broadest measure of capital spending by the private sector—declined at an annual rate of 6.1%.  “That was enough to knock a full percentage point off the economy’s growth rate.”  He could have added that business  as well as investment fell in the first quarter.  Business investment fell 2.4% in Q1’14, in particular a 5.5% fall in investment in new equipment.  Cassidy went on: “Investment spending was weak in 2013, and it was weak in 2012. It’s been weak since the recovery started.  How weak? According to John H. Makin, an economist at the American Enterprise Institute, investment spending since 2009 has been running “a full standard deviation below the typical … pattern.” That’s wonk-speak for a big shortfall.”

Why is investment so weak?  Cassidy considers the alternative theories. “Keynesians tend to blame weak demand, but capital spending is running even below the levels predicted by Keynesian “accelerator models.” Some people blame the housing market and the aftermath of the real-estate bubble, but the weakness extends well beyond residential investment. Another fashionable explanation is “policy uncertainty,” but that doesn’t make much sense, either. The policy outlook has been clear for ages: fiscal deadlock and low interest rates.”

Cassidy dismisses the argument that the return on capital is too low.  After all, corporate profits have never been higher, at 11% of GDP.  Instead, he turns to the usual mainstream explanations.  “The first is a failure of animal spirits, which proves self-fulfilling. For whatever reason, business leaders don’t have much optimism and excitement about the future of the U.S. economy, so they keep a tight limit on capital expenditures.”

“The other theory relates to corporate governance and globalization. In today’s economy, large companies have the option to invest their profits anywhere in the world, or to return some of them to stockholders. In recent years, the senior executives of these companies have been recompensed very generously for directing investments to cheaper locales overseas and using any surplus cash to fund stock buybacks and higher dividend payments. If you were a C.E.O., what incentive would you have to ditch this strategy and engage in a big new investment program in the United States?”

Both these explanations have some truth in them.  But why are companies hoarding cash or invest in financial assets rather than in productive capital?  What is dampening their animal spirits?  The answer is that, although profits are up, the profitability of productive capital is not.  See my post,

And cash may be high, but so is debt,

US corporate cash

You need to start with profit for an explanation.  Keynesians say the crisis comes about through a lack of ‘effective demand’, namely an unaccountable fall in investment and consumption and this causes profits and wages to fall. Marx says: let’s start with profits. If profits fall, then capitalists would stop investing, lay off workers and wages would drop and consumption would fall. Then there would be a lack of effective demand.  So a lack of investment and growth is not be due to a drop in ‘animal spirits’, or even due to ‘too high’ interest rates, but because profits are down. The problem lies in the nature of capitalist production, not in the finance sector.

Instead of investing in the productive sectors of the economy, US corporations are hoarding cash abroad to avoid tax, issuing new debt at low interest rates, in order to pay higher dividends, buy back their own shares to boost their stock prices and or to launch takeover bids paid for by more debt and higher stock prices.  This has driven stock prices to record highs.

Investors are borrowing to speculate in the stock market at unprecedented levels.  This borrowing is called margin debt.  Margin debt on the New York stock exchange has raced ahead of even record high stock prices. When this margin debt peaks, it often heralds a bust in the stock market months later.  And the margin debt came off its peak in April, perhaps signifying that stock market bonanza may be about to reverse.

Margin debt

The booming stock market funded by borrowing and corporate debt contrasts with the so-called real economy: slow growth, stagnant investment, falling real incomes and persistent unemployment.

The employment figures for April have just been released and they were up sharply  A net extra 288k  jobs were created in April and the headline unemployment rate fell to 6.3%, the lowest since September 2008.  The job market is getting better apparently.  But the data are somewhat misleading.  Many Americans who have been looking for work for a long time have given up and stopped looking.  The labour participation rate (those in a job as a ratio of all adults) fell from 63.2% to 62.8%, equivalent to the fall in the unemployment rate.  Before the crisis that ratio was over 67% and while the reduction since is partly due to ‘baby boomers’ retiring, still some 3m people have left the labour force who are not retiring.  Indeed, 800k left the labour market in April.  And hourly wage growth slowed to 1.9% yoy, hardly above the rate of inflation, so those who got jobs got low-paid ones.

US labour participation

It is still the case that there are 3.45m Americans who have been without work for 27 weeks or longer. This represents 35% of the overall pool of the unemployed, still well above pre-recession levels of around 18%, if below the peak of about 45% four years ago.  America used to have a share of the long-term unemployment far below the average of other advanced economies but now that ratio has caught up with other OECD countries.

Among workers who had been unemployed for more than six months between 2008 and 2012, only 36% were employed a year later, with 30% still without work. The remaining 34% gave up looking for a job and dropped out of the workforce altogether. Even more troubling, only 11% had found stable, full-time employment for at least four months.  And not all of these are old and close retirement.  There is a lost generation of unemployed; a permanent reserve army of labour.

However, the mainstream consensus remains optimistic that the US economy is about to pick up pace this year and finally start to establish sustained trend growth.  The first quarter was just a product of a bad winter of extreme weather, the story goes.  They look to the economic activity indicators like the US ISM which look strong.  But then these economic activity indicators have been strong for over a year now but still growth does not pick up.  Now that spring is with us and temperatures have risen, will ‘animal spirits’ pick up and stimulate new investment, or will this depression continue?  The mainstream argues that the US economy is going to be growing at over 3% by year end, but the current data don’t encourage that forecast.

6 thoughts on “It was the bad winter

  1. Micheal,

    if we’re wondering why capitalist are not investing, isn’t there a way to find out empirically (and not just theoretically)? why not just ask them? i.e. do a some kind of survey of the biggest CEOs or something on why they’re not investing. even if they’re not Marxists (as they aren’t) they should be aware that investing in production is somehow not really profitable anymore (or not profitable enough). do you know of some kind of study of that sort?

  2. Today’s non-farm pay-roll data, together with the revisions for last month suggest that it really might have been the weather. The drop in the unemployment rate from 6.7 to 6.3 can to some extent be accounted for by the drop of around 350,000 in long term unemployed who have dropped out of the figures, now the unemployment benefit extension has ended, but the increase in actual employment seems real.

    The other survey data seems to suggest that trend growth for the rest of 2014 may be more like 3 to 3.5%. I think it shouldn’t be underestimated what effect all the political uncertainty caused by the Tea Party had either. CNBC had business leaders coming on every day saying that they were holding back on investment decisions until the situation over the Debt Ceiling (twice) and the Sequester was resolved.

    The current merger proposal from Pfizer for Astra-Zenica also indicates how much might also be down to tax and tax accounting. Pfizer are proposing to base their headquarters in Britain it seems if the merger goes through, because with a huge cash pile on their hands, they will save themselves huge amounts of tax. It would be interesting to know whether in economies where a lot of investment is no longer necessarily in the shape of factories, to what extent capital investment data is being distorted, because of where for tax purposes, the investment is being deemed to have taken palce!

  3. Michael,

    Thanks. From my viewpoint you are showing that the so called QE programmes only lead to new stock market bubbles but do not have an impact on the US real economy i.e. restoring investments and growth. From a Marxian viewpoint that is not surprising if there is still a lot of unused production capacity! I attach an official graph on the capacity utilization ratio for the US manufacturing sector (second graph):

    The official US industry capacity utilization rate shows a downward trend from peak 85% (1995) to 62 % (2008) for the whole period until 2015, there is an average downward trendline from 85% to 73,5 %, see here a rising OCC through overinvestments (IO) and a declining rate of profit, which they can not restore with only QE! It did not reach pre-2008 levels!

  4. The country is getting older which means less people working. You can therefore have a lower unemployment rate but perennially weak GDP.

    One thing of interest is that immigration to the US is really drying up. It’s not just the red tape either, people really perceive diminished opportunities. I believe it is net zero with Mexico right now.

  5. Michael, with US wages at record lows and still all the brick and mortar investments happening in the BRICs and elsewhere it causes me to ask: At what point do you see the US economy having a problem with deflation.?

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