Wednesday, October 30, 2019

GDP growth continues to slow, back to where we were 4 years ago.

Going into today, it was anticipated that US GDP growth for Q3 2019 was anticipated to fall below 2%. And indeed that’s what we saw, but somehow, this is being portrayed in some financial reports as a good sign.
The Commerce Department on Wednesday said the economic activity in the U.S. grew at an annualized rate of 1.9% in the third quarter, down slightly from the 2% print in the second quarter. Economists polled by Dow Jones had expected the economy to grow at a 1.6% rate.

The better-than-expected print was the result of continued consumer spending as well as government expenditures, the government report said. Personal consumption expenditures, a gauge of spending by American households, rose at a 2.9% annualized rate while government spending grew at a 2% rate.

Growth in gross private domestic investment continued to decline in the three months ended September 30 with a read of -1.5%, but far better than the -6.3% contraction in the second quarter.
So continued declines in investment (business) spending and consumer spending slowing from 4.6% growth to 2.9% while government spending keeps growing is the mark of an economy in decent shape? Not so sure about that.

Especially when I look at one particular area of the economy dealing with goods. Because part of the consumption “growth” in real GDP in the industrial sector for Q3 is actually a sign of weakness – price deflation. And it’s worse on the business and trade sides.

Price index, Q3 2019
Consumption, goods -0.8%
Business spending, equipment -0.9%
Exports, goods -3.9%
Imports, goods -4.0%

This means that real (inflation-adjusted) GDP is higher than the actual growth in spending and trade for these industrial sectors.

So if these industrial businesses are getting lower prices and fewer sales, how are they going to avoid layoffs and/or stay in business? Especially when prices keep rising for consumer services (+2.6%) and residential construction (+3.3%)?

The other thing I want to point out about today’s GDP report is that it reiterates how 2019’s growth is sputtering back to the levels of 2015-2016 that Donald Trump claimed he was going to improve from. Let’s look at GDP growth that takes out the change in government spending (which has grown in the time of Trump), and the effect of inventories.

If you look at the chart of those figures, you’ll see that underlying growth isn’t any different now than when some blue-collars thought electing Trump would “Make America Great Again” by improving the economy. In fact, private sector GDP growth has been under 1.6% for 3 of the last 4 quarters.

You can also see that there is no real difference in growth for the last half of 2017 and the first half of 2018, despite the GOP Tax Scam being passed into law at the end of Q4 2017. And now growth has fallen back to trend after that one-time bump.

Even if you include added government spending and the inventory effect, the last 12 months have only netted 2.0% growth. That’s no different than what we had 3-4 years ago, when Trump took advantage of economic softening to convince some people that he could make things better than what they were experiencing in November 2016.

So what’s going to keep things going with fiscal stimulus ending in the US as deficits rise to $1 trillion, and job growth slowing down? The Fed can try to pump up the stock market and encourage more borrowing by printing money and lowering interest rates (including another 0.25% cut today), but is that going to translate over into the real economy? Doubtful, and there would be more risk of becoming a major recession if things go south.

I’m not buying the happy talk from the financial media, and the numbers in today’s GDP report should be seen as more evidence of a full-employment economy slowing as the US expansion starts its 11th year. The real question is whether that slowing becomes a full-fledged stall and decline for 2020, and my guess is that future jobs reports (including Friday’s release for October) will be a better answer of that question than what we will see from Wall Street.

EDIT- And here's Paul Krugman to remind us that US GDP may tell a much different story than you see in your part of the country.

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