The BEA released today its comprehensive national account revisions, according to which real GDP grew at a 1.7% annual rate in 2013:Q2. Although this was above the 1.1% rate that many analysts were expecting, the new estimates also revise down the growth rates that were previously reported for 2012:Q4 and 2013:Q1, with the growth rate over these quarters now estimated to have been 0.1% and 1.1%, respectively, down from the 0.4% and 1.8% figures that had been reported last month.
The bare growth of the economy over 2012:Q4-2013:Q1 is the main reason that our Econbrowser Recession Indicator Index jumped up to 30.5%, a significant increase from the 9.2% figure that we released last quarter. This is one objective signal that the recent GDP numbers are even weaker than we’ve become accustomed to seeing since the economy began its disappointing recovery from the Great Recession in 2009:Q3. Note, however, that this does not mean the economy has entered recession territory. Our index would have to rise above 67% before we would issue such a declaration. Note also that in calculating the current value for the index we allow one quarter for data revision and trend recognition. Thus the latest value, although it uses today’s released GDP numbers, is actually an assessment of the state of the economy as of the end of 2013:Q1. However, our index is never revised, so that the numbers plotted in the graph below since 2005 are exactly the values as they were reported one quarter after each indicated historical date on Econbrowser.
|
In terms of the individual components of GDP, it’s clear that the ongoing fiscal drag is the biggest single factor in the recent sluggish growth. Lower government purchases of goods and services subtracted 1.3 percentage points from the 2012:Q4 growth rate and 0.8 percentage points from the 2013:Q1 growth rate. In other words, if you assumed a government-spending multiplier of 1, if real government purchases of goods and services had not fallen, U.S. real GDP would have grown at an average annual rate of 1.7% over 2012:Q4-2013:Q1 instead of the 0.6% actually observed. Lower government purchases of goods and services only subtracted 0.1 percentage points from the 2013:Q2 GDP growth rate, which is one reason the 2013:Q2 GDP growth rate was better than the preceding two quarters.
Note that 2013:Q2 also marks some significant changes in how GDP is calculated, the most important being that research and development spending is now counted as part of fixed investment and is adding a term in the calculation of GDP that was not counted previously. I explained the rationale for this change here. The changes have relatively little consequences for the GDP growth rate, which is all I’ve been talking about up to this point. The new “intellectual property products” category contributed 0.15 percentage points of the total 0.55 percentage-point contribution of nonresidential fixed investment to Q2 GDP growth (the height of the yellow bars in the graph above). The revision results in a slightly more significant change in the level of GDP. The level of nominal GDP for 2013:Q1 is now claimed to be 3.4% higher than it was reported to be as of the end of June. This would imply a very modest downward adjustment when one is updating magnitudes such as the ratio of debt to GDP.
In other words, we’re reporting the level of economic activity in a slightly more favorable way now, but it’s not making any significant difference for the reported real growth rate, which continues to disappoint.
Could you plot your recession indicator against the S&P since 2000?
Add some ideas… We’re not into recession yet. The economy still has some room to grow and will take advantage of it through the next year. Here is a link to graphs that show how effective demand signals the end of utilizing more labor and capital, and then the start a recession. Keynes described this in chapter 3 of GT. The last 2 graphs show there is still some real GDP growth left. The rough estimate of hitting the effective demand limit looks to be in the 2nd half of 2014.
http://effectivedemand.typepad.com/ed/2013/07/true-potential-real-gdp-looking-at-previous-recessions.html
https://app.box.com/s/8l0nf726nvfw4evguq0t
Since 1960, when the yoy and 2-qtr. annualized rates of real GDP per capita fell below 1% with the 4-yr. rate below 3%, the US economy was in recession.
By these criteria, US real GDP per capita achieved stall speed in Q3-Q4 ’12 and has since decelerated into recession in Q1-Q2 ’13.
https://app.box.com/s/g8h60davt2qchnoh0wb8
However, with the secular 5- and 10-yr. trend rates of real GDP per capita negative and 0.8%, the annualized rate is within the margin of error of the reported estimates of the deflator, inventories, and import prices; and this condition will persist indefinitely as in the case of Japan from the late ’90s and early ’00s to date.
https://app.box.com/s/b7atr90b08xulflw7yhw
Speaking of Japan, the 10-yr. change of US real GDP per capita continues to track that of Japan since the ’90s, implying many years ahead of little or no growth of US real GDP per capita (negative rates if immigration and births to immigrants were to increase in the years ahead).
Had the Q2 deflator been reported at the Q1 rate of 1.2% instead of 0.3%, the rates of real GDP, real GDP per capita, and the 2-qtr. annualized real GDP per capita would have been reported at 0.8%, 0.3%, and -0.7% respectively, which historically are rates consistent with the onset of recessions.
https://app.box.com/s/64sva05zmjfmhiczcd6p
https://app.box.com/s/owyqtuohvuhlhjsy3riz
https://app.box.com/s/20a7wvsek6pc2f4dvfv1
The 5-yr. nominal GDP has decelerated to 2%, which is the slowest rate since the 1920s-30s (and previous secular inflationary and deflationary bear market periods in the 1910s, 1880s-90s, 1860s-70s, 1830s-40s, and 1800s-10s).
http://research.stlouisfed.org/fredgraph.png?g=l2Z
Also, reported employment growth is now well in excess of real final sales less productivity, implying that the U rate has bottomed and employment growth will markedly decelerate hereafter. The historical precedent during recessions is for the U rate to rise 50-100%+.
Note that during the last two bubble stock market tops in ’00-’01 and ’07-’08, it took the S&P 500 two qtrs. after the recession began to top out and before entering a bear market crash phase resulting from extreme overvaluation and record margin debt to GDP prior to 9/11 and the Lehman takedown.
The question is to whom GS, JPM, MS, DB, and the boyz hand off the empty bag this time around before they pull the plug and they and Bernanke skip town and hand the mess over to Yellen.
What was that big fall in Government purchases in 2012:Q4? Was it state and local? I don’t remember anything federal that early.
Speaking of which, using the latest revised figures in this tool:
2012-Q4 GDP: $16,420.3 billion
Tax Increases: +$56.3 billion
Govt Spending: -$26.6 billion
Fed QE: +295.0 billion
With the following GDP multipliers for each:
Govt Spending: 0.6
Tax Increase: -3.0
Fed QE: 1.015
We just about perfectly match actual GDP performance from 2012-Q4 to 2013-Q1, getting $16,534.9 billion (vs the reported $16,535.3). Looking at the results for fiscal drag:
Govt Spending: -$16.0 billion
Tax Increases: -$169.9 billion
We find that government spending decreases account for 8.6% of the fiscal drag, while the various payroll, investment, and higher income tax rates that went into effect at the beginning of the year account for the remaining 91.4% of fiscal drag observed in the first quarter of 2013.
Doubling our values for tax increases and QE, and plugging in the total reported reduction of $29.1 in government spending from 2012-Q4 to 2013-Q2, we very nearly obtain the reported nominal GDP of $16,633.4 for the quarter.
We find then that the tax increases are by far the greatest source of fiscal drag acting against more robust GDP growth in 2013, accounting for over 90% of drag.
Also, if not for the Fed’s QE programs, the U.S. economy would likely have entered into recession in October 2012.
An igyt: There was a surge in military spending in 2012:Q3 in anticipation of “fiscal cliff” problems, with the result that the change between 2012:Q3 and 2012:Q4 was sharply negative.
Professor Hamilton,
Recently I have spent some time looking at cointegration related to M2 and nominal GDP. I notice that from about 1959 to 1991 there seems to be a cointegration relationship between M2 and nominal GDP, but not so afterward. I found an Econbrowser comment from you, as I recall in 2006 saying there was a breakdown in the relationship. Do you have any update on the subject?
Edward Lambert wrote:
The economy still has some room to grow….
This phrase may be the biggest understatement I have read here!!
Excellent post Ironman. You truly do live again!
JDH There was a surge in military spending in 2012:Q3 in anticipation of “fiscal cliff” problems
I don’t think that’s likely because the federal government’s fiscal year begins 1 October (i.e., the beginning of CY2012:Q4). Spending in CY2012:Q3 represented spending from the last quarter of fiscal year 2012. DoD cannot “pull forward” spending across fiscal years.
Also note that the DoD spending in the NIPA tables comes mainly from data in the Defense Finance Accounting System (DFAS). DFAS primarily tracks Treasury disbursements, not contract obligations. DoD is unique among federal departments and agencies in that the law allows up to a five year lag between Congressional authorization and contract award (depending on the “color” of the money) and another five year lag between contract award and Treasury disbursement. So conceivably the NIPA defense spending that showed up in the NIPA tables last summer captured a requirement mandated by Congress in FY2004, awarded on contract in FY2008, with final delivery and Treasury disbursement in FY2012. It all depends on the “color” of the money. Operations and Maintenance (O&M) spending in the NIPA tables is nearly contemporaneous with the year of Congressional authorization. But NIPA table spending for shipbuilding, aircraft and spare engines for Abrams tanks…not so much.
“The economy still has some room to grow….
This phrase may be the biggest understatement I have read here!!”
Ricardo y Eduardo, the last three times the US was in a similar Long Wave debt-deflationary regime as we are today was in the 1930s-40s, 1880s-90s, and 1830s-40s, but non-performing private debts in the form of bank loans and corporate bonds had contracted 30-50% to clear the decks to make room for a new reflationary cycle once positive demographic forces became entrained.
Note that even Japan experienced a 30% decline in bank loans during ’98-’03, even though the “adjustment” was insufficient to clear the decks because of the cross-institutional lending and holdings of investments between banks, insurers, and non-bank financial firms.
But the US banks via the Fed and US gov’t bailouts resulting in deficits of 6-10% of GDP prevented the debt-deflationary clearing of the decks this time around, i.e., bank creditors and equity holders were ot required to eat the losses the Dimons, Blankfeins, et al., presided over.
Now total bank assets are at an unprecedented equivalent of 100% of GDP and equity market cap, resulting in the top 0.01-0.1% owners of the TBTE banks having claims in the form of compounding interest on effectively 100% of wages, profits, and gov’t receives in perpetuity.
Therefore, by definition there cannot be any growth of real GDP per capita hereafter after the TBTE banks’ owners get their cut as principal creditors and owners of the world. The US economy is thus hostage to 30 years’ worth of cumulative compounding interest claims by the rentier top 0.01-0.1% of US, UK, Canadian, Australian, German, Swiss, Dutch, Italian, Japanese, and Saudi households.
Moreover, now that the differential growth of total local, state, and federal gov’t debt to GDP has reached an order of exponential magnitude, neither can the US gov’t continue to increase debt and deficits to GDP with the result of growth of real GDP per capita.
Thus, the more the banks direct the Fed to print no-cost reserves to fund banks’ balance sheets with book entry profits, the more the TBTE banks accumulate perpetual claims against 100% of wages, profits, and gov’t receipts, causing the money multiplier and velocity to decline further, and precluding growth of real GDP per capita after debt service (“rentier tax”) and taxes.
Therefore, we are faced with an unprecedented situation in which the gov’t cannot increase deficit spending; banks only lend to Fortune 25-300 firms to buy back stock or to the US gov’t with liquidity they have credited to their balance sheets by the central bank they own; and the high price and change rate of of oil consumption as a share of GDP reduces household spending for the bottom 90%.
Additionally, the higher taxes on labor, ongoing offshoring of employment, wages, and purchasing power, and the accelerating automation and loss of employment and purchasing power in the service sector ensures that the rate of wages will continue to decelerate for the bottom 90%+ of US households.
One could make the case that the hyper-financialization of the US economy, extreme wealth and income concentration to the top 0.01-1% (and their effective disengaging from the productive economic sectors), WW II-like local, state, and federal gov’t spending to GDP, and unprecedented levels of public and private debt and debt service as a share of US GDP have combined to result in an evolution to a post-capitalist regime in which business cycle and financial markets volatility has been reduced at the cost of dynamism, innovation, resilience, and the capacity to grow real GDP per capita hereafter.
But the emerging regime is not “socialist” in historical sense in that it is not characterized by an expansion of social-welfare spending; rather, the precise opposite “austerity” is the prescription being advocated by the top 0.01-1% and their political surrogates for the bottom 90% of societies worldwide.
So what is the system if not “capitalist” or “socialist”? A more courageous type might suggest that the system has evolved to become a militarist-imperialist, rentier corporate-state that does not require growth of real GDP per capita but rather increasing concentration of wealth, income, and power.
Is this what a post-capitalist, post-Peak Oil, post-Oil Age world constrained by global “Limits to Growth” looks like?
Who ultimately prevails in a winner-take-all, last-man-standing contest for the world’s remaning scarce resources? Not the bottom 99%, I’d wager . . .
Laksman Achuthan has not withdrawn his recession call.
See Zero Hedge.
It is getting very difficult to separate “growth” from “recession”, isn’t it?
I’m going to have a hearty LOL if we do have another recession. We’re about due for one aren’t we? Certainly by 2017. Anyway, just lol at the stimuLOL package of 2009. LOL at QE and LOL at ZIRP. IT DIDN’T WORK. Of course Krugman, Menzie, and the rest of the sock puppets will never say “Gee I guess govt borrowing/printing and handing money out to political friends doesn’t work.” No, they will, of course, say their plans weren’t big enough and were ruined because the Republicans hate minorities and women.
And now for something important :
A man that uncovered massive human rights violation by the US on a global scale (via the false-flag-anti-terrorism “patriot” act) is granted asylum in Russia.
This is not from a crappy sci-fi novel written in the 60’s, welcome to the year 2013, James !
This seems excessively optimistic: Wisconsin Among Best in the Nation in Economic Outlook
Just a quick thank you note for the ongoing discussion. Enlightened blogs & comments are most fun!
When the erudite recognize intuitive guidance given by cross-sample extrapolation, the convergence of expectations and real life econo-politics seems apropos.
Readers here (and just a few select places elsewhere) know the Nikkei has been a rich schematic of quantitative bubble dynamics, a veritable running history ten years ahead.
Up until QEII, that is.
Then the gravy train came off the tracks. Still, I’m thinking Hmmm, BOJ style equity purchases may be exactly what we are experiencing with all those new FR-stuffed F-sys reserves and subsequent paper profits.
Now, what really happened to Japan between 2003 and 2007…. Will we have a replay of military stimulus? From China maybe?
We’ll just have to wait and see what the US experiences from now until 2017. Recoupling with reality? Recession replayed?!! Stay tuned and…
Keep those cards and letters coming!
Laksman Achuthan is wrong by the terms of his call in 2011.
“The economy still has some room to grow….
This phrase may be the biggest understatement I have read here!!”
But what we need to accept is that from 1929 to 2009 ish we averaged 3.1% growth per year. That was with a YOUNG and RAPIDLY growing population. An ever increasing supply of highly productive workers. NOW we have a OLD, rapidly again, and slow growing population, COUPLED with MORE regulation than we’ve EVER had. We must STOP expecting 3%+ growth. It’s NOT going to happen. We must adjust our budgets and projections for 2% growth or we are doomed.
Don’t come and tell me we can do better. You can’t get grandpa to produce in his 70’s like he did in his 40’s.