Socialist Economic Bulletin

.647ZProgressive London conference discussion on economic strategy – 19 FebruaryThe terrible 4th quarter 2010 UK GDP figures show the urgent need for alternatives to the Tory economic agenda. This discussion will be a key focus at the Progressive London conference on 19 February at which Ken Livingstone will speak.

Mick Burke, from

.758ZUS 4th quarter 2010 GDP shows cyclical upturn and continued long term economic decelerationBy John Ross

Summary

US GDP growth figures for the 4^th quarter of 2010 of 3.2% came in below the average analyst forecast for the quarter of 3.5%. Cyclically the US economy is expanding but its growth rate is significantly slower than in previous post-World War II business cycles. Despite the cyclical upturn the long term slowing of the US economy, analysed in previous articles, therefore continues. The underlying reason for this deceleration remains the decline in US fixed investment.

Trends in this business cycle

To place the latest US economic data in comparative context, the performance of US GDP during successive business cycles since 1973 is shown in Figure 1. The label for each cycle is the year of the peak level reached by GDP in the previous cycle, with the data lines then showing the consequent recession and continuing to the high point of GDP in the expansion. For comparison trends lines for 2.6% and 1.7% growth are shown – these being, respectively, the current 20 year and 10 year moving averages for US GDP growth.

Figure 1

It may be seen that recovery in this US business cycle is slower than in previous cycles.

The 4^th quarter of 2010 was three years after the peak of the previous business cycle in the 4^th quarter of 2007. US GDP in the 4th quarter of 2010 was 0.1% above that previous peak level. In comparison:

• three years after the beginning of the double dip recession commencing in 1980 US GDP was 0.6% above its previous peak level;

• three years after the beginning of the recession starting in 1973 US GDP was 4.8% above its previous peak;
• three years after the beginning of the recession beginning in 1990 US GDP was 5.3% above its previous peak;
• three years after the beginning of the recession commencing in 2000 US GDP was 6.2% above its previous peak.

The slow pace of recovery of US GDP in the present business cycle compared to previous ones is therefore clear.

The results of the latest data on longer term US growth are shown in Figures 2 and 3 – showing respectively 20 year and 10 year moving averages for US growth rates. The latest 20 year moving average for US growth, to the 4th quarter of 2010, is 2.6% and the latest 10 year figure is 1.7%.

The deceleration of long term US growth is evident. The 20 year moving average of annual US GDP growth fell from a peak of 4.3%, in the 2^nd quarter of 1969, to 2.6% in the 4^th quarter of 2010. The 10 year moving average of US annual GDP growth has fallen from a peak of 5.0%, in the 2^nd quarter of 1968, to 1.7% in the 3^rd quarter of 2010.

Figure 2

The slow rate of US economic recovery

To show the consequences for US growth if recovery were to continue at the present rate, Figure 4 shows 3.2% US GDP growth projected to the end of 2011 – this growth rate is both that for the latest quarter and the average projection, in economists polled by the Wall Street Journal, for US growth in 2011.

To take a comparison for the rate of recovery during US business cycles, the 4th quarter of 2011 will be exactly 4 years after the peak of the previous business cycle. Given 3.2% annualised growth until the end of 2011, US GDP in the 4th quarter of 2011 would be 3.4% above its previous peak. For comparison, after 4 years of the 1980 business cycle US GDP was 9.1% above its previous peak, in the 2000 business cycle the equivalent figure was 9.5%, after 4 years of the 1973 business cycle US GDP was 10.0% above its previous peak, and after 4 years of the 1990 business cycle US GDP was 10.5% above its previous peak.

Average growth over these cycles shows clearly the slow trend of the current recovery. Annual US GDP growth after 4 years of the 1980 business cycle averaged 2.3%, with the equivalent figures for the 2000 cycle being 2.4%, for the 1973 cycle 2.5%, and for the 1990 cycle 2.6%. However, given an average 3.2% growth until the end of 2011, annual average US GDP growth over 4 years of the present US business cycle would be only 0.9% – a slow recovery in comparison.

Decline in investment

The reason for both the depth of the US recession and relatively slow growth during recovery in the present business cycle is clear. As analysed in previous articles the present US recession is dominated by the fall in fixed investment. Figure 5 shows, in constant price 2005 dollars, the change in the components of US GDP since the peak of the previous business cycle. As may be seen, both US GDP and all components of GDP, excluding the marginal decline in inventories, are now above their previous levels – except for fixed investment.

US GDP is $19bn above is previous peak level, while inventories are down a marginal $5bn. The increase in personal consumption is $89bn, the rise in government consumption is $131bn, and the increase in net exports is $168bn. However US private fixed investment is $386bn below its 4th quarter 2007 level.

As shown in Figure 6, the current decline in US fixed investment far exceeds that seen in previous post-World War II business cycles. In the 4th quarter of 2010 US private fixed investment was still 21.5% below its peak level – the latter being reached almost five years previously in the 1^st quarter of 2006.

Not only is the depth of fall of fixed investment in this business cycle far greater than in the previous ones, but it is unprecedented in a post-World War II business cycle that after five years US private fixed investment is still below its previous peak.

Decline in non-residential fixed investment

It is important to note that this decline in US fixed investment is not confined to the residential sector. As shown in Figure 7, approximately half the decline in fixed investment is due to decline in the residential sector and half to the non-residential sector – the fall, in constant price terms, in residential fixed investment is $197bn and the decline in non-residential fixed investment $193b.

Figure 8 similarly illustrates that the decline in non-residential fixed investment in this business cycle is more severe than in previous cycles.

US non-residential fixed investment peaked in the first quarter of 2008 and by the 4^th quarter of 2010, i.e. 11 quarters after this peak, was 12.5% below its previous highest level. After the same number of quarters in the 2000 cycle non-residential fixed investment was 9.9% below its previous peak, in the 1973 cycle 6.1% below its previous peak, in the 1980 cycle 5.4% below, and in the 1990 cycle 4.7% below its previous peak.Therefore the fall in non-residential fixed investment in this business cycle was more severe than in previous post-war cycles.

It is interesting to note that the slowest pace of recovery of non-residential fixed investment, prior to the present cycle, was in the 2000 cycle – i.e. recovery of non-residential fixed investment has been slower in the last two US business cycles than in previous ones. Such a slow rate of recovery of non-residential fixed investment would, of course, in large part explain the slowing long term rate of growth of the US economy.

Figure 8

The long term trend of US fixed investment

In order to show the structural consequence of this weakening trend of US investment, Figure 9 shows total US fixed investment, i.e. including both private and government fixed investment, as a percentage of GDP at current prices.

As may be seen, until the mid-1980s, with relatively short term fluctuations, US fixed investment remained relatively stable as a percentage of GDP – essentially centred on a level of 20% of GDP. This was, however, from the mid-1980s followed by a decline, with the percentage of fixed investment in GDP falling to 17.0% of GDP by 1991, recovery and then a lesser fall to 18.4% of GDP in 2002, and a precipitate drop to 15.3% of GDP in 2009.

In short, from the mid-1980s onwards, the level of fixed investment in the US has experienced both greater fluctuations and greater declines as a proportion of GDP. The consequence of the aftermath of Reaganite economics has therefore been a fall in US fixed investment as well as slower US growth rates.

Figure 10 shows that this fall in US fixed investment affected not only the residential but also the non-residential sector. US non-residential fixed investment rose relatively steadily to a peak of 14.0% of GDP in 1981 but then began to decline overall and fluctuate more significantly – the low point being reached at 9.5% of GDP in 2009.

The fall in residential fixed investment after 2005, to a low of 2.5% of GDP in 2010, is evident in Figure 10.

In short the last two and a half decades have seen a significant fall in US fixed investment in both residential and non-residential sectors.

Figure 10

Conclusion

The US economy has continued to turn upwards after the Great Recession. Such cyclical recovery may be expected to continue in the coming period – as it has so far been in place for only six quarters. But the pace of economic US growth is significantly slower than in previous post-war economic cycles. It is insufficient to reverse the long term slowdown in the average growth rate of the US economy. Only a reversal of the underlying decline in US fixed investment would be sufficient to halt this slowing of the US economy.

For a longer term, and more detailed, analysis of the long term deceleration of the US economy readers are referred to an earlier article.

This article originally appeared on the blog Key Trends in Globalisation.John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

.895ZAverage economist predictions for US GDP would mean only 0.9% annual average growth over business cycle to end 2011

By John Ross

Summary

A recent Wall Street Journal survey of economists revealed an average prediction of 3.2% US GDP growth in each quarter of 2011. This figure may be used to further clarify the analysis of US growth trends carried on this blog and discussion of the conclusions of Gavyn Davies, Jim O’Neill, and others regarding the issue.

A previous post noted the US economy has been slowing for several decades. The average growth rate currently projected for cyclical US recovery is insufficient to reverse such gradual but long term deceleration. The implications of 3.2% growth to the end of 2011 are that US GDP would have grown at an average of only 0.9% in 4 years of the current business cycle – substantially below trend to an equivalent point in previous post-World War II cycles. Such a 3.2% growth rate, even maintained for a 4 year period, would not reverse the US economy’s long term deceleration.

Therefore, unless there is a sharp acceleration of US growth above current projections, the trend of long term slowdown of the US economy will continue.

Trends in US business cycles

To allow comparison of US performance during business cycles, Figure 1 shows quarter by quarter economic growth in each US cycle since 1973. The lines show the development from the peak of the preceding cycle, through the cyclical recession, to the final quarter of growth before the ensuing recession – the year indicated for each line is the starting one for the the cycle. For comparison a 2.5% annual growth trend line and a 1.7% annual growth trend line are shown – these being respectively average the 20 year and 10 year US annual growth up to the latest available US GDP data for the 3rd quarter of 2010. For the latest business cycle, starting in the 4th quarter of 2007, a 3.2% growth projection for five quarters after the latest available data, i.e. to the end of 2011, has been added.

It may be seen from Figure 1 that 3.2% growth to the end of 2011 would leave US GDP growth considerably below that in the equivalent stages of previous US business cycles. .

Taking comparisons, the 4th quarter of 2011 is exactly 4 years after the peak of the previous business cycle in the 4th quarter of 2007. Given 3.2% annualised growth until the end of 2011, US GDP in the 4th quarter of 2011 would be 3.4% above its previous peak. For comparison, after 4 years of the 1980 business cycle US GDP was 9.1% above its previous peak, in the 2000 business cycle the equivalent figure was 9.5%, after 4 years of the 1973 business cycle US GDP was 10.0% above its previous peak, and after 4 years of the 1990 business cycle US GDP was 10.5% above its previous peak.

Average growth over the cycles shows trends clearly. Annual US GDP growth after 4 years of the 1980 business cycle averaged 2.3%, with the equivalent figures for the 2000 cycle being 2.4%, for the 1973 cycle 2.5%, and for the 1990 cycle 2.6%. However, given an average 3.2% growth until the end of 2011, the annual average US GDP growth over the 4 years of the present US business cycle would only be 0.9% – self-evidently a significantly slow recovery in comparison.

10 and 20 year moving averages

To show the effect of such performance on longer term US growth rates, Figure 2 shows the 10 year moving average of US GDP growth with a projection of 3.2% growth until the end of 2011. Figure 3 shows the same projection analysed in terms of a 20 year moving average.

As Figures 2 and 3 show the average economists prediction of 3.2% growth in 2011 would be insufficient to reverse the long term slowdown in US growth whether a 20 year or a 10 year moving average is taken.

Considering the 20 year moving average, 3.2% US GDP growth to the end of 2011 would raise 20 year average US GDP growth to 2.7% from the present 2.5% – still below the 3.0% in the 4th quarter of 2007, before the current cyclical downturn commenced, and which was itself below the long term rate of growth of US GDP.

Taking the 10 year moving average, 3.2% US GDP growth to the end of 2011 would raise the 10 year average growth figure to 2.0% from the present 1.7% – still well below the 2.9% in the 4th quarter of 2007.

Therefore it is clear that 3.2% growth in 2011 would be insufficient to reverse the long term deceleration of US growth.

Long term consequences of a 3.2% growth rate

Taking a longer time frame, it is also clear that a much more prolonged period of growth rates at current projections would not greatly alter the situation regarding failure to reverse the gradual but clear long term slowdown of the US economy. To show this, Figure 4 illustrates the result of 3.2% US GDP growth maintained until the end of 2015, i.e. over a 4 year period, for a moving 10 year US annual average growth rate. Figure 5 shows the same for a 20 year moving average. It may be seen that in neither case would a reversal of the long term deceleration of US growth rates occur.

Figure 4

Taking figures, 3.2% US growth maintained until the end of 2015 would raise the 20 year moving average for US growth to 2.7%, compared to 3.0% in the 4th quarter of 2007, before the current recession, and raise the 10 year moving average for growth to 2.1% compared to 2.9% in the 4th quarter of 2007.

Even a 4 year period at currently projected growth rates would not reverse the long term slowing of the US economy. Only if there were an acceleration of US growth rates to levels significantly above those currently projected would the gradual but progressive slowing of the US economy be reversed.

Conclusion

Analysis of prospects for the US economy has tended to concentrate on “spectacular” or short term trends such as predictions of double dip recession, Japan style prolonged stagnation, or fast cyclical growth. The fundamental trend in the US economy, however, is its long term slowing

from its historic growth rate. Current projections for US growth rates would not alter this deceleration.

This article originally appeared on the blog Key Trends in Globalisation.John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com1

.814ZLong-term and short-term cyclical prospects for US growth

By John Ross

Gavyn Davies, chair of Fulcrum Asset Management and former head of global economics at Goldman Sachs, launched a discussion on his Financial Times blog on prospects for US economic growth. This, among other issues, refers to material which has appeared here.

This discussion, as both Gavyn Davies and the present author note, highlights the need for clarity in distinguishing between short-term cyclical and longer term trends in US growth and problems in perspective that arise if the two are conflated.

The aim of the present article is therefore to provide some precise numbers which clarify these points. This also gives parameters by which to judge US short (and long) term growth performance as economic data is released – the US will publish new GDP data, for the 4th quarter of 2010, on 28 January.

Assumptions on US economic growth

Gavyn Davies referred to an article which appeared here entitled “The long term slowing of the US economy”. This noted the progressive long term deceleration of the US economy.

If a 20 year moving annual average of US GDP growth is compared at 10 yearly intervals, then 20 year annual average growth to the 3rd quarter of 1970 was 3.8%, to the 3rd quarter of 1980 3.6%, to the 3rd quarter of 1990 3.2%, to the third quarter of 2000 3.2%, and to the 3rd quarter of 2010 2.5%. For further details readers are referred to the article.

Gavyn Davies confirmed the article’s overall trend conclusion on the long term deceleration of US growth and provided further information on US GDP per capita GDP, which had not been dealt with in the article. He commented: “The rate of [US] growth has clearly slowed down in recent decades. I do not think this trend has been arrested or reversed, but there could still be scope for several years of cyclical recovery.”

I strongly agree with emphasising this distinction and it therefore further clarifies the discussion if definite numbers are plugged in.

Gavyn Davies, and Jim O’Neill chairman of Goldman Sachs Asset Management, both suggest as parameters of strong US growth performance in the coming period figures in the region of an annualised 3-4%.

Gavyn Davis noted positively: “according to the ISM business surveys and much other data published lately, the growth rate of [US] GDP may have risen to around a 3.5 to 4 per cent rate.” Jim O’Neill wrote: “A number of quarters of 3-4% or more real GDP growth are likely in the next couple of years.”

Certainly, compared to recent US growth performance, an annualised 3-4% would be high – the current US 5 year average annual growth is 0.9% and current 3 year growth is zero.

However, it should be noted that such stronger cyclical growth would still be insufficient to halt the long term slowing of the US economy. To show this Figure 1 shows the 20 year moving average for US GDP growth with two projections for the next two years 2011 and 2012 – that US growth is 3% or 4% in the nine successive quarters from the latest available data (the 3rd quarter of 2010) to the end of 2012. Figure 2 shows the same projections using a 10 year moving average.

It may be seen from Figures 1 and 2 that neither a 3% or a 4% growth rate sustained over the next two years would be sufficient to reverse the long term deceleration of the US economy.

Results of projections

Taking first a 20 year moving average, if a 3% US growth rate were maintained to the end of 2012 the 20 year US annualised growth rate would advance from 2.5% to 2.7%. If 4% growth were maintained for two years then the US 20 year moving growth average would be 2.8%.

However in the 4th quarter of 2007, that is the quarter before the start of the current US recession, the 20 year moving average growth rate was 3.0% – and as can be seen from Figure 1 this was a decline from the US rate of growth in previous decades. Therefore neither 3% nor 4% growth for the next two years would be sufficient to reverse the long term decline in the US growth rate.

Turning to a 10 year average, 3% growth over the next two years would take the 10 year US growth rate to 2.0% and 4% growth would take it to 2.3%. However the US 10 year moving average growth in the 4th quarter of 2007 was a significantly higher 2.9%.

Therefore annual average US GDP growth over years of 3-4%, as may be seen from Figures 1 and 2, would be insufficient to halt the declining trend of US 10 year GDP growth.

Longer term projections

It is indeed striking that even if 3-4% annual growth were continued for over four years, until the 4th quarter of 2014, this would still not be enough to reverse the slowing long term trend of US growth. A 4% US growth rate sustained until the end of 2014, for 17 successive quarters, would take the 20 year annual average of US growth to 2.8% and the 10 year average to 2.4%. A 3% US growth rate sustained until the end of 2014 would take the 10 year annual average growth rate to 2.0% and the 20 year annual average to 2.6%.

In neither case would this be sufficient to take the long term US growth rate back to pre-recession levels.

Recovery in business cycles

This above data illustrates, of course, that trends and cycles are not separate. Closer examination indicates that the long term slowing of the US economy is due not simply to deeper recessions, most notably the present one, but to slower growth during expansions. Long term deceleration of the US economy is a result both of the depth of recessions and of the relative slowing of recoveries.

To illustrate this the fundamental data regarding successive US business cycles is illustrated in Figure 3. This shows economic growth in each US cycle since 1973. The lines show the development from the peak of the preceding cycle, through the cyclical recession, to the final quarter of growth before the next recession – the year indicated for each line is the starting year of the cycle. For comparison a 2.5% annual growth trend line and a 1.7% annual growth trend line are shown – these being respectively average 20 year and 10 year US annual growth to the latest available data.

The fundamental trends shown by Figure 3 are clear. The current business cycle naturally saw the deepest fall of US GDP in any post-World War II recession. The 1973, 1980 and 1990s cycles culminated in annual average growth over the cycle above the 2.5% trend, while the 2000 and 2007 cycles showed growth below it – which simply illustrates in detail the long term slowing of the US economy.

The 2007 recession shows a trend which is so far significantly below both the 2.5% 20 year annual average and the 1.7% 10 year US average. Failure of US growth to eventually finish above these figures over the cycle would confirm a further slowing of the US economy.

Comparisons of US growth

Such trend rates of US growth in previous cycles give an appropriate benchmark for considering US economic recovery. Evidently, if a comparison is made to extreme scenarios then US performance might appear strong.

Jim O’Neill, for example, makes a comparison to Japan’s two decade long stagnation after 1990: “My hunch for the surprise of 2011 is that the US will positively shake people up… I believed that in spite of the considerable challenges for the consumer, the US economy would not fall into a Japan-style abyss of a lost decade or two. The evidence that the US will not go down this route will, I suspect, be this year’s surprise.”

By comparison to Japan’s post-1990 performance US performance of course would appear robust. But only if it were held that there was a major chance the US could enter a Japanese 1990s style stagnation would the fact that it did not do so constitute a surprise. An exaggerated standard of comparison has the inevitable effect of making US economic performance appear “strong”.

When making a more sober and quantitative standard of comparison, however, Jim O’Neill’s data is not precise and therefore obscures an appropriate comparison – precisely the slowing trend of US long term growth. He writes: “underlying productivity performance, together with its relatively more favourable demographic dynamics, suggested to me that the US might at some stage shift back into a growth trend of close to 3%… the behaviour of both the Federal Reserve and post midterm election Congress has probably allowed the momentum to take the US back into its growth trend…. A number of quarters of 3-4% or more real GDP growth are likely in the next couple of years.”

But, as the data given above shows, 3 per cent has not been US trend growth for more than 20 years – as noted 20 year US trend growth is 2.5% and 10 year trend growth is 1.7%. Nor, as illustrated above, would 3-4% GDP growth over the next couple of years reverse the long term slowdown of the US economy.

Speed of growth in previous US expansions

Indeed figures of 3-4% growth during recovery would be significantly below those experienced in US business cycles. For example, US GDP in the third quarter of 2010, the latest available data, was 0.6% below its peak in the 4th quarter of 2007 – i.e. after 11 quarters. By chance 11 quarters after the start of the US double dip recession of 1980 (in 4th quarter 1982), the previous most serious US post-World War II recession, US GDP was also 0.6% below its peak. The annualised growth in the succeeding quarters was then 5.0%, 9.0%, 7.9% and 8.3% – i.e. of a totally higher order of magnitude than the 3-4% recovery rates currently being projected in this US business cycle.

Even if the post-1980 cycle is discounted as being particularly strong, the post-1990 cycle saw three quarters with more than 6% annualised US GDP growth and six quarters additional quarters with more than 5% annualised growth – i.e. nine quarter of above 5% annualised growth. So “a number of quarters of 3-4% or more real GDP growth are likely in the next couple of years” would not represent a strong performance.

It is true that the post-2000 cycle only saw two quarters with more than 5% annualised growth but this precisely reflected the slowing of the US economy to the 2.5% 20 year average and 1.7% 10 year moving average. The projections made by Jim O’Neill would, therefore, not constitute strong US economic growth in historically comparative terms and would be insufficient to reverse the long term slowdown of the US economy. This is a more appropriate scale of comparison.

Glass half-full and glass half-empty

Finally, to summarise the importance of the necessary distinction between short term cyclical and longer term trends, the old analogy of a glass half-full or a glass half-empty might be used.

Taking first the “glass half-full”, the above data shows there is considerable potential for a near term US cyclical upturn even within the framework of a long term slowing of the US economy. If the reasonable assumption is made that the long term deceleration of US growth is determined by structural factors, and long term acceleration cannot occur without a change in these structural factors, then it is nevertheless clear from the above data that even without any structural changes US growth could average 3-4% over the next two years – i.e. such a growth rate would not require overturning the structural elements creating long term US slowing. This is simply because 3-4% growth over the next two years would actually be consistent with the pattern of long term slowing of the US economy, and would be weaker than in previous cyclical recoveries.

This, of course, is not a prediction that US growth over the next two years will average 3-4% – this depends on more short term factors. It is merely a statement that there would appear to be no element in the data on long term trends in US growth that would prevent an acceleration of growth to 3-4% over the next two year period. This might well have favourable consequences for US equity and other markets – that is, the short term cyclical pattern might be considered a “glass half-full”.

But the “glass half-empty” is that even growth rates of the 3-4% type projected over the next two years, or even for a four year period, would be insufficient to reverse the long term deceleration of the US economy. Only a US recovery at growth rates substantially above those currently projected, and/or sustained for significantly long periods, would reverse the trend of the long term slowing of the US economy.

Conclusions

What conclusions derive from the above? Two self-evidently “spectacular” perspectives for the US economy, either a 1929 style depression or a post-1990 Japanese style stagnation, are not supported by the data. However a more “mundane” but significant one is. The US economy has been decelerating for several decades. None of the rates of growth presently projected for cyclical US recovery are sufficient to reverse this gradual but long term slowing of the US economy.

This result may appear more prosaic than some other scenarios, but given the central role played by the US in the world economy its results are likely to to be profound.

Gavyn Davies’ initiating of a thorough, and clarificatory, discussion on prospects for US growth is therefore very welcome.

This article originally appeared on the blog Key Trends in Globalisation.John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

.122ZThe long term slowing of the US economy – and its implications

By John Ross

Summary

Current discussions on the US economy have tended to focus on shorter term issues – the likelihood, or otherwise, of a double dip recession, or perspectives of short term accelerations or decelerations in the US business cycle. These are significant issues. But they may obscure a more fundamental but less commented on trend – a long term deceleration of the US economy which has been under-way for several decades.

The long term annual growth rate of the US economy has slowed from its historical average of 3.4% to a 20 year moving average of 2.5% and 10 year moving average of 1.7%. As the US remains the world’s largest economy, and the single most important influence on international economic trends, the importance of such long term deceleration is self-evident.

This article focuses on establishing the facts of this gradual structural deceleration of the US economy. Further implications of this trend are considered in the conclusion of the article.

Background

To understand the significance of the long term deceleration of the US economy it is important to note that, in relative terms, the steady growth rate of the US economy was a central feature of the world economy for the last 120 years.

Taking the historical period 1889 to 2009, US annual GDP growth averaged 3.4%. As shown in Figure 1, with the exception of the fluctuations during and between World Wars I and II, a striking feature of US growth is its regularity. A virtual ruler might be placed along the US growth path for much of this 120 year period – a pattern strikingly differing from the majority of other economies.

Long term deceleration

Despite this considerable regularity in US economic growth a very gradual slowdown is visible in Figure 1. This trend may be seen more clearly by taking historical average growth rates over different periods to the latest available annual data – for 2009. Such long term growth rates, taken at 10 year intervals, are illustrated in Figure 2. The number of years indicated under the bars are the period over which the average growth rate is calculated up to 2009 and the percentages above the bars indicate the annual average GDP growth rate during the period.

Figure 2

Taking first the longest timescales, in the 120 year period 1889-2009, as already noted, annual average US GDP growth was 3.4%. During the 70 year 1939-2009 annual average US GDP growth was 3.6% etc.

Taking very long term 120 to 70 year periods, US growth rates remained essentially constant or arguably mildly accelerated – the lowest average annual growth in this period was 3.3% and the highest 3.6%.

From this point on, however, it may be seen from Figure 2 that US growth decelerates slowly but perceptibly and continuously. The 70 year annual average growth rate to 2009 (1939-2009) is 3.6%, the 60 year rate (1949-2009) is 3.3%, the 50 year rate (1959-2009) is 3.1%, the 40 year rate (1969-2009) is 2.8%, the 30 year rate (1979-2009) is 2.7%, the 20 year rate (1989-2009) is 2.5%, and the 10 year rate (1999-2009) is 1.9%.

The trend of deceleration is unequivocal. The US 10 year growth rate is now only slightly over half of the historical growth rate of the US economy. The more recent the period the slower the average US growth rate – i.e the US economy is decelerating with time.

As will be seen below, extending the data to the most recently available lowers the figures marginally further.

Recent trends

In order to illustrate post-World War II trends in the US economy more clearly, Figure 3 shows a 20 year moving average for US annual GDP growth – the 20 year period being chosen as sufficient to smooth out cyclical fluctuations. The calculation is for each quarter up to the most recently available data – that for the 3^rd quarter of 2010.

The gradual, but clear, downward trend in the rate of US GDP growth is evident. The 20 year moving average of annual US GDP growth fell from a peak of 4.3%, in the 2^nd quarter of 1969, to 2.5% in the 3^rd quarter of 2010. There was some recovery centred on the 1990s, although insufficient to regain previous growth rates, followed by a sharper decline to the most recent period.

If a 20 year moving annual average is compared at 10 yearly intervals, then the 20 year annual average growth to the 3rd quarter of 1970 was 3.8%, to the 3rd quarter of 1980 3.6%, to the 3rd quarter of 1990 3.2%, to the third quarter of 2000 3.2%, and to the 3rd quarter of 2010 2.5%.

In short the recent sharp deceleration of the US economy is an extension of a gradual but clear long term decline in the US growth rate.

In order to show the timing of the trend more clearly, Figure 4 superimposes a 10 year moving average US annual GDP growth on the 20 year moving average. Evidently a 10 year moving average shows greater fluctuations than the 20 year moving average, but the downward trend is also clear.

The 10 year moving average of US annual GDP growth has fallen from a peak of 5.0%, in the 2^nd quarter of 1968, to 1.7% in the 3^rd quarter of 2010. The deterioration due to the international financial crisis, of course, also shows more sharply using a 10 year moving average.

Figure 4

Implications

To summarise, the data clearly show a long term slowing of the US economy. The recent worsening of economic performance is not purely cyclical but is superimposed on a more long term slowing of the US economy. There are numerous implications of such a trend. Among these are:

1. It is significant to study short term fluctuations in the US economy, for example whether there will be a double dip recession (unlikely) or how strong will be the short term cyclical recovery. However a more fundamental trend is the long term slowing of the US economy.

2. As US GDP growth outperformed the other main developed economies in Europe and Japan in the most recent periods, but the US economy was itself slowing, this gap was wholly due to the poor performance of Europe and Japan and not acceleration in the US.

3. The lack of success of Reaganite/neo-Liberal policies in the US is evident from the data. Recent US growth rates are slower than those either in the period of “Keynesian” dominance of US economic policy, from World War II to the 1970s, or during US growth prior to World War II.

4. “New economy” claims, that is of a new period of rapid US growth based on Information Technology from the 1990s onwards, do not withstand statistical examination. Higher levels of US investment during the 1990s partially reversed slowing rates of US growth but this was temporary, and was followed by a new decline of US growth to a lower level than previously.

5. Claims by economists, for example Barro, that “U.S. data do not reveal major changes… in the average rate of economic growth” are incorrect.¹ On the contrary, as shown above, the US economy is slowing with time.

6. Careful analysis must evidently be made, in the the light of data above, of figures used to project US economic growth. As the US is currently recovering from deep recession, above average trend growth would be expected in the immediate period. This would tend to lead statistically to convergence over the cycle to an average US growth rate. But what average should be taken? It would appear clear from the data above that taking a 3.4% historic US average GDP growth rate is too high. For example, should a 20 year average or a 10 year moving average be taken? As these are respectively 2.5% and 1.7% this is a significant difference.²

7. The rapid growth decrease in the gap in total GDP between developing and developed economies clearly reflects not only acceleration in developing economies but also slow down in the most important developed economy, i.e the US.

As the long term slowing of the US economy is evident from statistical data, it must be integrated into analyses of both the US and international economies.

Notes

1. Robert J Barro, Macroeconomics: A Modern Approach, Thompson South Western 2008 p6.

2. The IMF in its latest World Economic Outlook predicts 1.7% US average GDP growth over the period 2009-2015 – i.e. the 10 year moving average. Long term projections, such as those in the recent PWC study The World in 2050 have tended to use projected US growth rates of around 2.4%. This is not apparently unreasonable, as it approximates to the US 20 year moving average, but given the tendency of the US economy to structural slowing, a downside risk clearly exists in such projections. A 2.4% growth rate would imply significant acceleration from that experienced by the US in the last 10 years – in which case explanation of such acceleration must be supplied given that the US economy has tended to slow and not acclerate.

* * *

This article originally appeared on the blog Key Trends in Globalisation.

John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

.226ZChina’s growth, China’s cities, and the new global low-carbon industrial revolution

A look at the by Nicholas Stern by Mark Watts

A thoughtful paper by Nick Stern,‘China’s growth, China’s cities, and the new global low-carbon industrial revolution’, published without great fanfare before Xmas, demonstrates that the widely promulgated view that China is rushing into exponential economic growth without regard to the growing environmental consequences is wide of the mark.

While most commentators fail to get past the frequently repeated statistics that China is now the biggest carbon emitter in the world and builds a new coal fired power station every week, Lord Stern, author of the eponymous ‘Stern Review’ on the economics of climate change, takes a closer look at the direction of Chinese environment and energy policy.

As Stern sets out “China is already at the forefront of the development of new low-carbon technologies and China has a great deal to gain by being in the vanguard of this new global growth story..China’s clear and strong action has been inadequately recognised and understood around the world."

Stern’s analysis is that China has no intention of simply aping the economic growth path of western countries:

“It is a profound and dangerous mistake to ignore these opportunities and to see the transition to low-carbon growth as a burden and a growth-reducing diversion. That mistake arises if you apply the crude growth models from the middle of the last century with their emphasis on fixed technologies, limited substitution possibilities, and simplistic accumulation. Modern growth models are about learning and technical change, and about substituting new inputs; and these models will also have to embrace interactions with the environment in terms of its influence on possibilities for both consumption and production…

“That is why I was so happy to learn, from a senior figure in the planning process, about the outline of the 12th plan, published in Chinese a few days ago. It does indeed embody a new model of growth, with its emphasis on domestic consumption and on efficiency. Together they will allow reduced saving rates without reducing growth rates. Further, and also of great importance, are the absolute cap on energy and the close attention to policies to reduce emissions. This plan is a landmark for China and for the world.”

While China’s future plans may be impressive, it is right that the country should be judged on its existing record. But as a report last year by the Climate Group, ‘China’s Clean Revolution: opportunities for a low carbon future’, demonstrated, China’s record on decarbonising its economy is far better than most popular perception would expect. For example:

· Since 1980 the energy intensity of the Chinese economy per unit of GDP produced has fallen by 60%

· 65% of all solar water heater installations in the world are in China

· 50% of all solar water heater manufacture takes place in China, along with 30% of global supplies of photo-voltaic panels (40% including Taiwan)

· While electric vehicles are still experimental in Europe and north America, there are already 50 million electric bikes on Chinese roads and China has the first mass produced hybrid plug-in car

· While the volume of car sales in China last year overtook those in the US, 60% of the Chinese market is for compact, more energy efficient vehicles

· Growth in installed wind turbines is faster in China than any country in the world, with wind power generating capacity topping 12mkWh in 2008, and doubling each year

China’s contribution to tackling climate change is, of course, crucial. As Nick Stern puts it:

“Starting at the current global level of 47 billion tonnes of CO₂e p.a., the most plausible paths [to avoid irreversible catastrophic climate change] pass well below 35 billion tonnes of CO₂e in 2030, and well below 20 billion tonnes of CO₂e in 2050. These numbers, 35 billion tonnes in 2030 and 20 billion tonnes in 2050, are crucial. If we are serious about a reasonable chance of 2°C they are essentially global constraints. If we break them as a world it will be very difficult to catch up later. We cannot negotiate with the environment and the laws of physics and chemistry.

“For a 2°C path, the world’s average emissions per capita have to be around or below 4 tonnes of CO2e by 2030 (this is clear from dividing the constraints ‘well below 35 billion tonnes’ by a likely world population of 8 billion in 2030). Thus China’s emissions per capita would likely have to be in 2030 around or below its current level of 6-7 tonnes for the world to have some chance of a 2°C path. That would mean that China would have to return to something like a total of 8-9 billion tonnes of emissions by 2030. In other words, if China is to grow at 7% p.a. for the next two decades and we hope, because China is still a poor country, growth rates will be at least 7%, it would have to cut emissions per unit of output by a factor of 4 over 20 years: if output goes up by a multiple of 4 in two decades and emissions return to their 2010 level in 2030 then emissions per unit of output must be cut by a factor of 4 in that period. This would mean cutting emissions per unit of output by 50% each decade or 29% in each five-year plan.”

Thus, while China’s per capita emissions remain only around a quarter of that of the average US citizen, and Stern argues “we must recognise the deep historical injustice in that the rich countries became wealthy with high-carbon growth but the poorest countries will be hit earliest and hardest by climate change.”

“Nevertheless China’s size and its growth make it inescapably central to any future efforts to manage climate change.. There is no country more important than China in leading the way to a radically different, more dynamic, and much more desirable form of growth. There is no more important power than the power of the example. China and the world as a whole have so much to gain from its leadership.”

· Nick Stern’s policy paper ‘China’s growth, China’s cities, and the new global low-carbon industrial revolution’ is published by the Centre for Climate Change Economics and Policy, Grantham Research Institute on Climate Change and the Environment’.

.615ZWhy the British economy shrank in the last quarter

By Michael Burke

The fact that British GDP actually contracted by 0.5% in the 4^th quarter of 2010 shocked many observers. It meant a decline after a year of moderate expansion. The fall means the British economy is now at a lower level than it was at the end of 2008, less than half way through the recession. The consensus among surveyed economists was that the economy would grow by 0.5% in Q4 – but even this would have represented a slowdown from the previous, modest pace of economic recovery. This is illustrated in Figure 1 below, which shows the slowing trend of the economy even before the latest awful data.

Figure 1

The government attempted to dismiss the data as simply reflecting the effects of severe weather at the end of last year. But Joe Grice, head of the Office for National Statistics (ONS) says that their best estimate is that the economy would have recorded zero growth in the quarter without the extreme weather conditions. Although this is not outright contraction, it is clear from the ONS statement that the underlying trend towards a marked slowdown in the economy continues.

Why Slowdown Now?

The question remains as to why the economy is on a slowing trend, especially as it is just 1 year into a modest recovery after the deepest recession since the 1930s? To analyse that it is important to examine the prior data. The first snapshot of the GDP data is simply an output measure, with limited detail and information on allocation of incomes or sources of expenditure. There is too no fine-grained data on the monetary value of GDP in the first release, so here only the data up to the third quarter of 2010 is examined, before the economy contracted once more.

In Figure 2 the real monetary value of GDP and its components is shown, from the peak level at the beginning of 2008 to Q3 2010.

Figure 2

From the peak of the boom in Q1 2008 to Q3 2010 (the most recent data, which excludes the contraction in Q4) real GDP has fallen by £54.3bn. The major contributor to this slump remains the decline in investment, Gross Fixed Capital Formation (GFCF). It fell by £31.1bn, or 57% of the total fall. Household spending also fell by £25.3bn as falling real incomes, rising unemployment and expectations of worse to come all took their toll. But this is less than half the decline in investment. Offsetting those declines somewhat is the small rise in net exports, up £8.5bn. But the major upward contributor has been the increase in government spending, which rose by £11.4bn.

Clearly while investment has been the main source of the recession, government spending has been the main prop for the recovery. But in the national accounts data the level of GFCF from two sources, the private and the public sectors are brought under the same heading. This conforms to national accounting data in the EU and elsewhere. But in the US GFCF is separated into private and public components (as well as further subdivided into housing etc). If the same distinction is made between private and public investment in Britain, an even more striking picture emerges. This is because government investment was more than rising even while total GFCF was contracting.

Over the course of the recession, as we have already noted, total GFCF fell by £31.1bn. But within that total, private sector investment fell by £40.4bn, while the government’s own investment rose by £9.3bn. This took the form of increased capital spending in areas such as the “Building Schools for the Future” programme, as well as hospital refurbishment and infrastructure investment and was part of the Labour government’s 2009 response to the crisis.

This distinction is shown in Figure 3. The category of GFCF has now become private sector GFCF, while government spending is comprised of government current spending as before plus the increase in government investment.

Figure 3

From Figure 3 it can be seen that the collapse in private sector investment is almost entirely responsible for the economic crisis- £40.4bn of a decline of £54.3bn, or three-quarters of the entire slump. If we take the total contribution to growth of government spending – both current spending and the public sector’s contribution to GFCF this rises GDP by £20.7bn.

This means that the economic contraction would have been far more severe without the rise in government spending.

It is known that government spending will decline under the Tory-led government. In fact current government current spending did contract in Q3 as the cuts policy began to be implemented. The fall was just £1.1bn, but it was the first such decline since the recovery began. The Q4 data will no doubt produce a larger cut in government spending, with further, steeper falls to come in 2011. Meanwhile the Labour government’s increased investment programme, which takes slightly longer to implement, will soon be crashed into reverse.

What Caused the Recovery?

Looking now at the earlier economic recovery, which ran for 4 quarters between Q4 2009 and Q3 2010, the total rise in output was £34.3bn from the low-point of the recession. The total rise in government spending during the recession and recovery amounted to £20.7bn. While much of that increase took place before the recovery began it will have been crucial in supporting the resumption in household consumption through welfare and other payments. In addition it will have fostered the rebound in GFCF as the private sector was encouraged to resume investment. In the one year long recovery, household consumption rose by £16.4bn, while GFCF rose by £12.0bn. Total government spending, including its contribution to investment was therefore directly responsible for 60% of the recovery – £20.7bn of a total increase of £34.3bn. Given the positive indirect effects on other categories of activity, it is no exaggeration whatever to say that government spending was responsible for the recovery.

It is clear now why the economy is slowing sharply. Osborne would like to blame it on the weather. But the reality is not a weather effect – as the ONS points out. There may well be a rebound in Q1, which would be unsurprising as some activity postponed in Q4 will take place now. But by removing the key prop to growth, in the form government spending, it is certain that the latest two quarters combined, Q4 2010 and Q1 2011, will see much slower growth on average than mid-2010. And 2011 will also see the effects of the VAT hike and widespread price increases which will all produce a sharp contraction in real incomes. Major cuts to capital spending are planned while benefits will be slashed in April.

It is easy to forget that the Tory-led government policy is dressed up in the name of deficit-reduction. But the deficit has been falling under the impact of stronger growth, itself induced by increased government spending. In the 2010 calendar year the borrowing requirement was £148bn, compared to a Treasury projection of £178bn for the Financial Year.

The policies of the Tory-led Coalition threatens to send both the economy and government finances into reverse.

.170ZCorporation Tax Cuts Don’t Lead To ProsperityBy Michael Burke

In George Osborne’s Budget in June 2010 it was announced that the rate of corporation tax will be cut in a series of steps from 28% to 24%. This was part of a series of measures which, it is claimed, would boost growth. In fact they comprised part of a series of tax cuts for companies and the highly paid which amount to a giveaway of £12.4bn in 2014/15, almost exactly equal to the yield from the VAT hike of £13.45bn – which in contrast will come overwhelmingly from the pockets of the poor.

But, just as the package of tax measures are not about deficit-reduction at all, but a transfer of incomes from the poor to the rich, so the claim that lowering tax rates will lead to growth is also incorrect. The claim is that lower taxes increase the flow of Foreign Direct Investment (FDI). But the recent FDI Barometer produced by Think London, the agency that promotes FDI in London, shows that overseas investors are less likely to invest in London, not more likely because of recent developments in UK economic policy. In a survey of over 300 executives responsible for making FDI allocations, 60% said the lower tax rate would not change the attractiveness of London as an investment destination, 13% said it would make them more likely to investment, but 22% said it would make them less likely to invest. Therefore a net balance of 9% said lower corporate taxes would make London less attractive to investors!

In fact those surveyed were much more agitated about racist immigration policies – with 48% opposed to the Tory-led Coalition’s cap on non-EU immigration.

This is because FDI is not driven by corporate tax rates. At one end of the scale the highest corporate tax rates in the OECD are imposed by the US and Japan at 39%. Germany has a 30% rate. The lowest rates are in Iceland (15%) and Ireland (12.5%), which should be more a warning than a model!

FDI, in common with all investment, is driven by prospective rates of return. Some factors, such as geographical location are outside policymakers’ hands. But the quality of road, rail, air and port infrastructure are not. Likewise, the size of the market is outside policymakers’ hands, except over the very long run, but economic growth rates are not. In particular, studies repeatedly show that it is the quality and skills of the workforce that is the main policy-driven factor in attracting FDI.

Ireland, with the lowest corporation tax rate in the OECD, demonstrates this reality. It is an article of faith for the Dublin government and its supporters that the 12.5% rate is the key to attracting FDI. Both the Taoiseach Brian Cowen and the Finance Minister Brian Lenihan have taking to describing it as “our international brand”. In the 1998 Budget (introduced in December 1997) their predecessor as Finance Minister, Charlie McCreevey, introduced the legislation for a new regime of corporation tax that led to the phased introduction of the 12.5% rate of corporation tax from 1 January 2003 – down from 32%.

Figure 1 below shows what actually happened to FDI in Ireland before and after the cut to 12.5% corporation tax. In the period since the corporation tax was slashed there have been many quarters where there was a net outflow of FDI and the annual average total was an inflow of just €2.3bn. Before the rate was cut that annual average inflow was €17.7bn, and there was only one quarter of net outflow in FDI.

Figure 1

If FDI were measured relative to either the level of GDP or as a proportion of total investment, the before and after contrast would be even starker.

Clearly, low corporate tax rates did not leads to higher inflows of FDI, and are not responsible for it. But over a prolonged period the Irish economy has had a much greater share of world FDI inflows than would be suggested by the small size of the domestic economy.

Figure 2 below shows one of the main reasons why that is the case. It shows the percentage of the 20-24 year old population in EU countries who achieved at least an upper second level education. Ireland comes out top.

Figure 2

This also helps to explains why FDI investors don’t relish tax cuts. They aren’t fools. They know that low-tax economies do not have the resources to pay for investment in infrastructure, transport links and above all education- the factors that actually attract FDI. Low corporate taxes therefore do not attract, even deter FDI, as the London survey and the Irish experience demonstrate.

But George Osborne is a long-time fan of his fellow Thatcherites in Ireland. In fact the current Dublin government has far more fans in Downing Street than in Ireland, with its opinion poll rating dropping to 14% even before the latest resignations of nearly half the Cabinet. Determined to emulate the effects of Ireland’s Thatcherite economic policymaking, the Tory-led government has set out a course to lower corporate taxes. This will not attract FDI, but it does have the effect of allowing established companies to retain a greater proportion of their profits- and lowering wages and increasing capital’s ability to generate profits remains the essence of government policy. Reality shows there will be no increase in FDI to Britain due to lower corporate taxes.2