US economy – the combination of structural slowdown and cyclical recession

US economy – the combination of structural slowdown and cyclical recessionBy John Ross


This article focuses on evidence confirming long-term slowdown, as well as cyclical recession, of the US economy as indicated in the latest release of the 2nd quarter 2010 US GDP figures.


As widely reported, the second estimate of 2nd quarter 2010 US GDP revised annualised US growth down from 2.4% to 1.6% – i.e. US GDP grew by 0.4% during the 2nd quarter. The main changes compared to the first GDP estimate, in constant and annualised 2005 price terms, were a downward revision of net exports by -$19bn, due primarily to an upward re-estimation of imports by $14bn, and a revision of inventories downwards by -$13bn. Fixed investment remained essentially unchanged compared to the earlier first GDP estimate, with a revision downwards of -$1bn, and personal consumption was recalculated as $8bn higher than in the first GDP estimate (Bureau of Economic Analysis, 2010b) (Bureau of Economic Analysis, 2010a). An earlier article made a detailed examination of 2nd quarter US GDP data and therefore only the implications for long-term trends are dealt with here. (Ross, 2010)

Slow recovery

The downward revision of 2nd quarter GDP naturally highlights how much slower present US recovery is than in previous post-World War II business cycles. Ten quarters into the downturn US GDP still remains 1.3% below its peak in the 4th quarter of 2007 – see Figure 1. In the previous worst post-World War II business cycle, that following 1973, recovery to the previous peak level of GDP was complete after eight quarters. Unless there is a significant acceleration of growth, US GDP will not regain its peak level until 2011 – meaning at least three years of net zero percent growth.

Figure 1

10 08 28 Bus Cycles

This slow recovery is, however, in line with a gradual but clear deceleration of long-term growth in the US economy – see Figure 2. The moving 20 year average of US GDP growth has now fallen gradually to 2.5% – significantly below its 3.5% historical average. Reasons the US is unlikely to reverse this trend in the foreseeable future are analysed below.

Figure 2

10 08 28 20Y Growth Annual

Fixed Investment fall

The new GDP figures also cast clear light on the issues of whether the recession in the US is primarily created by trends in consumption or investment. A number of analyses suggested that the core of the US economic crisis would be deleveraging by US consumers– see for example (Roach, 2009). If so the decline in US GDP would be centred in US consumption. The present author has consistently argued that this analysis is in error and that the core of the recession in the US is the decline in fixed investment. (Ross, 2010a) This is again strongly confirmed by the new revision of US GDP data.

Due to the significant downward revision of the US GDP figures, and the small upward revision of the consumer expenditure figures, consumption as a percentage of US GDP clearly remains well above its pre-financial crisis level – see Figure 3. Between the peak of US GDP, in the 4th quarter of 2007, and the 2nd quarter of 2010, US personal consumption has risen from 69.9% of GDP to 70.5% and total US consumption has risen from 85.8% of GDP to 87.6%.

Figure 3

10 08 28 Ch Personal & Total Consumption

The 1.8% of GDP increase in consumption as a percentage of US GDP is accounted for by a 0.8% of GDP increase in the share of military expenditure, a 0.6% of GDP increase in the share of personal consumption, and a 0.4% of GDP increase in the share of Federal non-military consumption.

In contrast the share of fixed investment in US GDP has fallen sharply by 3.6% of GDP. The share of non-residential fixed investment has fallen by 2.1% of GDP and the share of residential fixed investment by 1.5% of GDP.

The changes in components of US GDP, in terms of fixed price annualised 2005 dollars, are shown in Figure 4. US GDP remains $172bn below its previous peak level. However net exports, inventories, and government consumption are already above their 4th quarter 2007 level – by $116bn, $51bn and $112bn respectively. Personal consumption is below its 4th quarter 2007 level but only by $72bn. The US recession is entirely dominated by the $410bn decline in fixed investment.

Figure 4

10 08 28 $ 2Q 2007

The US economy, therefore, has not responded to the financial crisis primarily by reducing consumption, through personal debt deleveraging or other means, but by sharply reducing fixed investment.

Implications for long term US growth rates

A severe decline in US fixed investment, however, does not have only short term effects. As confirmed in the latest data of Jorgenson and Vu, capital investment continues to account for more than fifty percent of US GDP growth – the percentage for the latest period they analyse, in 2004-2008, is 61%. (Jorgenson & Vu, 2010) Under such conditions a severe decline in US fixed investment, of the type seen during the current recession, in practice excludes a rapid resumption of US GDP growth.

The slowdown that has been witnessed in long term US economic growth is therefore likely to continue. The present recession confirms a pattern of not simply cyclical downturn but structural slowing.

In that context the marked acceleration of US GDP growth which took place in 1995-2000 would appear to be a temporary upward fluctuation, financed by large scale import of capital, within an overall context of a long term structural slowdown of the US economy. It would not appear to mark the beginning of a more rapid US growth period.

The above trends therefore indicate that not only short but medium and long term projections for US economic growth should be assumed to be lower than historical averages. The US economy has been gradually slowing in not only a cyclical but a structural fashion.

* * *

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


Bureau of Economic Analysis. (2010b, August 27). National Income and Product Accounts Gross Domestic Product, 2nd quarter 2010 (second estimate). Retrieved August 27, 2010, from Bureau of Economic Analysis: http://www.bea.gov/newsreleases/national/gdp/2010/gdp2q10_2nd.htm

Bureau of Economic Analysis. (2010a, July 30). National Income and Product Accounts: Gross Domestic Product: Second Quarter 2010 (Advance Estimate). Retrieved July 30, 2010, from Bureau of Economic Analysis National Economic Accounts: http://www.bea.gov/newsreleases/national/gdp/2010/gdp2q10_adv.htm

Roach, S. (2009). The Next Asia. Hoboken, New Jersey: John Wiley and Sons.

Ross, J. (2010a, February 11). The myth of the decline of the US consumer. Retrieved August 28, 2010, from Key Trends in Globalisation: http://ablog.typepad.com/keytrendsinglobalisation/2010/02/the-myth-of-the-decline-of-the-us-consumer.html

Ross, J. (2010, July 31). US 2nd quarter GDP figures – investment remains the key issue for US recovery. Retrieved August 28, 2010, from Key Trends in Globalisation: http://ablog.typepad.com/keytrendsinglobalisation/2010/07/us-2nd-quarter-gdp.htmlJohn Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com1

Sales of Marx’s Capital increase by 1000% in Germany

yesSales of Marx’s Capital increase by 1000% in GermanyIt has been the resurgence of Keynesian economics, led by figures such as Joseph Stiglitz and Paul Krugman, which has been the largest beneficiary from the crisis of the former ‘conventional wisdom’ in academic economics. However more radical views have also gained a wider audience. One index of this is a tenfold increase in the sales of Marx’s Capital in Germany. An account of this, together with a rather accurate description of Marx’s theory of crisis by Cliff Bowman, Professor of Strategic Management at Cranfield University School of Management, can be found in a video posted on the Socialist Unity website.
John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

Trade Unions Call for Investment as the Means to Economic Recovery

Trade Unions Call for Investment as the Means to Economic RecoveryBy Michael Burke

‘The government’s deflationary policies have been a major driver in our recession. They have cut growth and economic activity, reduced employment, driven down tax revenues and driven up unemployment costs…. borrowing costs increased. It’s like running in quicksand – the more the government cuts, the more we sink. The dole queues, the emigration lines, and the vacant shop-fronts are a testament to government policy.’ So says Jimmy Kelly, Irish Regional Secretary of UNITE, the union, writing in the latest Sunday Business Post .
In British Tory circles, the policy of the Irish government in moving straight to massive spending cuts is much admired, even if the outcome has been an embarrassment. Prior to the recession there was a small budget surplus. The deficit rose to 7.3% of GDP by the end of 2008 as the recession began to bite. But the policies of the Irish government in effect doubled it to 14.3% of GDP in 2009- and created the longest and deepest recession in Western Europe. Yet, while welfare payments to young jobseekers were halved, medical cards for the elderly withdrawn, and payments to single parents and the disabled were slashed, huge sums have repeatedly been found to bail out zombie banks. The €25bn to Anglo-Irish Bank alone dwarfed the spending cuts of over €14bn. If the bank bailouts are also included the deficit rises to just under 20% of GDP.
Despite all this, the debate in Ireland is frequently dominated by Thatcherite ideology, shared not simply by government supporters (who have dwindled to below 20% in opinion polls) but also by many of their supposed critics. One of these erstwhile critics, central bank Governor Honohan recently claimed in a New York Times article that ‘no-one is arguing for stimulus.’ This is not true, with ITUC General Secretary David Beg calling for investment, a view echoed by the main employers’ association the IBEC.
In fact, Jimmy Kelly is calling for something far more productive than stimulus. ‘This is not a traditional stimulus programme, whereby the government temporarily boosts demand until such time as the private sector gets back on its feet. It is an investment-led programme constituting a major drive to modernise our economic base and boost productivity.’
‘Take the example of our physical infrastructure; our transport, telecommunications and energy networks are ranked as among the worst in the industrialised world. This is a major drag on growth, productivity and competitiveness. An investment drive that delivered next generation broadband to every house and business, a coherent public transport system, a water network that didn’t leak and an upgrading of our building stock to the highest possible energy rating is the type of bold, creative vision we need.
‘The best thing is that this will not cost the country any real money. Investment in wealth-creating and cost-reducing assets does not create debt – it creates an economic return which, in turn, reduces deficits and debt. We must invest our way to a balanced budget’.

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

Sales of Marx’s Capital increase by 1000% in Germany

Sales of Marx’s Capital increase by 1000% in GermanyIt has been the resurgence of Keynesian economics, led by figures such as Joseph Stiglitz and Paul Krugman, which has so far been the largest beneficiary from the crisis of the former ‘conventional wisdom’ in academic economics. However more radical views have also gained a wider audience. One index of this is a tenfold increase in the sales of Marx’s Capital in Germany. An account of this, together with a rather accurate description of Marx’s theory of crisis by Cliff Bowman, Professor of Strategic Management at Cranfield University School of Management, can be found in a video posted on the Socialist Unity website.

Improved growth shows investment works – the 2nd quarter UK GDP figures

Improved growth shows investment works – the 2nd quarter UK GDP figuresBy Michael Burke

The British economy expanded at its fastest rate since the recession ended, up 1.1% in Q2 according to preliminary data. These data are often subject to substantial revisions, but the hope must be that, having been held over and scrutinised for 2 weeks, they are an accurate reflection of the pick-up in activity.

The latest growth rate represents a significant acceleration over the prior two quarters when the cumulative expansion was just 0.7%. But the pace of the recovery is almost exactly in line with the recoveries from both the 1980 and 1992 recessions, which were much milder and shorter than the recent slump. In both the 1980s and 1990s recessions the previous peak in activity was recovered after 3 years. At this similar pace it will take close to 5 years to recover the previous peak in activity.

There are two key factors which supported the modest rebound in activity- the depreciation of the pound and the 2009 Budget.

The fall in the pound has been precipitate. As the chart below shows, prior to the recession Sterling was valued at over 2 US Dollars, and fell by over 26% in 2008 and to a low of US/£$1.37 early in 2009. This depreciation and the recovery in global trade prompted a very modest pick-up in exports. In the Q1 GDP data (the preliminary Q2 do not provide a breakdown of the national accounts) exports are 2.9% above their recession low in Q2 2008.

Chart 1

At the same time government spending has been the main support for the recovery. Current government spending and government’s share of investment (gross fixed capital formation) have risen by a combined 12.6% since the recession began. In the course of the recession, government spending rose by £18bn compared to an aggregate contraction of £88bn. In the two quarters of recovery to Q1, the further direct effect of these two factors, export growth (£7.3bn) and increased government spending (£13.6bn) has more than accounted for the entire growth of the economy (£9.7bn). If, as reported, other sectors of the economy made a greater contribution to growth in Q2 – with construction said to add 0.4% to GDP in the quarter, it will be because of the direct and indirect support received from government spending.

Economic Outlook

These positive effects of increased government spending and a weaker currency are already beginning to wear off and the impulse being reversed. As the chart above shows, the currency has already appreciated by over 10% from its January 2009 low against the US Dollar, and Sterling has also been appreciating against the Euro, the currency of Britain’s main export markets.

It is also widely known that this expansionary fiscal policy is shifting into reverse, with significant cuts enacted and vastly more in the pipeline.

The forward-looking indicators of the economy are already warning of a slowdown, before those cuts bite. Recent surveys of both manufacturing and construction growth have both shown a levelling off in activity. But surveys of the service sector, which accounts for three-quarters of the economy, have seen a marked deceleration with the June reading the lowest for 10 months . As the Bloomberg news service puts it, ‘U.K. services growth slowed more than economists forecast in June after the government’s austerity measures to cut the budget deficit sapped confidence’. Both house prices and consumer confidence recently recorded their first falls in over a year.

Previous optimism that a pronounced slump would lead to a sharp recovery has given way to a more sober assessment. These are strong grounds for the view that the growth rate is already peaking and a slowdown likely later in the year. With the extraordinarily deep cuts planned by the ConDem coalition, a double-dip recession or a severe slowdown in recovery is a real threat.

The Deficit & Growth

It is evidently the case that a further increase in government spending would benefit the economy. It might even lead to a renewed decline in the currency, as the combination of relatively loose monetary policy and fiscal policy is held to be a prescription for currency depreciation.

But the argument of the government and its supporters is that there is simply no room to increase government spending. Drawing comfort from Liam Byrne’s crassly ignorant phrase, they argue that ‘there’s no money left’.

On that logic, of course, however desirable increased government investment might be to support the economy, it is not sustainable. Government finances would go to hell, with huge deficits, loss of credit rating, IMF missions, and so on.

All of which seems very compelling – except that it is factually incorrect. As SEB has previously noted, the 2009 Budget was moderately stimulative and that worked. Growth was higher than anticipated and the deficit narrowed as a result.

The latest trends in public finances confirm that point and amplify it, as well as providing a warning about the impact of cuts. In the December Pre-Budget Report Alistair Darling forecast a public sector borrowing requirement (PSBR) of £178bn in the current financial year. In his March Budget this year, that projection had fallen to £167bn. The Office for Budget Responsibility lowered it to £156bn and Osborne’s June Budget shaved it to £155bn. Yet they are all still playing catch-up to the trend improvement in government finances.

In the chart below we show the 12-month rolling total for the PSBR, which has consistently undershot official forecasts and has been falling outright since February this year, when it peaked at £144.4bn. In June it had declined to £143.1bn.

Chart 2

The reason for the undershoot in the deficit is that tax receipts are much higher than anticipated, up £8.3bn in the latest 3 months alone. In the latest 12 months, that is in the period after the 2009 Budget, total government spending is £36.8bn higher than in the prior 12 months. Of that, £3.4bn is increased interest payments, and therefore £32.4bn is the actual increase in government outlays on goods, services and investment. This boosted economic activity, and the taxes that derive from it. Taxes on production are £18bn higher in the latest 12 months than in the prior period. In addition, the rise in unemployment has only been a proportion of what was expected. This feeds into lower-than-anticipated welfare payments.

Yet according to official wisdom, this cannot be. Increased government spending ought to be leading to an increase in the deficit, not its narrowing. The reason that the forecasts on the deficit are so faulty is that they overlook or completely ignore the stimulative effects of government spending and its positive effects on government finances, both revenues and outlays.

That ignorance stretches into the labour movement. Ex-Chancellor Alistair Darling quite rightly ascribes the improvement in the economy to Labour government’s actions. But these were from the investment and increased spending of the 2009 Budget not his 2010 cuts Budget where he threatened to be ‘worse than Thatcher’. Further, the connection between this rebound in GDP and the improvement in government finances seems to have escaped him entirely.

By contrast, Brendan Barber says, ‘The impressive GDP figures are the result of fiscal stimulus and active policymaking. But continued growth cannot be taken for granted, and there is now a huge risk that cuts in spending will bring the recovery to a shuddering halt. Deficit fetishism still risks a return to a flat line economy’.

The TUC general secretary is quite right. Not only is the policy of cuts to public spending sure to weaken growth, but it threatens, as a result, to lead to renewed widening of the deficit.

Green Campaign Builds for RBS’s Capital To Be Used Productively

Green Campaign Builds for RBS’s Capital To Be Used ProductivelyBy Michael Burke

Campaigners have called for the Royal Bank of Scotland to be transformed into a Green Investment Bank to kick start a wave of investment in green technologies The supporting document suggests that it would create 50,000 new green jobs a year, boost the UK economy, reduce the UK’s carbon emissions and improve international competitiveness – whilst not increasing the budget deficit. The report was commissioned by pressure group PLATFORM and the anti-poverty campaigners, World Development Movement, who reject the premise that investment in a green economy should be scrapped due to public sector cuts.

By contrast, it has recently been reported that the coalition government may scrap plans to invest public money in a Green Investment Bank. Instead the government may rely on private capital to fund green projects such as wind farms, high-speed rail and electric cars.

Deborah Doane, director of the World Development Movement, said, ‘It would be completely irresponsible and short-sighted to scrap public investment in a low carbon economy. RBS is sitting on billions of pounds from the taxpayer which is going to finance dirty projects often linked to human rights abuses, instead of more productive ends. The money we’ve invested in RBS should be directed towards green investment. It’s a no-brainer: not only wouldn’t it cost the taxpayer directly, it would boost the economy and create new jobs in the UK at a much-needed time.’

The idea has received backing within parliament; one hundred and seven MPs signed an Early Day Motion which calls on the Government to use its majority share in RBS to prioritise climate change as a principal concern in RBS’s lending decisions.

Room To Invest

SEB has previously argued that RBS, 84% owned by taxpayers, has scope to increase its lending very substantially without endangering its solvency. Indeed, attempts to bolster RBS’s capital beyond those of its High St. rivals simply increase that spare lending capacity

The recent European-wide stress-testing of banks’ balance sheets was widely criticized as insufficiently robust. British banks had previously been put to a more severe test by the Financial Services Authority (FSA), which also published the results.

The key features of those are set out in the table below – it is calculated from the FSA data.

Table 1. FSA ‘Stress Test’ Results for British Banks

The FSA focuses on ‘Tier 1’ capital, mainly shareholders’ funds, as the main buffer against further crises. It projects what the ratio will be in 2011 assuming economic recovery, rising profits and weak lending growth. It also provided a stress test which included double-dip recession, a rise to 12.5% unemployment, a 60% fall in house prices and default by one or more European government. The FSA’s estimate of the impact of all those events combined for each bank is shown in the final column.

Here it is important to note that the banks actually have a huge and growing excess of capital over any prudent requirements, with RBS one of the most awash with the capital that is being hoarded. Previously, the FSA had required Tier 1 capital to amount to 4% of total assets. During the financial crisis in 2008 it altered the requirement so that total capital, Tiers 1 and2, must be 8% of assets . There has been some discussion that new international rules (‘Basle III’) will change the requirement so that Tier 1 capital must be 6% of assets.

Yet all the banks have spare capital way in excess of the expected 6% total. RBS currently has 14.4%. And even in a disastrous set of circumstances it would have nearly double the required international level. Paradoxically, it is the banks’ refusal to lend which is one of the key factors, along with government economic policy, increasing the risk of a double-dip recession and all its negative consequences. Furthermore, the ratios are based on ‘risk-weighted’ assets where values are already deflated by that adjustment for risk. RBS’s actual assets amounted £1,523bn at the end of 2009 .

Given the vast sums in the banks’ balance sheets, even fractional changes in the capital ratios through increased lending would release very large funds for investment. Currently, £100bn in new investment would only entail RBS’s Tier 1 capital ratio dropping to 13.5% from 14.4%. This could provide an enormous economic boost, kick-starting a Green transformation of the economy, creating new jobs, meeting the needs for housing, transport and infrastructure – and not a penny of new government borrowing.

Should RBS be used for the interests of the British economy or for private profit

Should RBS be used for the interests of the British economy or for private profit

By Michael Burke

RBS has announced it is selling off its insurance arm and getting rid of 2,600 jobs. This is not simply a personal disaster for those workers and the communities in which they live, but it also concerns all taxpayers. That state owns 84% of the bank.

The RBS share price was 44.5p at the end of last week, having been as high as 590p in March 2007. The low was 10.5p in January 2009.While no-one can predict where the share price will go it is clear that all financial assets remain close to fire-sale prices.

But the government is allowing an asset sale when assets can be bought extremely cheaply. There is no doubt too that RBS and other banks are viewed as risky propositions, but the sell-offs, which include branches in Britain and in the high-growth Indian market as well as the insurance businesses are the least risky part of the entire group.

These are effectively public assets which are being sold off cheaply to the private sector in order to boost its profitability. They will also have the simultaneous effect of increasing the public sector’s underlying deficit by reducing its cashflows. SEB has previously pointed out that the management of publicly-owned RBS was also attempting to replace low-interest debt government with higher interest private sector debt, in order to curry favour with financial markets. This is because they intend to be back in the private sector as soon as they can, again at a knock-down price against the interest of taxpayers. So far, they have been frustrated in their fund-raising aims but they are persisting. But the urgency is growing because RBS has moved back into profit. Operating profits were £713mn in Q1, compared to losses of £1.353bn in Q4, partly as bad debts declined .

The stated aim of the RBS bond issuance is to bolster its capital strength. But RBS’s capital strength, measured by its ratio of ‘core assets’ to total loans is currently 10.6%, much higher than both Lloyds and Barclays, which are below 9%. It is difficult to believe that RBS’s loan book is much worse than its rivals and it will face higher levels of default, given the disastrous merger of Lloyds with HBoS.

But so be it. Let RBS borrow more, even at higher interest rates than available from the government. But taxpayers should insist that its capital ratio does not need to be astronomically high, just a circumspect 9%, a little above Lloyds and Barclays. With current capital levels, that would mean RBS could fund a huge increase in productive investment.

RBS’s balance sheet is shrinking because it is refusing to lend and because of losses incurred in speculative investments. But it remains a colossal £1,583bn. Bringing down the capital ratio to 9.0% from 10.6% would release £280bn for productive investment. And with a 9.0% capital ratio, every further £10bn to bolster core capital would release another £100bn for investment. These sums would more than compensate for the entire fall in output during the recession.

RBS can be used for asset-stripping by the private sector and robbing taxpayers, who have poured £122bn into the banks to keep them afloat. Alternatively the public sector, which owns RBS, can use it to benefit the whole of society. The government could end the private investment strike in the British economy simply by instructing RBS to lend to infrastructure projects, transport, Green technologies and housing.