The End of Growth

October 22, 2014

http://www.reuters.com/article/2014/10/16/us-cenbanks-markets-policy-idUSKCN0I501120141016

Last week, markets were in a steep sell-off, driven largely by increasing worries about global economic growth.  (See the above-linked Reuters article from last week.)  In the wake of the Great Recession, years of interest rates at zero and money printing by the central banks of the U.S., Europe and Japan have yielded pretty disappointing results.  Europe is once again on the brink of recession.  And Japan has either been in recession or been on the brink for decades.  And slowing economic data in the U.S. is making it look as though we won’t avoid backsliding into recession either.

We’ve all seen cartoons depicting pessimists standing on street corners wearing sandwich-board signs declaring that “the end is near.”  Well, folks, it’s time to face facts.  When it comes to economic growth, the end is, in fact, here.

Let’s begin with a step back – way back – to World War II.  The imperialist ambitions of both Germany and Japan had similar roots.  Both nations were badly overpopulated, short on resources and long on unemployment.  Both embarked on huge land grabs.  In the wake of the war, in 1947, the Global Agreement on Tariffs and Trade – the precursor of today’s World Trade Organization – was implemented, with the primary goal of preventing such wars by giving Germany and Japan easier access to resources and more access to U.S. markets, thus alleviating the high unemployment that fostered Hitler’s rise to power.

No problem, at first.  Americans had done without for years, with the nation’s manufacturing capacity devoted 100% to the war effort.  There was a lot of catching up to do and Americans’ appetite for goods seemed insatiable.  The economy boomed and the federal government was able to cut spending and whittle away the debt it had racked up during the war.

The infrastructure and economies of Germany and Japan were rebuilt.  Slowly, the new trade regime enabled imports from those nations to erode America’s trade surplus.  First came Volkswagens and a sprinkling of Mercedes and BMW’s from Germany.  Those were followed first by motorcycles from Japan, and then Hondas – pathetic little cars that were painted in paisley and sold as jokes, but they got their foot in the door.  By the early 70’s our trade surplus was gone.  We oscillated between surplus and deficit for a few years.  We ran our last trade surplus in 1975.  Since then, we’ve experienced 38 (soon to be 39) consecutive years of trade deficits.

At about the same time, America’s budget deficit began to grow again too.  It had to, to offset the trade deficit’s drain of money from the economy.  Soon, new terms began to creep into the American economic lexicon:  “redundancy,” “down-sizing,” “right-sizing” and “outsourcing.”  American manufacturers began closing their doors en masse, unable to sustain a profit margin in the face of the onslaught of foreign companies snatching up American market share.

Even with their new-found trade surpluses and manufacturing jobs cannibalized from American manufacturers, the Europeans and Japanese both found it necessary to lean heavily on deficit spending, just as America was doing, to keep a lid on unemployment.  Rising productivity enabled manufacturers to meet growing demand without growing employment at the same pace.

At the end of World War II, the world’s population stood at just under 2.5 billion.  Today it has nearly tripled.  All of this growth has been concentrated in urban areas.  Cities have expanded and grown vastly more crowded, and it’s a fact that people living in crowded conditions consume less out of necessity.  Growth in the global labor pool outpaced the rate at which workers were absorbed into the economy, putting downward pressure on wages.  And that situation grew exponentially worse when China was factored into the global trade equation, growing the global labor pool virtually overnight by 25%.

For a time, government deficit spending, used primarily to fund social safety net programs and other programs designed to supplement incomes and prop up a perception of wealth, sustained consumption and kept the economy growing.  But that tactic has run its course.  National debts have risen to worrisome levels.

Developed economies looked to China to pick up the slack by developing its economy, turning 1.3 billion people who had nothing into western-style consumers.  By that measure, China has been a huge disappointment.  Collectively, they consume a mountain of goods, but nowhere near enough to even consume their own productive capacity, much less to develop into a market for other nations.  Their growth is faltering and it looks like their domestic consumption will settle at the same diminished level as Europe and Japan.

Growth is now virtually dead and all the deficit spending in the world can’t prop it up.  Economists won’t admit that fact and adamantly refuse to give any consideration to the fact that population growth lies at the heart of the problem.  But markets don’t care, and what we’re witnessing is an adjustment to a no-growth world.  Interest rates have fallen to zero.  Bond yields, projected to rise as the economy “recovered” never did, and are now sliding backward to near-zero levels.  Central banks’ hands are tied, left only with thinly-disguised money printing programs to fall back on to provide stimulus to the economy, a tactic that’s already begun to make them nervous about unintended consequences.

The world’s economy is reaching a critical and dangerous point, where the inverse relationship between population density and per capita consumption begins to take hold in a big way that can trigger an irreversible downward spiral.  People consume less than they’d like for two reasons – because they lack space to make use of products, and because they are simply too poor to afford them.  When the proportion of people in the first condition reaches a critical level, the downward pressure on wages begins to make everyone poorer, accelerating the downward pressure on consumption.  Governments’ and central banks’ resources and abilities to hold this economic force at bay will soon be exhausted.

Economists had better extract their heads from that place where the sun doesn’t shine, and soon, if this economic fate that they don’t understand and are unable to see is to be avoided.  I fear that they won’t.  Growth isn’t always desirable.  Sometimes it’s cancerous.  Left unchecked, population growth will soon present the one challenge that none of them are clever enough to overcome – worsening poverty that gets so bad that it throws the world population into decline.  In essence, if economists and world leaders aren’t smart enough to manage our population to a level where all can enjoy a high quality of life, their stupidity will surely drive it to a level that no one wants.

 


Unemployment Falls Below 6%, Thanks to Vanishing Workers

October 3, 2014

http://www.bls.gov/news.release/empsit.nr0.htm

This morning’s September employment report (link provided above) claims that the economy added 248,000 jobs in September and that unemployment fell to 5.9% (from 6.1% a month earlier).  Yet, per capita employment remained unchanged in September.  Here’s the chart:  Per Capita Employment.

So how does that happen?  Once again, another 100,000 workers vanished from the labor force at the same time that the population grew by over 200,000.  Thus, the reality is that unemployment didn’t change at all.  And the unemployment “detachment from reality index” – the difference between the government’s official unemployment level and a realistic reading that grows the labor force along with the population – rose to a near record level.  (Here’s the chart:  Detachment from Reality Index.)

It’s also interesting to note that, once again, manufacturing employment was flat (where is the “manufacturing renaissance” we keep hearing about?) and hourly earnings actually fell by one cent in September.

 


Americans Continue to Grow Poorer During “Recovery”

September 19, 2014

http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf

One of the consequences of the inverse relationship between population density and per capita consumption is declining incomes as the demand for labor fails to keep pace with the growth in supply.  As per capita consumption goes, so goes employment.

I published Five Short Blasts in 2007, just before the onset of the “Great Recession.”  That unemployment rose and incomes declined during the recession was no surprise and provided no proof of my theory.  But a report released last week by the Federal Reserve does.  The Fed released it’s 2013 update to its tri-annual “Survey of Consumer Finances.”  (Link provided above.)  The latest survey shows the changes in consumer finances during the 2010-2013 period, a period of recovery, following the previous release which covered the 2007-2010 period of recession.

The survey found that while Americans grew substantially poorer during the 2007-2010 period of recession, they have continued to grow poorer during the so-called “economic recovery.”  Median incomes fell yet another 5% after falling 8% during the recession.

Median net worth fell another 2% during the “recovery” after falling 38% during the recession.

Wealthy Americans, the top few percent of wage earners, have fared much better.  Their incomes have risen 4% during the recovery and they have completely recovered their much-smaller loss in net worth that occurred during the recession.

Economists are baffled.  I’m not, and you shouldn’t be either.  As long as the U.S. continues to mis-apply free trade to nations grossly overpopulated and as long as we continue to exacerbate our own worsening population problem, declining incomes and worsening unemployment is inescapable.  People living in crowded conditions consume less.  It’s impossible to avoid.  When people consume less, less is produced and employment declines.  It’s all really quite simple – simple to anyone willing to open their eyes and ponder the economic consequences of a growing population – something that economists are still unwilling to do.


Disappointing August Employment Report

September 5, 2014

http://www.bls.gov/news.release/empsit.nr0.htm

After a couple of months of halfway-decent employment reports, the one released this morning by the Bureau of Labor Statistics was a disappointment, and the details are even more disappointing than the headline numbers.

According to the “establishment survey” portion of the report (which yields the headline number), the economy added 142,000 jobs – far fewer than the 200,000-plus jobs that analysts expected.  What’s worse is that, according to the household survey, the employment level (analagous to the establishment survey) rose by only 16,000.  Also, the June and July data from the establishment survey were revised downward by 28,000 jobs.

Despite the tiny gain in employment level, the “unemployment rate” declined again to 6.1%, thanks to the same old trick of claiming that the size of the labor force declined again by another 64,000, even though the population grew in August by 220,000.  As a result, the unemployment rate “detachment from reality index” (the difference between the official U3 unemployment rate and a more realistic figure that grows the labor force in proportion to population growth) rose again and remains at a near-record level.  Here’s the chart:  Detachment from Reality Index.

Because of the near-flat employment level while the population grew, the number of unemployed Americans rose by 96,000 in August:  Unemployed Americans.

And per capita employment fell for the first time in four months:  Per Capita Employment.

Both the number of unemployed Americans and per capita employment are at the same level as in June, 2009, a year-and-a-half into the “Great Recession.”

Manufacturing employment actually lost 1,000 jobs in August.

The average workweek was unchanged for the sixth consecutive month.  (Not a sign of improving labor demand.)

It’s beginning to look like the previous couple of months were a “flash-in-the-pan” catch-up period following the dismal, weather-impacted first quarter.  The economy is settling back into a low-to-no-growth mode that has characterized most of the “recovery.”  As I claimed would happen in my previous post, could this be the beginning of a slow slide back into recession?


Stage is Set for Next Recession*

September 3, 2014

The economy has been riding a crest as of lately. It should. Since the last recession began in 2008, between deficit spending by the federal government and monetary expansion by the Federal Reserve, over $10 trillion has been pumped into the economy.

But that’s come to an end. The Federal Reserve’s QE-whatever program has tapered to nearly nothing and ends in October. And perhaps more importantly, federal deficit spending has slowed to the point where it exactly matches the trade deficit. Check this chart of the growth in the national debt vs. the cumulative trade deficit:  Debt-Trade Deficit. The significance of this is that every time – every time – the growth in the national debt slows to the point where it begins to lag the trade deficit, the economy lapses into recession.

To understand why this happens, draw a line around the economy. Then add up the money flows that cross that line. Exports put money into the economy while imports take money out, meaning that a trade deficit is a net drain on the economy.  Taxes take money out of the economy while federal spending puts money back in.  So deficit spending (putting more money back into the economy than is taken out through taxes) has a stimulative effect on the economy while running a budget surplus is a net drain on the economy.  (The sustainability of deficit spending and the long-term effects are a whole separate discussion.)  Foreign investment puts money into the economy while American investment takes money out. In this case, net investment has consistently been a huge drain on the economy for decades as corporations have sunk all of their money into emerging foreign markets for a long time.

Add all of these up and we are now entering a phase where there is a net drain of money out of the economy. The problem is that economists and politicians lean on deficit spending to pull us out of recessions, but then grow nervous as the national debt soars. Eventually, the deficit spending has its predicted effect and the economy begins to recover.  Americans grow more confident, open their wallets, and take on more debt.  Federal revenue grows as incomes as corporate profits rise, and federal spending moderates as the need for social safety net spending (like unemployment benefits) decline, and as politicians grow eager to show fiscal restraint.

That’s all fine, but what economists and politicians alike fail to recognize is that, over the long haul, it’s impossible to balance the federal budget without first restoring a balance of trade. Otherwise, it’s inescapable that the net drain of money from the economy will drive it into recession.

It happened at the end of the Reagan-Bush era in the early ’90s.  It happened again at the end of the Clinton administration, when Clinton balanced the budget while simultaneously granting most-favored-nation status to China and sending our trade deficit soaring.  It happened again at the end of the “W” administration.

And now it will happen to President Obama.  He could avoid it, but he won’t.  He could boost spending, but that would forever label him as a reckless spender and give a boost to Republican candidates running on a platform of fiscal restraint.  Besides, Republicans in Congress wouldn’t stand for it, even if he wanted to do it.  Instead, he’ll fall into the same trap as his predecessors, hoping that history will remember him as one who did what needed to be done to end the recession, put the economy on solid footing and then restored fiscal sensibility – an economic trifecta that hasn’t happened before and won’t happen now because it can’t happen.

It may take a year or two for the net drain of money from the economy to bite, but it’s coming, so get ready.

* * * * *

* All “recessions” are determined by macro-economists to occur when the macro-economy, as measured by GDP (gross domestic product), shrinks for two consecutive quarters.  But there are actually two different kinds of such recession – the one we traditionally think of as being bad, and another kind that we’ve never witnessed that is actually beneficial.  The latter occurs when the decline in GDP is accompanied by a decline in the population when the population is above its optimal level, as it is in the U.S. and throughout most of the world.  In that scenario, the decline in population actually unleashes pent-up per capita consumption that has been strangled by over-crowding.  The decline in GDP is slower than the decline in population, resulting in an increase in demand for labor and rising incomes.  This is the recession that we’ve never seen before but should all be hoping for.


Manufactured Exports Lag Obama’s Goal by Record Margin in June

August 11, 2014

www.bea.gov/newsreleases/international/trade/2014/pdf/trad0614.pdf

Last week the Bureau of Economic Analysis announced that the U.S. trade deficit fell by $3.1 billion to $44.1 billion.  It was the second monthly decline in a row, but there’s little evidence of a long-term improving trend.  Check out the chart:  Balance of Trade.  The general improving trend that was evident for a couple of years, beginning in early 2012, ended early this year when the rapidly worsening deficit in manufactured goods swamped a decline in oil imports.  Though the deficit in manufactured goods improved by $3.0 billion in June, you can see from the following chart that a quickly worsening trend remains in place:  Manf’d Goods Balance of Trade.

Most of the improvement in the manufactured goods deficit was driven by a decline in imports.  (Such declines are usually followed by a big jump the following month.)  But the improvement was also helped by a small $0.8 billion rise in exports.  In January of 2010, President Obama set a goal of doubling exports within five years.  Though he wasn’t specific about the type of exports, it’s reasonable to believe that the plan was for manufactured exports to contribute their fair share toward that goal.  It didn’t happen in June.  The $0.8 billion rise was less than half of the $1.8 billion it needed to rise in order to keep pace with the president’s goal.

Nothing new there.  That’s been true nearly every month for the past three years.  Exports have risen by only $0.7 billion since March of 2012, while they needed to rise by $42.4 billion to keep pace with the president’s goal.  The result is that manufactured exports now lag the president’s goal by $45.9 billion – a record shortfall that exceeds the entire trade deficit.    Here’s a chart that shows both manufactured exports and imports:  Manf’d exports vs. goal.

Contrary to all the hype about a “manufacturing renaissance,” the decline of the manufacturing sector of our economy has continued unabated during the Obama administration.  It’s not a surprise.  The president has ignored the import side of the trade equation – the side he has the power to affect if only he had the will and courage to do so, and instead took the chicken’s way out, setting a goal for exports, over which neither he nor anyone else in the U.S. has any control, since it’s determined solely by foreign demand.  In effect, he washed his hands of U.S. trade policy, but did it in a way that he hoped would give the appearance of being a champion for American workers.  Shame on him.

 

 


Why Incomes are Stagnant or Declining

August 5, 2014

OK, it’s time for something completely new and original.  This began with the release of 2nd quarter GDP (gross domestic product) a couple of weeks ago.  The Bureau of Economic Analysis (BEA) announced that the economy grew at a 4% annual rate in the 2nd quarter – the most impressive economic performance of the supposed recovery from the deep recession of a few years ago.  Of course, that slightly bigger pie is now shared by slightly more people – 1% more each year – so in per capita terms the economy grew by 3%.  But even that is decent growth.  Here’s a chart of real (adjusted for inflation) per capita GDP:   Real Per Capita GDP.  Looking at the chart, you can see that per capita GDP has recovered, but is barely above the level of 6-1/2 years ago.

Last week, the BEA also announced that the economy added more than 200,00o jobs in July, adding to a string of such results.  But the report also noted that wages barely budged in July, rising by only a penny per hour.  When you consider that the top 1% of wage earners are rolled into that data, you realize that wages for 99% of us are in decline.

What gives?  How is it that wages aren’t rising in an economic environment of 4% growth and consistent monthly job gains of 200,000 plus?  It’s a question that has vexed economists and the Federal Reserve.

It boils down to a question of what drives the demand for labor.  Growth in per capita GDP should translate into growth in the demand for labor.  But there’s another factor at work that I touched on in Five Short Blasts but I’ve barely mentioned since – productivity growth.  So I thought it would be interesting to go back and calculate the annual rate of growth in per capita GDP, minus the rate of growth in productivity.  Although GDP and population data go back further, productivity data is only available as far back as 1947.  So that’s the base year for my data, and is assigned a value of “1.”  Each succeeding year, that figure is reduced or increased, depending on whether the combination of per capita GDP growth and productivity growth yielded a slightly positive or negative percentage change in this “demand for labor.”  Here’s the chart of the results:  % Change in GDP per capita minus productivity.

From 1947 until 1963, there was a general downward trend.  Then, over the next 36 years, an upward trend reversed the losses of the previous 16 years, reaching a peak in 1999 at a level clearly above that of 1947.  But what really blew me away was what happened next.  Beginning in 2000, this figure fell like a rock and, in ten short years, wiped out all of the gains of the previous 36 years, and continued falling to a record low reached in 2010.  Since then, it’s begun to recover, but ever so slowly.  Last year it was still below the previous low reached in 1963.

Now this is a piece of data that rings true.  Doesn’t it feel like what’s been going on?  Remember the “jobless recovery” for which President Bush took so much criticism?  This shows you that it was real.  And it shows you just how much damage the recession that began in 2008 did to the economy.

What’s driving this decline?  The growth in per capita GDP has fallen dramatically since 2000.  It’s no longer keeping pace with the growth in productivity.  To illustrate the point, here’s the average change in per capita GDP by decade:

  • 1950’s = 2.43
  • 1960’s = 3.17%
  • 1970’s = 2.17%
  • 1980’s = 2.20%
  • 1990’s = 2.21%
  • 2000’s = 0.62%
  • 2010-2013 = 1.50%

Meanwhile, productivity growth has remained fairly constant at around 2.2%.

This slow-down in per capita GDP is even more remarkable when you consider the extraordinary measures that have been taken in the last few years to prop up the economy.  Since 2000, the national debt has more than tripled from $5.7 trillion to over $17 trillion today.  And, in the past few years, the Federal Reserve has poured in an additional $4 trillion.  That’s over $15 trillion of “stimulus” since 2000.

One has to consider the possibility that the inverse relationship between population density and per capita consumption is at work here, and we’ve reached the tipping point where leaning on population growth to fuel the economy is backfiring and eroding per capita GDP.

 


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