3rd Quarter GDP Up, Erosion in Underlying Economy Continues

October 30, 2009

Thursday the government reported that GDP rose at an annual rate of 3.5% in the third quarter, rising from an annual rate of $12.901.5 trillion in the 2nd quarter to $13.014 trillion in the 3rd quarter.  (Expressed in 2005 dollars.)  The government would have us believe that this is great cause for cheer – evidence of a rebounding economy and the end of recession.

But how much of this is real growth versus the illusion of growth created by government stimulus spending?  In March the government passed the American Recovery and Reinvestment Act, authorizing the spending of $787 billion to boost the economy.  Proof that it’s actually stimulating the economy would be an increase in GDP if the stimulus spending is removed.

The fact is that the underlying economy continues to deteriorate.  As I reported in Stimulus Spending Masks Huge Decline in 2nd Qtr. GDP, the underlying economy contracted at an annual rate of 8.2% in the 2nd quarter.  In the 3rd quarter, stimulus spending increased to $113 billion, for an annual rate of $452 billion.  If this spending is removed from 3rd quarter GDP, we find that the underlying economy has continued deteriorating, albeit at a slower pace, at an annual rate of 3.5%.  Without the stimulus spending, 3rd quarter GDP would be 7.5% below the peak GDP reached in the 2nd quarter of 2008.  (It should be noted that that figure was also “stimulus-aided,” the result of the Bush administration $150 billion tax rebates.)

Making matters worse, real per capita GDP (sans stimulus spending) fell to its lowest level since 3rd quarter 2003, with the addition of another 300,000 people to the U.S. population contributing to the decline.

This is why some political leaders, economists and financial pundits are raising alarm over the possibility of  backsliding into recession once the government stimulus is removed – because the underlying economy continues to deteriorate, and not at a slow pace.  It’s likely that the government will enact new stimulus measures to sustain the illusion of economic growth, but at the risk of record deficits alarming the financial community in a way that will send interest rates soaring, countering any stimulus measure.  It would be amusing to watch such idiotic economic policy play out were it not for the devastating effects on the vast majority of Americans.


China Disingenuous about Re-Balancing Global Trade

October 28, 2009



Just in case anyone was deluded into thinking that China was genuinely interested in restoring balance to global trade, along comes this blunt refusal by a Chinese trade official to consider anything that will slow the growth of Chinese exports:

Speaking at a separate forum in Beijing, Jiang Jianjun, a deputy director with the Ministry of Commerce’s Department of Foreign Trade, cited China’s rising share of global output and its swelling foreign exchange reserves as pressures on the yuan to strengthen.

“However, according to our projections, until there’s a noticeable improvement in exports, the exchange rate will not see a major adjustment,” Jiang said.

He said it would take two or three years for China’s combined exports and imports to regain pre-crisis levels.

Of course, exchange rates have nothing to do with trade imbalances, but that’s irrelevant.  Both the U.S. and China think that they do, and China’s refusal to allow any further strengthening of the yuan is proof positive that they have no interest whatsoever in re-balancing trade.  Give China credit.  They understand how to make trade work to their advantage.  It helps their cause that the people across the trade table from them are complete fools.

Hey, Asia! Want to Reduce Your Dependency on Exports to the U.S.?

October 27, 2009


The above-linked Reuters article was too good to let pass without comment.  It seems that Asian leaders have gotten together to discuss how to go about reducing their dependence on exports to the U.S. in order to correct global trade imbalances.

Asia-Pacific leaders called on Sunday for regional-wide free trade and other measures to reduce dependence on the United States and big Western markets as Asia leads the way out of the global economic downturn.

… Thai Prime Minister Abhisit Vejjajiva, host of the meetings, said Asia clearly needed a new growth model leaning less on big Western trading partners and more on Asia-wide trade pacts. The global financial crisis, he said, bore this out.

“The old growth model, where simply put we have to rely on consumption in the West for goods and services produced here, we feel will no longer serve us as we move to the future,” Abhisit told a news conference.

There’s no doubt that leaders now understand that persistent trade imbalances can’t be sustained – that they ultimately lead to economic collapse.  They believe that through a regional Asian trade bloc, they can boost their economies and stimulate domestic consumption to such an extent that they will have no capacity for supplying America’s need for products.  Apparently, they see a day when a customer at a Toyota dealer is simply turned away with the explanation “Sorry.  We don’t have any more cars available to sell.”  That must be what they envision because, unless they stop selling to the American market, the trade imbalance will persist.

The very idea that they are genuinely anxious to abandon their dependence on exports to the U.S. is laughable.  If anything, they would like nothing better than for the U.S. to boost its imports.  Imagine if the U.S. took steps to re-balance trade and break its dependency on imports from Asia.  They’d be howling bloody murder, calling us protectionists and complaining to the World Trade Organization.

Hey, Asia!  Want to cut your dependency on the U.S. and re-balance trade?  It’s easy!  Just start closing your Toyota, Nissan, Honda, Suzuki, Hyundai and Kia dealerships in the U.S.  When WalMart places orders for container ships-full of Chinese products to stock their shelves, politely reject the orders and suggest that we make the products ourselves.  Problem solved!  Or here’s another idea:  start buying as much from us as we buy from you.

We all know it’d never, ever, ever happen.  It’s all just another ploy to buy more time to sustain the trade imbalance they’ve enjoyed for decades at Americans’ expense.  Talk, talk, talk.  For decades we’ve listened to them talk about lowering trade barriers, ending currency manipulation and protecting intellectual property.  Now it’s talk about stimulating their domestic economies.  That should be good for another decade or so of more talk, and we all know that talk is the most we can expect from America’s cowardly leadership.

The only way that global trade imbalances, especially America’s huge trade deficit in manufactured goods, will ever be corrected is through tariffs imposed by the U.S., not just on Asian nations but on all over-populated nations, forcing the needed correction and bringing millions and millions of high-paying manufacturing jobs back to the U.S.

Manufacturing: Poised for Rebound or More Decline?

October 15, 2009



The above-linked Reuters article reports on statements by the Manufacturers Alliance regarding its latest release of its monthly manufacturing index.  The index jumped nicely in September to a reading of 38, from its low of 24 in June.  So manufacturing is rebounding, right?  That’s what the Manufacturers Alliance and the Reuters article would lead you to believe. 

But, as former British Prime Minister Benjamin Disraeli famously said, there are three kinds of lies:  “lies, damnable lies and statistics.”  Statistics can be twisted so support any position.  In this case, yes, the manufacturing index improved.  But there’s just one problem:  any reading below 50 indicates contraction.  So, although the index improved from 24 to 38, what it really means is that conditions in the manufacturing sector continue to get worse, not better, but at a slower rate.  Does that sound like a rebound to you?  Of course not. 

The only part of the index that improved above 50 was the “expectations” part of the index – what the survey respondents expect to happen next year.  It seems they expect conditions to improve.  But there’s no evidence of improvement to support it.  It’s just pure hope and optimism – all part of a grand plan to boost consumer confidence by hyping “green shoots” in the economy while ignoring reality. 

Eventually, manufacturing will rebound from the level it’s at today, but not to the level it was at before the recession began.  The decades-long decline in manufacturing has been driven by idiotic trade policy that traded away our market without gaining access to equivalent foreign markets, and that decline will continue for lack of courage on the part of our leadership to make the changes necessary to restore a balance of trade.

Population Growth Injected into Carbon Cut Debate

October 14, 2009



As reported in the above-linked Reuters article, at least one low-level government official recognizes that projected U.S. population growth will make America’s goals for reducing carbon emissions much more difficult.  Brian O’Neill, a scientist at the U.S. National Center for Atmospheric Research, who also works at the International Institute for Applied Systems Analysis in Austria, has correctly observed that projected population growth makes carbon emissions reductions more difficult for the U.S. compared to some other developed countries where their populations are stable or declining. 

The leaders of the G8 nations have agreed to cut carbon emissions by 2050 by 80% from their 1990 levels.  Some of these developed nations are expected to decline in population by 2050, but not the U.S., whose population is projected to be 60% higher in 2050 (at 400 million people), vs. its 1990 population of 250 million.  So an 80% reduction in those emissions by 2050 would translate into a per capita reduction of 87.5% for the U.S.  For nations whose populations are projected to decline, their per capita reductions would be less than 80%.  This will translate into a lower standard of living for Americans than for other developed countries. 

Why is O’Neill talking to Reuters correspondents about this?  Is he a rogue low-level official speaking for himself?  Or is he parroting thinking that he’s heard at higher levels in his organization?  Or is it possible that this is an intentional move by the Obama administration to inject the subject of population growth into the carbon emissions debate? 

If the latter is the case, then to what end is the administration broaching this subject?  Two possibilities come to mind.  Since virtually all of our population growth is due to immigration, could it be that the administration is setting the stage for a dramatic change to immigration policy?  The second possibility seems more likely to me – that the administration is trying to shift the focus of carbon emissions reductions to a per capita basis instead of total emissions.  If so, they may think that the U.S. can get some relief on its own emissions goals vis-a-vis other G8 nations, but there’s a danger that such an approach could back-fire.  If total carbon emissions reductions are translated into a per capita basis, then it would be logical to apply the per capita figure evenly to all people of the world.  In such a scenario, U.S. emissions would have to be cut much further, since vast numbers of people already exist at far lower levels of per capita emissions, and population growth projections for many third world countries is even worse than the projections for the U.S.  In other words, if everyone gets to emit their fair share, then U.S. emissions will have to be cut much more drastically than 80%, a level that many already believe is simply unattainable. 

My interest in all of this is, of course, not so much reductions in carbon emissions, but the pressure that this subject brings to bear on the need to reduce our population.  Since economists don’t understand that reductions in our population would actually have huge economic benefits, we’ll all be better off in the end whether the impetus for population reductions is economic or some environmental concern.  The good news here is that, as much as environmentalists would like to keep the population factor below the radar, it’s beginning to be openly discussed.

Finally, the article ends with a quote so egregious that I can’t let it pass without comment:

David Satterthwaite, of the International Institute for Environment and Development (IIED), said … “It’s consumption that drives dangerous climate change, not population.” … “There is at most a weak link between population growth and rising emissions of greenhouse gases.”

Anyone who would make such a statement is being disingenuous, to put it mildly.  The rise in greenhouse gas emissions is directly related to the growth in population over the past couple of centuries.  Even a fifth-grader can understand that total emissions is a function of population times the average per capita emissions.  Only a fool would focus solely on per capita emissions while discounting the role of population growth.  Stabilizing and reducing our population is critical to achieving our goals for greenhouse gas emissions reductions.  If reduced enough, it could also have the side effect of providing a huge boost to the standard of living for everyone.

Structural Unemployment

October 11, 2009



It’s a basic tenet of economics that economies tend to return to full employment following the temporary disruptions of recessions.  But, as reported in the linked Reuters article, economists are beginning to worry about “structural unemployment” – high levels of unemployment that will persist even after an economic “recovery.” 

Millions of American job-hunters risk permanent unemployment as industries undergo radical change and some skills become irrelevant in the wake of the worst U.S. economic recession in 70 years.There are troubling signs that unemployment in the United States is taking on a structural dimension, though the extent of it may not become clear until the severe downturn that started in December 2007 finally ends, analysts said.

Structural unemployment has been gathering steam for decades, as the out-bound container ships that appeared to be returning empty to China, Japan, Germany and Korea were instead actually loaded with American jobs.  So where were these analysts and economists as all this was going on?  They were busy manning the brooms, sweeping the unemployment issue under rugs and transforming the American economy into a two-legged stool, teetering on the housing and services sectors while the manufacturing sector was steadily sawed away. 

It worked for a while, as housing and retail were juiced with credit, made possible by lax or non-existent lending standards.  But once everyone’s bank accounts were drained dry, the stool tipped and the whole system collapsed. 

“The figures reflect the fact that some of the jobs lost are probably lost for good and highlight that unemployment is rising more because of structural changes in the economy than in past recessions,” said Tony Crescenzi, strategist and portfolio manager at Pimco in Newport Beach, California.

The jobs aren’t “lost for good.”  They were carried overseas on ships floating on a sea of flawed trade policy.  If we just open our markets to these enormous populations, the jobs we provide them can prime the pump of their economies and they’ll soon be buying as much from us as we buy from them, it was assumed.  Well, it didn’t prime the pump.  Those jobs were poured down a rat hole.  We didn’t understand that those densely populated economies, instead of being fertile grounds for exports, were merely vast labor forces desperate for employment.  There’s not enough export market there because their over-crowding makes it impossible for them to consume at anywhere near the level required to absorb their own domestic productive capacity, let alone imports from the U.S.  And worsening over-crowding here in America, stoked by immigration, is making matters worse.

But not understanding this, economists grasp at straws to explain this new phenomenon of structural unemployment:

“That does make one to wonder about long-term unemployment, what you might call structural unemployment,” said Heather Boushey, senior economist at the Center for American Progress.

… Annual vehicle sales have dropped from a peak of nearly 17 million vehicles in 2005, while housing starts have fallen from an annual rate of around 2.3 million units in January 2006.

… Analysts reckon vehicle sales and new home construction will probably not return to those lofty levels, meaning that workers laid off from these sectors have a slim chance of getting their jobs back.

… “That means there is excess capacity of millions in terms of what could be produced. The jobs lost there might be lost for good because we won’t get back to 16 or 17 million car sales in a very long time,” said Pimco’s Crescenzi.

The logic is that people will stay unemployed because they don’t have enough income to buy things.  They don’t have enough income because they’re unemployed.  When will economists stop chasing their tails and consider the possibility that they’re over-looking something?  Perhaps people are unemployed because per capita consumption is declining while productivity is rising.  Perhaps such effects can actually be imported through free trade.  Perhaps population growth is a poor crutch for economic growth.  Perhaps, economists, closing your minds to the ramifications of population growth wasn’t such a hot idea after all. 

Structural unemployment is real, rooted in the extreme population densities found throughout Asia and much of Europe.  It is the responsibility of these nations to address the cause of their structural unemployment.  It is not our responsibility to import it.

August Trade Deficit in Non-Petroleum Goods Rises to Highest Level Since January

October 9, 2009



The BEA (Bureau of Economic Analysis) released the August results for international trade in goods and services this morning.  As is always the case, the headline number gets all the attention and the headline number was good – the trade deficit declined to $30.7 billion in August, down from a revised $31.9 billion in July and a bit better than expectations for a rise to $33.0 billion.  Let the party begin!

But the news for American workers isn’t good.  All of the decline (and more) is explained by a reduction in oil imports and a tiny increase in the services surplus.  (“Services” are largely paperwork transfers of money that involve few jobs.)  The bad news is that the deficit in non-petroleum goods – in other words, manufactured products (where all the jobs are, or rather were) – actually rose by $0.7 billion to $24.3 billion, the highest level since Jauuary, when international trade was in significant decline as a result of the economic collapse.  (See exhibit 9 on page 14 of the BEA report, link provided above.)

And our cumulative trade deficit, since our last surplus in 1975, has now topped $9.6 trillion (in current dollars).

If the Obama administration and congressional leaders are looking a way to reduce our soaring unemployment, fixing our misguided trade policy would be the perfect place to start.

U.S. Unemployment Soars to 11.2%, 785,000 Jobs Lost in September

October 7, 2009

Friday, the Labor Department released the unemployment report for September, announcing that 263,000 jobs were lost in September and that the unemployment rate ticked up 0.1% to 9.8%. 

What the Labor Department didn’t tell us is that the data shows a far worse picture, and the government is covering it up with assertions that vast numbers of people are simply dropping out of the labor force and going back to school. 

The facts are that the employment level fell by 785,000 in September, at the same time that the population grew by about 275,000.  (So, if the Labor Department was honest, it would admit that the labor force grew by about half that figure.)  The net result is that U3a unemployment (U3 is the government’s narrowest measure of unemployment) shot up in September from 10.6% in August to 11.2% in September, while U6a jumped to 20.1%.  These are the highest levels since the Great Depression. 

 Here’s the data:

Unemployment Calculation PDF

No wonder the government is fudging the numbers.  It’s trying to paint a rosy picture of a recovering economy, while the fact is that the employment situation is deteriorating just as bad as it was at the beginning of the year. 

The government’s claim that people are dropping out of the work force during a recession when they need income the most is laughable.  Are unemployed workers going back to school?  No doubt.  Yesterday, as I drove past a community college, I could see that its huge parking lot was completely full.  But are we to believe that these people who once needed income to pay for housing, food, clothing and medical care are less in need of income now that they’ve layered tuition and books onto their list of expenses?  Of course not.  They need income even more now.  And they’re just as unemployed. 

Don’t be fooled.  The unemployment picture continues to deteriorate at a frightening clip.