1st Quarter GDP a Mix of Good News and Bad News

April 30, 2010


The Bureau of Economic Analysis (BEA) released its first estimate of GDP (gross domestic product) for the first quarter this morning.  Real GDP grew at an annualized rate of 3.2%, down from the hot pace of 5.6% in the 4th quarter of last year.  (The link above takes you to the BEA report.)  But that pace was largely driven by inventory-building and not by underlying growth in the economy.  The news this quarter is better.  The bulk of the 3.2% growth rate was driven by consumer demand. 

As has been the case for four quarters now, GDP was boosted by spending under the economic recovery act.  However, that money is now about half spent and the rate of spending has slowed dramatically, falling from a high of $113.2 billion in the 3rd quarter of ’09 to $55 billion in the 1st quarter of this year.  Take away that spending and the rate of growth in the underlying economy was 7.1% (annualized) in the 1st quarter, down from 9.4% in the 4th quarter of last year.

Growth in real GDP per capita was 2.4% annualized, dragged down 0.8% from the growth rate of the overall economy by population growth.  That’s well below the growth rate of 4.6% in the first quarter. 

Here’s a chart of real per capita GDP since 2000:

Per Capita GDP

And here’s a chart of the quarterly population growth which has been a drag on real per capita GDP:

Quarterly U.S. Population Growth Rate

The BEA report is a mix of good news and bad news.

Good News:

  • Domestic motor vehicle output is accelerating, as are computer sales.
  • Real personal consumption expenditures increased 3.6 percent in the first quarter, compared with an increase of 1.6 percent in the fourth.
  • Durable goods increased 11.3 percent, compared with an increase of 0.4 percent in the 4th quarter.
  • Nondurable goods increased 3.9 percent, compared with an increase of 4.0 percent.
  • Services increased 2.4 percent, compared with an increase of 1.0 percent.
  • Real final sales of domestic product — GDP less change in private inventories — increased 1.6 percent in the first quarter, compared with an increase of 1.7 percent in the fourth.  The growth is good; the deceleration is not.
  • Current-dollar personal income increased $115.1 billion (3.9 percent) in the first quarter, compared with an increase of $92.5 billion (3.1 percent) in the fourth.

Bad News:

  • The rate of growth in GDP, especially real per capita GDP is decelerating.
  • An increase in imports more than offset an increase in exports, making international trade an overall drag on GDP growth.
  • Real residential fixed investment decreased 10.9 percent, in contrast to an increase of 3.8 percent.
  • Real nonresidential fixed investment increased 4.1 percent in the first quarter, compared with an increase of 5.3 percent in the fourth.  But the really bad news is  nonresidential structures continue to decline dramatically, decreasing 14.0 percent, compared with a decrease of 18.0 percent in the 4th quarter. 
  • The change in real private inventories added 1.57 percentage points to the first-quarter change in real GDP after adding 3.79 percentage points to the fourth-quarter change.  Inventory growth isn’t sustainable.
  • Real disposable personal income was unchanged in the first quarter, compared with an increase of 1.0 percent.
  • The personal saving rate — saving as a percentage of disposable personal income — was 3.1 percent in the first quarter, compared with 3.9 percent in the fourth.  (In other words, the growth in GDP was partly financed by a draw-down in savings.)

Looking ahead, the first quarter GDP was still heavily influenced by fiscal stimulus in the form of stimulus spending, home-buyer tax credits (expiring today) and massive Federal Reserve purchases of mortgages, which ended at the end of March.  The economy will now be left standing naked, with far less government support.  It’ll be interesting to see what happens in the 2nd quarter.


Comments on New Arizona Illegal Immigration Law

April 26, 2010

With the passage and subsequent signing of the immigration bill in Arizona, the subject of immigration reform has exploded back onto the national stage, although it’s likely that the subject will quickly be swept aside by more recent news events.  A few observations are in order:

  1. None of the discussion has even touched on the real issue here – the need to manage our population to a sustainable level, whatever that level may be.  (Most experts agree that we’re already well beyond that point.)  Obviously, no such plan would have any chance of success as long as people continue to enter the country illegally in significant numbers. 
  2. Those here illegally should have a path to citizenship, but that path has to begin in their home countries, where they should go to the end of the line, behind those who have been following the rules.
  3. With legal immigration contributing more than one million people per year to U.S. population growth, it’s impossible for the U.S. to move toward a sustainable population without dramatically curtailing legal immigration to the point where it matches the rate of emigration. 
  4. Although those opposed to the new Arizona legislation are getting all of the press, there is a large contingent of the Hispanic population there that supports it.  With an enormous Hispanic population, Arizona could not have passed this legislation without their support.  Clearly, the majority of Hispanics are responsible citizens who are just as concerned about the effects of illegal immigration as other Americans.  But there is a very vocal minority who place their racial identity ahead of the welfare of their country.  And let’s not forget the contingent who oppose such legislation because they profit from the exploitation of slave labor and human trafficking. 
  5. There is nothing unconstitutional about the Arizona law as written.  The police must have good reason to suspect that a person is illegal before asking for identification.  This doesn’t mean racial profiling.  Is the person unable to speak English?  Do they run for no apparent reason when police approach?  Are they driving a vehicle that’s unregistered?  No driver’s license?  And let’s not forget that the problem of illegal immigration goes well beyond Hispanic immigrants to include Asians, Africans, Middle Easterners, eastern Europeans, etc.  There are plenty of all of these in every state in the union, including Arizona. 
  6. Obama’s reaction to passage of this legislation was hardly a rallying cry for immigration reform, referring to “irresponsibility by others” without mentioning Arizona by name.  He went on to call for “fixing America’s broken immigration system” without any mention of anything that could be construed as amnesty for those here illegally.  I’ve said before and I continue to believe that Obama is smart enough not to let his agenda of dealing with far more important issues like the economy, energy policy and global warming get sidetracked by the amnesty issue.  Better to deal with it by quietly and slowly improving border security and, in concert with the states, by turning up the heat on illegal immigrants, gradually forcing them out of the country.  If dealt with in that way, it’s a problem that will gradually take care of itself.  No need to pick a big fight in Congress on an issue that the vast majority of Americans oppose (amnesty for illegals). 
  7. If Obama were to fight for some kind of immigration reform that included amnesty for illegals, how could anyone take him seriously from that point on when he speaks of being concerned for working Americans?  How could we take him seriously when he speaks of the need for energy independence when he adds 11 million energy consumers to our ranks?  How could we take efforts to reduce carbon emissions seriously when he adds 11 million carbon emitters?  Mass immigration is a cause whose time is past.  It’s time to get serious about the problems wrought by an exploding population. 
  8. Supporters of  amnesty for illegals should be careful what they wish for.  When Bush attempted to fulfill a campaign pledge to tackle the issue, he soon discovered that any progress was impossible without first securing the border and enforcing the existing laws.  This lead to the biggest crackdown on illegal immigration in decades.  Obama has already proven himself a pragmatist, adopting many of the same approaches begun by the Bush administration in dealing with Wall Street, Iraq and Afghanistan.  He’ll run into the same opposition to immigration reform encountered by Bush and the same rationale still exists – our border is still not secure and the problem of illegal immigration still hasn’t been addressed.  The result might very well be a resumption of the crackdown.  Let’s hope. 

Congratulations to all of the good people of Arizona – its citizens, legislators and governor – for having the courage to act in the best interest of their state and the country, instead of being held hostage by special interests.

Importing Teachers While Americans Are Laid Off

April 16, 2010


I haven’t posted much on immigration in a while, but this article touched a nerve.  The above-linked article tells the story of hundreds of Filipino teachers imported by the state of Louisiana through an unscrupulous “placement firm” in a scheme that barely rises above human trafficking. 

What gets me is that this has taken place over the last three years – a period during which the country has barely avoided another Great Depression, while unemployment has soared over 10% and while thousands of fine teachers have been laid off all over the country.  And the federal government is complicit, allowing its H-1B visa program, supposedly designed to import skills not available in the U.S., to be exploited by corporate scam artists. 

I’m sure that Louisiana would complain that they can’t get teachers to relocate from places like Detroit.  So then how does one explain that teachers are willing to relocate from halfway around the world?  And would anyone dare to suggest that the Philippines turns out better-qualified teachers than the U.S.?  That doesn’t wash with the fact that the best-qualified students from foreign countries come to the U.S. for their education. 

This is all about school systems being too cheap to pay teachers wages attractive enough to motivate them to relocate, taxpayers being unwilling to support their school systems (because of steady downward pressure on wages and benefits) and apathetic politicians growing fat on corporate largesse. 

If I were president, I’d bring the whole H-1B visa program to a screeching halt with an executive order on day one.

We Have a Label!

April 14, 2010

Of all the labels attached to various political/economic philosophies – conservatism, liberalism, libertarianism, capitalism, socialism, communism, fascism, mercantilism, protectionism, globalism, consumerism, etc. – none ever seemed to fit my/our philosophy precisely.  Elements of each can be found in the approaches I’ve advocated.  I think I lean much more heavily toward capitalism than communism; more toward protectionism than globalism.  But none is a good fit.

Yesterday I came across one so obscure that I’d never heard of it, but prominent enough to be defined in Wikipedia.  It’s “producerism.”  Here’s a link to the Wikipedia article:


And here’s Wikipedia’s description of the general position of “producerism”:

Producerism sees society’s strength being “drained from both ends”—from the top by the machinations of globalized financial capital and the large, politically connected corporations that together conspire to restrict free enterprise, avoid taxes and destroy the fortunes of the honest businessman, and from the bottom by members of the underclass and illegal immigrants whose reliance on welfare and government benefits drains the strength of the nation. Consequently, nativist rhetoric is central to modern producerism (Kazin, Berlet & Lyons). Illegal immigrants are viewed as a threat to the prosperity of the middle class, a drain on social services, and as a vanguard of globalization that threatens to destroy national identities and sovereignty. Some advocates of producerism go further, taking a similar position on legal immigration.

In the United States, producerists are distrustful of both major political parties. The Republican Party is rejected for its support of corrupt Big Business and the Democratic Party for its advocacy of the unproductive lazy waiting for their entitlement handouts (Kazin, Stock, Berlet & Lyons).

The Reform Party of the United States of America often uses producerist rhetoric. Populist producerism (and nativist policies) are also seen in the rhetoric of Jean-Marie Le Pen in France, Jörg Haider in Austria, and similar dissident politicians across Europe (Betz & Immerfall, Betz).

Producerism is sympathetic to the idea that labor is an end in itself, inherently ennobling, and thus should be protected at least to some extent from the chaotic forces of consumer choice and market competition. In some Commonwealth of Nations countries, this position is used as an abstract definition of producerism, which is then held as the opposite of an abstract consumerism, the position that the free choice of the consumer should dictate the economic activity of a society. In other parts of the world, especially the United States, such a clear-cut definition is not feasible.

As described above, producerists seem to be a bit xenophobic and a bit over-nationalistic.  So I’d prefer to describe myself as a “producerist with a rationale.”  It’s not illegal immigrants’ over-reliance on welfare and government benefits that concerns me.  (They may very well be less of a drain on benefits than American citizens.)  It is, of course, their contribution to worsening overpopulation that concerns me – their contribution to eroding per capita consumption and, thus, worsening unemployment.  And it’s the role of population density disparities in driving trade deficits that makes free trade with badly overpopulation nations bad trade policy – not a fear of competition.

It’s interesting that the Wikipedia article describes “producerism” as “widespread, but rarely commented-upon.”  I suspect that a significant fraction of people would identify with this philosophy, but I doubt that many have ever heard of it.

You’ll probably hear me use this term more frequently in future posts.

Goal to Double Exports Off to a Weak Start

April 13, 2010


The Bureau of Economic Analysis (BEA) released February trade results this morning (link to the full report provided above).  This is the first month of trade data since President Obama announced in January his plan to double exports in five years.  Being skeptical, I promised that I would track his progress against this pledge.  It’s a fine pledge, but wasn’t backed up by any trade policy action. 

Well, we’re off to an extremely weak start.  In order to double exports in five years, they need to rise at a rate of 1.16% per month, which would be an increase of $1.66 billion over January’s exports.  However, exports in February rose by only $0.3 billion. 

And, of course, the real goal is to slowly reduce the trade deficit, reaching a balance of trade in five years.  By that measure, the news is even worse.  Imports jumped by $3.1 billion, increasing the trade deficit by $2.7 billion. 

Here’s the chart that tracks progress toward Obama’s pledge:

Obamas Goal to Double Exports

It’s a little difficult to see just one month of data on the above chart, so here’s a chart of only the first year of this five-year “plan”:

Obamas Goal to Double Exports, 1st year

It’s not my intention to bash Obama here, but to point out the folly of expecting improved trade results when no action has been taken toward that end.  No doubt, the president believes that he has taken action by playing the diplomat and securing from other nations pledges to boost their imports of American goods.  But this is nothing more than the same approach of every Democratic and Republican president who has preceded him for the past three decades.  Albert Einstein famously defined insanity as doing the same thing over and over again and expecting different results, which is exactly what Obama’s trade policy is doing. 

No improvement in the U.S. balance of trade is possible until tariffs are implemented to counteract the role of population density disparities in driving trade imbalances.  February’s trade results are just one more pebble added to the ever-growing mountain of evidence.

China Manipulates Trade Balance Ahead of Yuan Decision

April 12, 2010


The above-linked USAToday article reports on China’s first trade deficit in more than six years.  It’s no mere coincidence that this has occurred just before a decision by the Obama administration whether to label China a “currency manipulator,” a move that would have opened the door to tariffs on Chinese imports. 

China virtually admits as much:

China posted a $7.24 billion trade deficit in March, its first in almost six years, the official Xinhua News Agency reported Saturday, citing customs figures. Officials say the trend will be short-lived. The March deficit was China’s first since it recorded a $2.26 billion deficit in April 2004.

The return to deficit after many years of surplus could help ease pressure on China to allow the value of its currency to rise against the dollar — a key source of contention with the U.S. and other trading partners.

But even China’s minister of commerce, Chen Deming, described March’s deficit as only a “blip on the radar,” the state-run newspaper China Daily said Friday.

Running a trade deficit in any one month is no real trick for China.  All they have to do is stockpile raw materials – oil and other commodities – by boosting imports while simultaneously slowing their exports a little. 

Economists say the deficit reflected weak exports to the United States and other major markets still struggling to recover from the recession. Strong imports of commodities and components to fuel China’s own booming industrial sector contributed to the 66% jump in imports — albeit from a relatively low base the year before when China was also just emerging from a slowdown.

“Surging raw materials prices, for crude oil, iron ore, and nonferrous metals, which China buys a lot of for its own strong domestic economy, are another factor,” said An Yun, an analyst at Chang Xin Asset Management.

In other words, they manipulated trade to come up with a deficit just ahead of the Obama decision.  So don’t be fooled; this isn’t the start of a new trend toward rebalancing the global economy.  The U.S. trade deficit with China will soon be worse than ever, regardless of what happens to the yuan valuation issue.  That is, of course, unless Obama actually decides to take action.  But that’s a hedge that even Goldman-Sachs couldn’t sell.

Mortgage Rates Soar Following End to Fed Purchases

April 7, 2010

In its weekly press release, the Mortgage Bankers Association just announced this morning that 30-year mortgage rates soared last week to 5.31 percent from 5.03 percent a week earlier.  This is the first week following the end of the Federal Reserve’s massive purchase of mortgage-backed securities, designed to prop up the housing market.  The Fed’s program of purchasing mortgage-backed securities began in January, 2009 and since then has injected $1.25 trillion into the mortgage market.  The result was that mortage rates have held steady at historically low levels, with 30-year fixed rates barely budging from 5.0 percent during that time frame.  That program ended on March 31st.

The result of the big jump in mortgage rates this week is that refinance applications fell by 16.9% while applications for new home purchases rose by only 0.2%, a level that is below year-earlier levels by 18.1%. 

Late last year, the Federal Reserve ended its program of purchasing U.S. treasuries.  Since then, rates on 10-year treasuries have jumped dramatically.  With the end of the Federal Reserve’s massive injection of liquidity into the economy through these two programs, the economy has now been left to stand on its own two feet (with the exception of federal deficit spending of $1.5 trillion) for the first time since early 2009.  These soaring interest rates don’t bode well.  The housing market has struggled to stabilize in the past year in spite of the Fed MBS purchase program.  What will happen now that a big rug has been pulled out from under it?  Will the Fed jump back in with an ever-expanding balance sheet if mortgage rates soar and the housing market resumes its collapse? 

In the past year, federal deficit spending ($1.5 trillion) combined with Federal Reserve balance sheet expansion ($2 trillion) has accounted for a full 25% of our $14 trillion economy (as measured by GDP). 

It’s no wonder that the Federal Reserve has vowed to keep interest rates at near-zero as far into the future as anyone can see, or that Obama administration officials warn that the economy is not out of the woods and that unemployment will remain high for a long time.  They are all holding their collective breath in the hope that the economy doesn’t resume its collapse while all this injected liquidity is removed.  Happy talk about the economy should be taken with a grain of salt.

Here’s a link to the Mortgage Bankers’ Association press release:


Geithner’s Veiled Threat to Swap India for China

April 6, 2010


Here’s a new trade strategy twist.  As reported in the above-linked Reuters article, Treasury Secretary Tim Geithner proposes that India and the U.S. work together to rebalance global growth.  The implication is clear:  the U.S. is threatening to steer imports away from China and toward India.  While this might be an effective strategy for applying leverage to get our way with China, we’d simply be trading a terrible trade deficit with China for an even worse one with India. 

U.S. trade with the two nations is an interesting contrast.  While imports from China have exploded in the past decade, trade with India has remained stuck in low gear – a tiny fraction of our trade with China.  That’s a bit surprising when you consider that India is a long-time ally of the U.S., was once ruled by Great Britain, and has just as large a population (known to corporations as consumers), making it an even more hospitable environment for American businesses than China.

The biggest reason that trade with India has floundered is that it was never a communist super-power and a threat to the U.S. like China.  With the death of Mao and the ensuing acceptance of capitalism by the new generation of Chinese leaders, the U.S. and other western nations fell all over themselves in a bid to use trade to defuse tensions and make China a responsible member of the global community.  India (like most other undeveloped nations) was left holding the bag.  So rapid and thorough was the shift of manufacturing jobs to China that there is little left carrying “made in the U.S.A.” labels whose manufacturing can be outsourced to India. 

It is interesting that Geithner seems to believe that a bigger trade relationship between the U.S. and India could blossom in a balanced way that trade with China could not.  With a population density 2-1/2 times that of China, India is even less capable of absorbing imports from the U.S. than China (because overcrowding has even more seriously eroded their potential domestic per capita consumption), while their even worse excess labor capacity makes them that much more of a threat to American manufacturing.  Only tariffs or import quotas imposed on India would have any hope of assuring balanced trade with the U.S.  Would India be willing to subject themselves to such restrictions while China is not?  Why?  And would the U.S. even be smart enough to insist on them?  We haven’t demonstrated such trade policy savvy for the last six decades.  Why should we believe we’d start now? 

It’s an interesting trade policy twist, but one that seems to be more of a transparent ploy to make China squirm a little (something we’d all love to see) than a serious change in trade policy.  Time will tell, but I wouldn’ t take it very seriously.

Experts Agree: Yuan Appreciation Will Have Little Effect

April 6, 2010


I have argued over and over that the Obama administration’s reliance on forcing China to allow the yuan to float and be determined by market forces will have absolutely no effect on rebalancing trade with China.  At the risk of repeating myself, I’ll state my case again:  currency valuations have virtually nothing to do with trade imbalances.  Currency valuations, if set by market forces, stabilize not at a level that balances trade but at a level that balances unemployment.  Extreme population densities erode per capita consumption, leaving a huge imbalance in the supply of labor relative to domestic demand.  Consequently, it is disparities in population density that drive global trade imbalances. 

This is why, in spite of the dollar falling by over 300% in four decades vs. the Japanese yen, America’s trade deficit with Japan only grew much worse.  Now, unemployment in both nations is roughly equal and both the trade deficit with Japan and the dollar/yen exchange rate have more or less stabilized.

Though U.S. and Chinese unemployment rates are roughly equivalent, overall productivity in China is relatively lower.  Thus, it is likely that the trade imbalance with China will remain the same or could potentially continue to worsen, regardless of what happens with the valuation of the yuan.  Nations with extreme population densities are so desperate to gainfully employ their excess labor capacity that they never allow something so mundane as currency valuations to erode their export markets.  The cost of subsidizing their manufacturers is nothing compared to the cost of high unemployment and civil unrest.  The cost boils down to a very cheap jobs program.  Public sector spending could never create high-paying jobs so cheaply as subsidizing their manufacturers – a fact lost on U.S. policy-makers. 

As reported in the above-linked CNBC article, the Petersen Institute for International Economics agrees that yuan revaluing will have no effect on the U.S. trade imbalance with China:

Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington, …. said there were compelling arguments for China to relax the yuan’s peg against the dollar. But he saw no prospect that this would return employment to the United States ….

“Chinese appreciation would help…, but should not be regarded as the principle solution to the U.S. current account deficit.”

That begs the question:  What should the “principle solution” be?  The only thing left, after floating the yuan, is tariffs – ideally a tariff structure on manufactured goods designed to correct for China’s inability to consume at a level where it imports as much as it exports.  But that would require a degree of trade policy courage that this administration has yet to demonstrate.  I won’t hold my breath.

China’s Trade Surplus with U.S. is Secure

April 5, 2010


The above-linked USAToday article reports on the Obama administration’s decision to delay labeling China a “currency manipulator” which, under World Trade Organization rules, would leave the U.S. free to impose tariffs on Chinese imports.

China has nothing to fear from the Obama administration.  Its trade surplus with the U.S. is secure and likely to grow.  Obama has, time and again, in spite of his campaign promises to enforce trade deals and bring manufacturing jobs back home, proven himself unwilling to take action on trade policy.  He still has done nothing in response to large and wide-ranging tariffs raised by Mexico early in his administration.  He has never uttered a peep of protest about blatant dumping by Japanese automakers.  And, while his administration has done some timid peeping about Chinese currency manipulation, he has once again proven unwilling to act. 

Besides, even on the outside chance that he did slap the “currency manipulator” label on China, it would lead to nothing but years of more talk.  And even on the outside chance that China did agree to let its currency float and be determined by market forces, it would have no impact on the balance of trade.  

Still, Geithner said in a statement that China should adopt “a more market-oriented exchange rate” to balance the U.S. trade deficit with China, which totaled $226.8 billion last year — the largest imbalance with any country. U.S. manufacturers say China’s yuan is undervalued by as much as 40% and is a big reason for the massive trade deficit.

Wrong.  Currency valuations have nothing to do with this trade deficit with China nor with any trade deficit.   Trade imbalances are driven by imbalances in labor capacity.  Excess labor capacity in densely populated nations is driven by their low per capita consumption, eroded by overcrowding.  Thus, it is ultimately a disparity in population density that drives global trade imbalances. 

If “currency manipulation” is the cause of the U.S. trade deficit with China, then how does one explain an even larger U.S. trade deficit (in per capita terms) with the Euro zone, a region almost as densely populated as China?  How does one explain the far larger trade deficit with Japan (in per capita terms), a nation  ten times as densely populated as the U.S.?  And how does one explain the fact that, in spite of the dollar falling by over 300% vs. the yen in the past four decades, our trade deficit with Japan, instead of falling, actually exploded?  The reason is because currency valuations, if allowed to be determined by market forces, actually stabilize at a level where unemployment is evenly distributed, and not at a level where trade is balanced. 

A stronger yuan versus the dollar would make U.S. products less expensive in China, while making Chinese goods more expensive for American consumers.

Sure, but that doesn’t mean it will have any effect on trade.  China will maintain their market share by taking less profit and by finding other ways to subsidize their manufacturers, just as Japan and Europe have done for decades.   

The administration is hoping that China will again allow its currency to rise in value against the dollar as a way of narrowing the trade gap — as it did until mid-2008 when the global recession began to cut sharply into China’s exports abroad.

 And what was the result of China allowing the yuan to appreciate by 20% during that time frame?  The U.S. trade deficit with China worsened. 

The article goes on to present the pros and cons of tough trade action on China, weighing help for American workers against Chinese cooperation on the Iran nuclear issue, and so on.  It’s clear that there will always be a reason for the U.S. to be the world’s doormat when it comes to trade policy.  American jobs are always the first concession made for international cooperation on one thing or another. 

No, China has nothing to fear.