Inventory-Building Masks Stagnant 3rd Quarter GDP

October 30, 2010

The Bureau of Economic Analysis released its first preliminary estimate of U.S. Gross Domestic Product (GDP) on Friday morning.  (Link provided above.)  GDP grew by 2.0%, a marginal improvement over the 2nd quarter final reading of 1.7%.  Inventory-building added 1.44% to GDP.  That’s not good.  Inventories can’t grow indefinitely and, at some point, are corrected with inventory reductions.  Strip out inventory-building and GDP rose by only 0.56% – less than the rate of population growth.

Before going further, I should point out that all of these numbers are dependent on the government’s estimate of inflation, or what they call the GDP “deflator.”  GDP actually rose at an annual rate of 4.2%, but the government estimates the GDP deflator to be 2.2%.  Thus, “real” (adjusted for inflation) GDP rose at an annual rate of only 2.0%.  What if the government underestimated inflation and its effect on the cost of living?  The numbers would show “economic growth” but everyone would be getting poorer.  I point this out just to illustrate how questionable these numbers can be.

With that said, factoring in population growth of about 1% per year, real per capita GDP rose at an annual rate of about 1%, little changed from the 2nd quarter.  With stimulus spending factored out, it actually rose at much more robust pace of 4.5%.  But that’s a technicality, caused by a huge downward swing in stimulus spending from the previous quarter.  As you can see from the following chart, real per capita GDP with stimulus spending factored out has been bouncing up and down (likely due to lags in reporting on stimulus spending), but shows no upward trend.  In other words, the stimulus spending halted a cataclysmic decline in GDP and stabilized it, but there’s no evidence of growth.  And the stimulus spending will soon be coming to an end. 

Real Per Capita GDP

This is why the Fed is so worried about prospects for the economy and is widely expected to start pumping billions more into the economy.  More on that in the next post.


Are Candidates “China-Bashing Xenophobes?”

October 29, 2010

Thought you’d be interested in the above-linked commentary by James Pethokoukis that appeared on Reuters yesterday, and the comment I submitted in response.  (Scroll down a few comments that follow the article.)  Also, I found the general tone of the vast majority of responses encouraging.

Vote on Tuesday

October 26, 2010

I was actually planning to  publish a post titled “Vote on Tuesday?  Don’t Bother.”  Both parties run on platforms designed to energize their base and then, when elected, move toward the middle.  The result is that both parties are indistinguishable and nothing ever changes, at least not on the critical issues of immigration and trade.

Then this came in the mail yesterday:

It seems that Lance Enderle is running to replace incumbent Mike Rogers in Michigan’s 8th Congressional District.  Since moving to Michigan in ’01, I have supported Republican Mike Rogers because of his opposition to illegal immigration and amnesty for illegals.  But, like virtaully all Republicans and Democrats, Mike was a staunch supporter of free trade.  So I had to hold my nose each time I voted.  Besides, Mike’s opposition to illegal immigration was more passive than active.  Being in a “throw the bums out” frame of mind, I’d probably have voted against him this time around anyway. 

As you should know by now, there are only two issues that I believe affect the direction of this economy – trade and immigration.  Everything else is a side-show that ultimately has little impact on our economy.  Since both parties generally support high rates of immigration and free trade, I’ve had no enthusiasm for this election.  They’re all the same and no one is going to take a stand on these issues. 

But, as you can see, Lance Enderle has clearly stated his belief that NAFTA (North American Free Trade Agreement) should be repealed, and he believes in raising tariffs on all imports.  While that actually goes further than I would (I’d only raise tariffs on manufactured imports from overpopulated nations), it’s a step in the right direction.  Tariffs on all imports would be better than what we have now.  At least now I have a reason to go to the polls on Tuesday.  And, if Enderle is elected, at least we’d have one advocate for sensible trade policy in Congress.  If he makes it, I hope he doesn’t disappoint me on these promises in the way that Obama did.

Obama Backs Down on China Currency

October 19, 2010

Just about the time you think the Obama administration may be growing a backbone in dealing with China ….. well, no.  Once again, they’ve chosen to duck and cover, leaving American workers to take the brunt.  The administration has decided to hold off on issuing a report that would brand China a “currency manipulator,” opening the door to corrective tariffs.  (See the above-linked Reuters article.)  It seems that Obama wants to hold off at least until after the next G20 meeting in November, giving a “multi-lateral” approach another chance.  Earth to Obama:  the U.S. trade deficit with China isn’t a multi-lateral issue.  Aside from the U.S. and China, none of the other 18 in the G20 gives a damn about our trade deficit. 

The issue here isn’t multi-lateralism vs. a go-it-alone approach.  The issue is that this administration hasn’t the courage to take even the simplest of measures in defense of our economy and American workers.  If it doesn’t have the guts to issue a report, what are the chances that they’d have the guts to actually impose tariffs on China and then make them stick? 

President Obama clearly places more importance on diplomacy, on maintaining an air of cooperation at G20 meetings, and on a legacy of being a world-respected statesman than on providing real leadership for the American people.  Maybe this shouldn’t be a surprise, since he vowed to take such an approach during the campaign two years ago.  But he also vowed to tackle the trade deficit and re-write the North American Free Trade Agreement.  Neither has happened, nor will they happen. 

There will be no improvement in America’s trade deficit under this administration.  The president’s plan to cut into the deficit by doubling exports is less of a plan than it is a dodge.  There’s no hope that American manufacturing jobs will be coming home under this administration.  It’s clear that our only hope for “change” will have to wait until the 2012 election.  Obama and his adminstration will have to go.

$US-TWD Exchange Rate vs. U.S. Balance of Trade with Taiwan

October 15, 2010

Continuing my series of examining the effect of exchange rate (or lack thereof) on trade imbalances, I’ll now examine Taiwan, America’s 9th largest trading partner (year-to-date in 2010).  This study of exchange rates vs. the effect on balance of trade couldn’t be more timely, given the escalating currency war that now dominates economic news.

Taiwan is a nation almost twenty times as densely populated as the U.S.  Therefore, my theory of the effect of population density on per capita consumption predicts that we’d have a trade deficit with Taiwan.  We do, and it’s a whopper.  When expressed in per capita terms, our trade deficit in manufactured goods with Taiwan is four times worse than our deficit with China. 

But how has the deficit responded to changes in the currency exchange rate?  Here’s a chart of the data:

$US-TWD Rate vs Balance of Trade

As you can see, in the 16 years covered by this data, the U.S. trade deficit responded to changes in the currency exchange rate as predicted by economists (improving with a falling dollar and vice versa) only 7 times, or 44% of the time.  In other words, the trade deficit in this case was more likely to do just the opposite of what economists predict.  And, when this 16-year period is taken as a whole, we see that in spite of the dollar strengthening over that period, the balance of trade with Taiwan actually improved instead of worsening, exactly the opposite of what one would expect.

So here’s an update of the theory correlation chart with Taiwan included:

Theory Correlation Score

Again, the population density theory continues to be a far better predictor of balance of trade than the exchange rate theory.  So far, of the 12 countries examined, there has been a strong correlation between exchange rate and balance of trade in only two cases – Australia and Colombia, both nations either less densely populated than the U.S. or about the same. 

There are still five nations to go to round out this study of America’s top 15 trading partners and the effect of currency valuation on balance of trade:  The Netherlands, India, Singapore, Venezuela and Saudi Arabia.  In the interest of wrapping up this study, I’ll include all five in the next installment. 


Exchange rate data provided by

Obama’s Plan to Double Exports Failing Miserably

October 14, 2010

This morning the Census Bureau released its report of U.S. International Trade in Goods and Services for the month of August.  Here’s a link:

In January, President Obama set a goal of doubling exports in five years, the real goal being, of course, to reduce our trade deficit.  I predicted this plan would fail for two reasons:  (1) The U.S. has no control over exports, and (2) few countries have the ability to expand domestic consumption, which would drive a demand for imports from the U.S. 

Since January we’ve been tracking Obama’s progress on this goal.  The August data makes it clear that he’s slipping far behind.  Here’s a chart of our progress vs. Obama’s goal:

Obamas Goal to Double Exports, 1st year

Seven months into this plan, exports have risen at a pace that, if continued, would increase exports by 72% in five years, well below the goal of 100%.  You may be thinking, “hey, that’s not so bad!  Lighten up!”  Oh, really?  The problem is that imports have increased at a rate that, if continued, would increase imports by 257% in five years.  Doing the math, this disparity in the rates of increase in imports vs. exports will leave us with an annual trade deficit of $2.548 trillion in five years!

Here’s a chart of the monthly balance of trade through August:

Balance of Trade

The following excerpt from the 2nd paragraph of the report pretty much tells the tale:

Exports of goods were virtually unchanged at $107.7 billion and imports of goods increased$3.9 billion to $166.7 billion. 

The president has often blamed the profligate spending of his predecessor for the state of the economy he inherited, knowing full well that the real problem lay with the trade deficit, which exploded in the decade following the granting of MFN (most favored nation) status to China, opening the door to a tsunami of imports.  Obama knows that the simplistic over-spending and deficit message plays better with the electorate.  He asks if we want to go back to the same policies that created this mess in the first place.  The fact is that his failure to take meaningful action on the trade deficit virtually assures another economic crisis.

$US-FRF/Euro Exchange Rate vs. U.S. Balance of Trade with France

October 12, 2010

Continuing my series of examining the effect of exchange rate (or lack thereof) on trade imbalances, I’ll now examine France, America’s 8th largest trading partner (year-to-date in 2010).  This study of exchange rates vs. the effect on balance of trade couldn’t be more timely, given the escalating currency war that now dominates economic news.

France is a nation whose population density is more than three times that of the U.S. and is actually much closer to the population density of China.  Therefore, my theory of the effect of population density on per capita consumption would predict a trade deficit with France.  And that’s exactly what we have.  In fact, expressed in per capita terms, our trade deficit in manufactured goods with France in 2008 was almost exactly the same as our deficit with China.  (It fell in 2009, along with the rest of global trade, thanks to the recession.) 

But how has the deficit responded to changes in the currency exchange rate?  Until 1998, when France joined the European Union and adopted the Euro as its currency, the French currency was the franc.  So the following graph depicts changes in the value of each. 

$US-FRF&Euro Rate vs Balance of Trade

As you can see, in the 19 years covered by this data, the U.S. trade deficit responded to changes in the currency exchange rate as predicted by economists 11 times.  That is, the trade balance worsened when the exchange rate rose (when the dollar strengthened), or improved when the exchange rate fell (when the dollar fell).  However, overall, during this 19-year period, the net result is that the exchange rate with France remained basically flat.  Yet, the balance of trade with France worsened dramatically.  So, when examined on a year-by-year basis, the correlation between exchange rate and balance of trade gets a weak positive score of 0.58.  But the overall effect during that 19-year period indicates that there has been an opposite effect.  The overall trend has been toward dramatic worsening of the balance of trade between the U.S. and France, just as my population density theory would predict. 

So here’s an update of the theory correlation chart with France included:

Theory Correlation Score

Again, the population density theory continues to be a far better predictor of balance of trade than the exchange rate theory.  So far, of the 11 countries examined, there has been a strong correlation between exchange rate and balance of trade in only two cases – Australia and Colombia, both nations either less densely populated than the U.S. or about the same. 

Next up will be U.S. trade with Taiwan, America’s 9th largest trading partner year-t0-date in 2010.


Exchange rate data provided by

New World Order Unraveling as Patience with Trade Imbalances Wears Thin

October 11, 2010

The “New World Order,” a term I use to describe international cooperation through organizations like the United Nations, the World Trade Organization, the International Monetary Fund (IMF) and the World Bank, as opposed to the term used by conspiracy theorists, is beginning to unravel over the issue of currency exchange rates.  It’s about time. 

All of these organizations (or their precursors) were established in the wake of World War II in the hope of breaking the cycle of misunderstanding, mistrust and nationalism that fostered global conflict twice in a span of less than thirty years.  It’s not that I have a problem with international cooperation.  But such cooperation and organizations, based on false premises and flawed economics, have been doomed from the beginning.  Cooperation toward a goal of perpetual exponential growth (including population growth), coupled with a seismic shift in trade policy to unproven and flawed 18th century trade theories, produced ever-worsening global trade imbalances, culminating in the fall of 2008 with the only logical outcome possible – the bankrupting of the United States and the collapse of the global economy. 

In the wake of that crisis, world leaders pledged cooperation in enacting stimulus to arrest the slide, and cooperation toward eliminating the trade imbalances.  Predictably, the Obama administration tried to fly under the radar with approaches that wouldn’t ruffle any feathers – verbal arm-twisting of China on their currency and cajoling Europe and Japan to boost their domestic economies.  None of it worked and now Obama and the Democrats are paying the price for their timidity, facing huge losses in the mid-term election.  Finally, U.S. Treasury Secretary Tim Geithner, having had enough of China’s delay tactics, dropped his opposition to labeling China a currency manipulator.  In short order, the House last week, by a wide margin, passed a bill that (if also passed by the Senate and signed into law by Obama) does just that, opening the door to punitive tariffs on Chinese products. 

Predictably, howls of protest from China and hand-wringing by other export-dependent nations over the prospects for rising U.S. protectionism soon followed.  Japan, alarmed over the unrelenting rise of the yen has just resumed blatant manipulation.  And the U.S. Federal Reserve has all but said that it will soon be dumping huge volumes of dollars on the world market to further erode the dollar’s value.  Emerging nations (led by China, of course) have taken their concern to the IMF, demanding that it intervene and stop this escalating currency war. 

All of this is good news and I expect that it will continue.  It’s good because it’s finally getting at the root of our economic woes.  But, in the short run, it won’t make a bit of difference for the U.S. economy, since currency exchange rates have very little to do with global trade imbalances, which are actually rooted in population density and per capita consumption disparities that can only be mitigated by across-the-board tariffs.  But at least the trade imbalances are coming under fire and eventually, one way or another, we’ll arrive at a point where a return to sensible trade policy will put this economy back on its feet.  It’s going to be a long road, but finally the first steps are being taken.

September Employment Report: No Change. No Progress.

October 8, 2010

The Bureau of Labor Statistics released September’s employment report this morning.  (Link provided above.)  To no one’s suprise, the unemployment picture remains virtually unchanged.  This is an economy that is going absolutely nowhere. 

The employment level actually rose for the 2nd month in a row, but rose by only half as much as last month.  But workers also re-entered the labor force (in other words, the government pulled them out of their “bank” of “discouraged workers”) for the 2nd month in a row.  The net result is that unemployment remained unchanged.  Here’s the calculation of unemployment, including my own calculation of more realistic figures:

Unemployment Calculation

Here are the charts of that data:

Unemployment Chart

Labor Force & Employment Level

Unemployed Americans

I’ve also added a new chart this month:  “Per Capita Employment.”  This is a simple calculation of the employment level divided by the U.S. population.  It cuts through all the mumbo-jumbo associated with hiding workers in a pool of “discouraged workers.”  A decline in this figure indicates an economy where employment isn’t keeping pace with population growth – an economy in decline.  And that’s exactly what’s happening.  Here’s the chart:

Per Capita Employment

The linked employment situation summary breaks down the loss of jobs in September as follows:

  • Government Employment:  – 159,000
    • Federal Census Workers:  – 77,000
    • State and Local Government:  – 76,000
  • Construction:  -21,000
  • Leisure & Hospitality:  + 34,000
  • Professional & Business Services (temps):  + 28,000
  • Health Care:  + 24,000
  • Mining:  + 6,000
  • Manufacturing:  No change
  • Wholesale Trade:  No change
  • Retail Trade:  No change
  • Transportation & Warehousing:  No change
  • Information Services:  No change
  • Financial Services:  No change

The jump in “leisure & hospitality” is likely due to the weakening dollar, boosting tourism to the U.S.  The drop in construction is further evidence of the contraction in credit and the slump in housing.  The “no change” in manufacturing is a bad sign that the president’s plan to boost exports is failing. 

The range of 9.5-10.0% unemployment appears to be the “new normal” for our economy – no surprise since the Obama administration has done nothing to address the underlying issues with our economy:  the massive trade deficit and the crazy practice of importing a million new workers into our labor force every year.

The TEA Party: Changing Lanes or Heading in a New Direction?

October 3, 2010

Born from fear of health care reform and its likely implications for rising taxes and growing federal deficits, what began as a simple acronym for “taxed enough already” has morphed into the closest thing to a legitimate 3rd party that we’ve seen in many years. I say “legitimate” because there have always been many parties beyond the Republican and Democratic parties – the Libertarian Party and the Green Party, just to name a couple. But none has ever garnered enough support to be taken seriously, much less to have a real impact on an election.

On the surface, the TEA Party seems to be nothing new. The promise of lower taxes and less government spending has always had broad appeal, and it’s been the backbone of the Republican Party platform (often abandoned once in office) for decades. But there’s a deeper undercurrent that I’ve often heard in describing its constituents that I find intriguing. They increasingly see no difference between the Republican and Democratic parties. The Tea Party is attracting a growing throng of voters who’ve come to the realization that minor course corrections on a wrong heading still leave us headed in the wrong direction. They’re craving something big and new – something that will really make a difference in our slow-but-steady economic decline. There’s an opening here for a new political party big enough to sail a container ship through it. To the extent that the TEA Party can deliver the message that business as usual is over – that we’re ready to abandon the bankrupt ideologies of our two major parties, it’s serving a valuable purpose.

But if lower taxes, less government spending and smaller government is all the Tea Party brings to the table, it’s destined for the scrap heap of other failed political movements. After all, in the final analysis, there’s precious little difference between the economy of one nation with no taxes and no government spending compared to another that taxes its citizens at 100% and then returns all of the money to them through a massive welfare program. Each is left with virtually the same purchasing power. Tinkering with tax rates and spending isn’t going to make any real difference. And if “less government” is the key to prosperity, then how does one explain the fact that the economy of China, a communist regime with total control of every aspect of its economy, is the fastest growing in the world while America’s is in decline?

The problem isn’t that we tax a little too much or too little, or spend a bit more or less than we should. What does make a difference is trade policy. A nation with a large trade surplus (like China) can’t help but have a booming economy, while any economy that runs a long-term trade deficit (like the U.S.) is doomed to decline. We got off onto the wrong trade policy road a long time ago, in 1947, when the U.S. signed the Global Agreement on Tariffs and Trade – the forerunner of today’s World Trade Organziation. Is the TEA Party ready to go down a new road?

At the same time, we’ve been stuck on another road to ruin since our country’s inception, relying on exponential population growth to drive economic growth. We enjoyed the pretty scenery along that road for a long time but lately, as we’ve added to the labor force faster than their output can be absorbed, the view from that road has been turning uglier. It now looks like a dead end into an economic slum. Is the TEA Party ready for a new direction?

Send a message? Throw the bums out? Fine, I’m there. But if the TEA Party turns out to be nothing other than a left-to-right lane change on the road to ruin, then it’s a complete waste of time and its candidates will be exposed as nothing more than opportunists with nothing new to offer. Instead, let’s hope this hard swerve to the right is the first step in a three-point turn to reverse our direction and get back on the right road.