Key Trends in Globalisation

US 1st Quarter GDP - an unprecedented post-war investment fall

Media headlines regarding the publication of the first quarter 2009 US GDP figures concentrated on the 6.1% annualised decline in GDP itself. This was worse than average predictions - which had been for a 4.7% annualised decline. But the most serious development was an unprecedented post-war decline in US investment.

This investment decline is not only dragging the US economy into deeper recession but will have a particular impact in that it precludes any rapid US output recovery.

Analysing first the comparison of the change in US GDP in this business cycle compared to others since World War II, Figure 1 compares the percentage decline in GDP since the peak of the present business cycle, in the second quarter of 2008, with the previous major US post-war economic downturns in 1973 and 1980.

Figure 1

As may be seen, the downturn in US GDP since the second quarter of 2008 is both more rapid and deeper than in any previous post-war business cycle – confirming the by now well established fact that this is the worst US economic downturn since World War II.

However, the downturn in GDP has so far only lasted for three quarters and the total decline to date, of 3.3%  is serious but of the same essential qualitative magnitude as the most serious previous post-war economic cycles. It is not, so far, comparable to more serious economic crises – for comparison in 1929-30 US GNP fell by 9.4%.

The conclusion regarding the US GDP itself, therefore, would be that the downturn is very serious but not yet out of the range of previous post-war business cycles. How serious the decline in US GDP will be, therefore, depends on how long the downturn continues and whether US GDP continues to drop.

But the downturn in US investment is of an entirely different and more serious magnitude. Figure 2 shows the downturn in US fixed investment (gross domestic fixed capital formation) in the current business cycle compared to those commencing in 1973 and 1979. As the investment cycle does not always coincide exactly in time with the GDP cycle, in these figures the peak has been taken as the peak of cyclical fixed investment not the peak of GDP.

US investment already started turn down after the first quarter of 2006. As may be seen the present decline in US investment far exceeds those seen in previous post-war business cycles. Furthermore rate of decline of investment was accelerating in the first quarter of 2009.

Figure 2

The total decline in US fixed investment since its peak in this cycle is 23.8%. The year on year decline to the first quarter of 2009 is 18.0%. For comparison it may be noted that the decline in US private fixed investment in 1929-30 was 23.4%. In short if the fall in US GDP in this business cycle does not approach that of 1929 the current decline in US  investment is of a qualitatively greater magnitude than any seen in previous post-war business cycles and does approach 1929 levels of decline.

In order to illustrate these trends more clearly Figure 3 shows the changes in the domestic components of US GDP since the first quarter of 2006 - the extremely severe decline in US exports has been analysed elsewhere.

Figure 3

As may be seen while the dimensions of the decline in US GDP and private consumption in this business cycle is relatively moderate, while government consumption overall has not fallen at all, the decline of investment is of extremely severe dimensions.

The result, as may be seen in Figure 4, is not only that US investment has fallen rapidly but its percentage of even a shrinking US economy is declining. US investment has fallen outside its normal postwar range as a percentage of GDP - this US level already being very low in terms of international comparisons.

Comparison to annual figures shows that the proportion of US GDP allocated to fixed investment has now fallen to its lowest level since the immediate post-war reorganisation of the US economy in 1946.

Figure 4

 

These figures have major implications. In the short term, the decline in investment is dragging the US deeper into recession. But in the medium and longer term such a low level of investment makes it hard to relaunch economic growth.

Furthermore such a level of investment is so low compared to US competitors - China and India both have rates of investment of well over 30% of GDP, that it will lead to further decline in the international competitivity of the US economy.

The implications which flow from the first quarter United States GDP figures are therefore that the US economic downturn is likely to be protracted – which has major implications not only for the United States but for the world economy, and the US economy will continue to fall behind the growth rate of both China and India.

As the G20 summit did not resolve the key issues watch trends in the US

The Financial Timessummed up the G20 summit rather cynically, but also accurately, under the self-explanatory title 'G20 Summit Has Little Impact on Global Economics,' concluding ‘it is apparent the world economic order was very little different on April 3 compared with April 2’.

The numbers, however, confirm that assessment. Agreement on increasing funds for the IMF by $500 billion, announced at the summit, had already been reached prior to it and is in a too small to deal with any of the major issues in the world economy – losses on US housing and share markets, for example, total $13 trillion, the decline in US production this year is likely to approach $1 trillion and lost production in Europe and Japan will exceed this figure. The agreement on $500 billion extra IMF funds was therefore only a statement that countries on the verge of overt bankruptcy will not be allowed to plunge over it - but neither will there be sufficient funding to finance real recovery. It is simply a question of how many such countries will meet the technical conditions of economic depression - usually set as a GDP decline of more than 10%.

A significant number of such countries are in Eastern Europe - such as Latvia and the Ukraine. This was doubtless why China, with the largest foreign exchange reserves in the world, only put in $40 billion to the IMF compared to $100 billion from the European Union – China, fairly reasonably, thinks which should it bear the main cost for bailing out Eastern Europe?

As regards the second major G20 summit agreement, to expand trade credits, World Bank economist Simeon Djankov noted that there is “no evidence [trade finance] is a real bottleneck to trade”. The recent precipitate decline in world trade is rooted in declines in financial markets and economic recession rather than lack of trade credits.

The reality is in the present scale of financial crisis any sum not measured in trillions of dollars is too small make a significant difference. Therefore from where will the really big sums come from to finance the various bank rescue packages?

One of the key answers is the rapidly worsening living standards of ordinary Americans and the discontent and conflicts this will give rise to in .

The new US defence budget presented by Secretary of Defence Gates makes clear that military spending by the United States will actually rise despite the economic downturn - with a 4%, that is above the rate of inflation, increase projected for next year. As the core of the financial crisis is that the US is consuming more than it produces, which is merely another way of saying the US is running a large and unsustainable balance of payments deficit, then, to cut consumption, if military spending is not to be reduced, consumer spending, and non-military areas of government expenditure such as health and education, will have to be cut.

So far over five million US jobs have already been lost in this economic downturn, 663,000 going in March alone, with consequent loss of consumer purchasing power. As Kevin Hassett put it on on Bloomberg regarding the consequences: ‘The U.S. unemployment rate skyrocketed to 8.5 percent in March, and there is every reason to expect that it will soon be above 10 percent. Given how bad things are, it will probably break the postwar record of 10.8 percent, set in late 1982.

‘Even if we don’t challenge that record, this recession is already worse than its 1980s counterpart. Back then, unemployment had been quite high for many years before it spiked. The unemployment rate in late 1982 was just 2.3 percentage points higher than it had been a year earlier.

‘This time, the turnaround in our fortunes has been sudden and sharp. It seems almost impossible, given how bad things are now, that in March 2008 the unemployment rate stood at 5.1 percent -- 3.4 percentage points lower than it is now. That means the surge in unemployment over the past year is even more radical than the one that produced the modern record. The economy has fallen off a cliff.

‘Almost everyone has now been affected. A recent ABC News/ Washington Post poll found that 60 percent of Americans had a close friend or family member who had been laid off.

‘Unemployment this high brings with it widespread suffering that hasn’t been felt by an entire generation, suffering that feels worse because recent times were so good. Americans seem to be more sombre now than at any moment in my lifetime.’

While large scale unemployment by itself cuts US consumer spending, a sharp reduction of income for those in work is also taking place - with a particular effect being felt by the US trade unions. It is well known that the primary condition that will be made for any bailout package for General Motors, Ford and Chrysler will be a substantial reduction in the incomes and benefits of their employees. But this is extending past this well publicised example. A typical case is the one at the Boston Globe: '"If management is willing to lead us, to take pay cuts and concessions, I'm sure the union would be willing," said Bob Sullivan, 56, who has worked as a mailer for 38 years...

'The Globe's owner, The New York Times Co., last week threatened to quickly shutter the money-losing newspaper unless its 13 unions swiftly agree to $20 million in concessions, including pay cuts, reduced company contributions to retirement and health care, and the elimination of lifetime job guarantees now enjoyed by some 430 workers, according to union officials and other people familiar with the matter. Management told union leaders last week that without serious cutbacks, the Globe is projected to lose $85 million this year, following a $50 million loss in 2008, according to a Globe employee who was briefed on the discussion… In fact, they fully expect the Times Co. to impose more cuts on management's pay and benefits. Last week the Times Co. instituted a temporary 5 percent pay cut for non-union managers at the Globe and other Times Co. properties. In January the company cut pension benefits for existing non-union managers, and managers hired after Jan. 1 no longer receive a pension plan but rather an enhanced 401(k). And last month, the company eliminated retiree health benefits for non-union employees.

'James McLaughlin, a mailer for 38 years, said workers have been making concessions for years, giving up raises and paying more for health care. Last year the pressmen and union drivers agreed to concessions that saved about $10 million, including a 5 percent wage cut, according to a person familiar with the matter.

"It's tough," said McLaughlin, 58. "We never thought we'd have to worry about the demise of the newspaper. We've given up so much. I think I can give a little more."'

With such perspectives not wonder that, as Hassett put it, Americans are more sombre than at any time in his lifetime.