Let’s ask ourselves two simple questions;
- How do economists and Federal Reserve Chief Ben Bernanke is an economist, discern whether an economy is growing, is vibrant and healthy? Well, for most economists it’s a simple number, they use a country’s Gross Domestic Product (GDP) to measure the state of the economy.
- What’s the most important thing for a politician? The answer is getting reelected.
Wikipedia defines GDP as “the market value of all officially recognized final goods and services produced within a country in a given period.”
There are three - product/output, income approach and the expenditure approach - different ways to calculate GDP, all of which should give the same result. The expenditure approach to measuring GDP basically measures the total amount of spending, at market prices, by individuals (end users) for one year, on newly-produced goods and services - GDP measures how much money we spend.
The four major components of the GDP are: consumption, investment, government purchases, and net exports.
Consumption spending: Household buyers and consumers, me, thee and our families and friends, are counted as Consumption Spending and we account for about 70 percent of the expenditure that comprises GDP in the US. Consumption Spending is divided into three categories: durable goods (items expected to last more than three years), nondurable goods (food and clothing), and services.
Investment spending: Investment Spending covers three categories: nonresidential (spending on plants and equipment), residential (single-family and multi-family homes), and the change in business inventories.
Government spending: Governments pay salaries, order supplies, spend on defense, roads, schools, etc.
Net exports: Imports deduct from GDP and exports add to the final tally. In recent years, the U.S. has consistently experienced imports exceeding exports.
The GDP is considered the nation's report card because it provides the broadest measure of economic activity. What does the US’s latest report on the state of the economy, the US’s GDP report card, say in regards to further monetary easing, yes or no? Let’s break it down into a pro/con list, the pro’s are actually negative stats but are positive for more quantitative easing (QE).
Second Quarter Report Card, Pro
- The Commerce Department said gross domestic product expanded at a 1.7 percent annual rate. GDP growth is sluggish - the economy's average sustainable growth rate has historically been between 2.5% and 3.0% - a growth rate of between two percent and 2.5 percent is generally seen as needed just to hold the jobless rate steady
- The unemployment rate ticked up to 8.3 percent in July (and has exceeded eight percent for 42 straight months) so despite the Fed’s best efforts the unemployment rate is still climbing, payroll increases averaged 73,000 in the second quarter, down from 226,000 in the prior three months. More disturbing, nearly half of the unemployed people in the US have now been out of work for six months or longer, that’s up from the traditional median unemployment duration of ten weeks
- Consumer spending, which accounts for about 70 percent of U.S. economic activity, was 1.7 percent, down from the first quarter's 2.4 percent pace. A smaller rise is expected for the third quarter with demand for big-ticket items such as automobiles cooling
- Rising fuel costs and the prospect of tax changes and government budget cuts - the so called “fiscal cliff” in the U.S., the $600 billion of tax increases and spending cuts that will take effect automatically at the end of the year are hurting consumer confidence
- There was a pull-back in restocking by businesses wary of sluggish domestic demand. Also growth in business investment in equipment and software was lowered to a 4.7 percent pace, the slowest since the third quarter of 2009 and softer export growth is expected. Factory orders data showed demand for non-defense capital goods excluding aircraft – a measure watched as an indicator of business confidence and future spending – fell 4 per cent in July, following a 1.7 per cent decline in June. The months of May and April saw declines of 2.1 per cent
There are bright spots, Con
- Stronger export growth
- Wages and salaries from April through June rose by $56.1 billion after a revised $133.5 billion first-quarter gain that was bigger than the previous estimate of $123.3 billion
- Disposable income adjusted for inflation rose 3.1 percent from April through June after a 3.7 percent gain in the first quarter
- The saving rate in that same period climbed to four percent from 3.6 percent in January through March
- The index of pending home re-sales climbed 2.4 percent to 101.7, the highest since April 2010
Reason, and Room, to Ease
“We have seen no net improvement in the unemployment rate since January. Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.” Federal Reserve chief Ben Bernanke
Inflation is still near the central bank’s goal of two percent, a measure of prices excluding food and energy costs tied to consumer spending climbed at a 1.8 percent annual pace in the second quarter - the combination of high unemployment and slow GDP growth removes upward pressure on prices.
Growing the Economy
How do you get an increase in economic growth, how do you grow an economy? By increasing the GDP. And how do we do that? By increasing one or some combination of the four components of GDP:
- Consumption Spending – consumers are retrenching and paying off debt
- Investment Spending – businesses are sitting on their cash hoards and not reinvesting in inventory, plants, machinery and software
- Government Spending – they have control of the printing press
- Net Exports – business cannot be competitive without modern well maintained infrastructure, plants, machinery and software
Without an increase in one (or some combination) of these components of total spending, GDP cannot increase. Who, out of the household sector, the business sector, the government sector (state/local or federal) or the import/export sector is in a position to take the lead on spending?
Answer, Government Sector, Federal
As I said, the most important thing to a politician is getting reelected – most people will vote for the guy who promises they will keep the job they presently have, will improve their prospects for a better job, or simply promises them a job.
What has historically driven the American economy is consumer spending - what drives consumer spending? Consumer confidence, but confidence, and the willingness to spend money, comes from having a secure job, a regular pay cheque you can count on.
“Household buyers and consumers, me, thee and our families and friends, are counted as Consumption Spending and we account for about 70 percent of the expenditure that comprises GDP in the US.”
Here’s how they put Americans back to work and ramp up consumer confidence levels so they start spending again:
- The “fiscal cliff,” the $600 billion in budget cuts and tax increases slated for the new year, must be eliminated. This would go a long way to restore consumer confidence
- Democrats, Republicans and the Federal Reserve need to stop the petty infighting and bickering and work together to create a plan to put people back to work. If the US could show there was a concrete plan put together, and publically endorsed, by all three interests, and that it was going to be followed, this would go a long way to restore confidence, internally as well as globally
- The Federal Reserve needs to communicate to consumers and business better, for example – interest rates are going to stay at their present low rates until a clearly defined moment occurs – it’s not enough to say rates might stay low till 2014, tell business and borrowers they will be low till “this” happens.
- A third round of asset purchases should be started and not stopped until the employment picture has improved for several straight months
“You know, if you look back in the 1930s, the money went to infrastructure. The bridges, the municipal buildings, the roads, those were all built with stimulus money spent on infrastructure. This stimulus bill has fundamentally gone, started out with a $500 rebate check, remember. That went to buy flat-screen TVs made in China.” Michael Bloomberg
“Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors’ expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about “tail” risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.” Snippet from Federal Reserve head Ben Bernanke’s recent Jackson Hole speech
An Infrastructure Spending Plan is Key
The American Society of Civil Engineers (ASCE) 2009 Report Card for America’s Infrastructure graded the U.S. infrastructure with a “D.”
The Society has recently published three Failure to Act reports, studies on surface transportation and water were released in 2011, the ASCE report on electricity infrastructure was released in April of 2012.
Deteriorating surface transportation infrastructure will cost the American economy more than 876,000 jobs and suppress the growth of our GDP by $897 billion by the year 2020.
Drinking water and wastewater infrastructure is aging and overburdened. A modest increase in investment will:
- Protect $416B in GDP
- Protect almost 700,000 jobs
- Avoid personal income losses of $541B
Closing the electricity investment gap of $107 billion would lead to fewer brownouts and blackouts and save US businesses $126 billion, prevent the loss of 529,000 jobs and $656 billion in personal income losses for American families.
“A devastating commentary on the war in Iraq is that we have been unable to spend money on infrastructure.” Charles Schumer
Government spending on infrastructure would revive the economy by putting people back to work, consumer confidence would increase, and spending would increase.
Inventories would need to be restocked, business would invest in new plants and equipment. American business would become more competitive because of the increased quality of modern infrastructure, exports would increase, imports decrease.
The GDP Report Card would show straight A’s and a note on the bottom would read job well done.
The ASCE’s Failure to Act reports should be on every politicians, and every voters, radar screen. Are they on yours?
If not, maybe they should be.