Friday, June 25, 2010
GDP Third Estimate
The full report in pdf is here.
Headline is +2.7% (annualized).
The underlying numbers after adjustment for inflation/deflation:
- GDP increased 89.1 billion from Q4 2009:
- Personal consumption expenditures increased 69.5 billion.
- Gross Private Domestic Investment increased 62.2 billion
- Net exports fell 25 billion.
- Government spending fell 12.1 billion.
- Personal consumption expenditures rose mostly on goods (more than twice the increase in services). Motor vehicles were slightly negative. This tends to suggest that we wore out some spending impetus.
- The growth in GPDI (Gross Private Domestic Investment) was almost entirely due to private inventory increases. Fixed investment was slightly negative.
- The drop in government spending was solely due to state and local spending declines of 14.9 billion.
- In the first quarter state and local budgets were still receiving considerable help from federal measures. In the second half of this year much of that will be gone, so state and local spending must keep falling until it is more in line with tax revenues.
- Growth in GPDI, which is the main driver of the domestic economy and certainly a huge jobs driver, received some help from business spending on items such as equipment, capital goods such as machinery, computers, and software. However it still was not enough to overcome the decline in housing and commercial building. According to recent reports, computers are wearing out a bit at the end the second, but some life is left in machinery/capital goods. There is a clear downturn in residential, so we can kiss that off.
- Thus, growth in GPDI is going to have to come from growth in private inventories, but growth in private inventories will be chained to final sales (businesses are not just going to build up inventory if a backlog develops). THIS CHAINS PCE growth and GPDI growth TOGETHER IN THE SECOND HALF.
- At this time, inventories are still clearing through, but the latest ISM reports and retail reports suggest that this is slowing a bit.
- In any case, in a low credit environment PCE growth is mostly a function of incomes. But with further state and local job cuts in the offing, the end of the Census cycle, a downturn in home sales, and an increasing number of people losing unemployment benefits without being able to find jobs, income growth isn't going to be very strong.
- Worse, PCE growth and state and local revenues are chained together. Sales tax revenues are mostly dependent on people buying stuff.
- Therefore PCE and GPDI are dependent on jobs, which is dependent on GPDI. Gasp.
Here the BP disaster enters the picture. Because much of increased supply comes from ocean drilling and synthetic oils (such as those produced from the tar sands + natural gas in Canada), costs of acquiring new supply have to be the underlying driver for long term oil costs. And the reality is that costs for ocean drilling probably just incurred a long-term increase. I would say that probability is about 99%, but there may be something I don't know, so take that with a grain of salt. I'm pegging that somewhere around 10%, which would imply that oil's likely base price going forward is somewhere around the low 70s. And that's a structural change which raises transport costs and production costs.
In addition to that, China's manufacturing is clearly going to be pushing some increased costs due to the increased cost of oil and increased wages. Manufacturing wages in China have to grow on inflation (and the monsoon in India has slowed and may produce a higher rate of inflation in India than expected a month ago). Inflation in China and India is fundamental to the world economy.
So here is the nightmare scenario for governments. We have a structural budget gap. If we raise taxes, we reduce PCE, which reduces GDP growth. But with trend growth so low, and PCE growth likely to moderate anyway, we really can't afford to reduce PCE by fiat because we'll produce a second contraction, which will certainly not help government revenues.
For voters, this is also a nightmare scenario, because we have nowhere to run in the current parties. What will work in this environment would be a mix of Republican/Democratic strategies. Right now that mix appears politically unobtainable. All taxation is not the same. In a situation in which growth is dependent upon bolstering investment, certain taxes should be cut and can be compensated for with raising other taxes. But we don' t have a party that is willing to do it.
Right now we are growing and can maintain growth, but only weak growth. As soon as current legislative initiatives start to be felt in the real economy, we'll slip into another contraction.
By which I assume you mean we should reduce taxes on cap gains, dividends, and business income, while we raise taxes on individual income starting with a low tax bracket. You've also said in the past that we should reduce or eliminate the deductions for municipal bonds and Treasuries, I think.
I'll bet that would work, but I've seen little indication so far that Americans are willing to take it.
Democrats absolutely will not do it--their campaign donors depend on the advantages conferred on the politically-connected by high tax rates on growing competitors. Republicans probably would do it, but Americans won't sit still for having their individual rates increased while "fat cats" have theirs decreased. So the Republicans try to sell growth by claiming everybody can have lower rates, which ain't true in this environment.
I suspect things must get much worse before we're willing to do the obvious things.
But we should cut capital gains. Unhappily, most of that is now an inflation/property tax. It's totally counterproductive.
And we absolutely do need to raise taxes on some income that is now tax-sheltered (over certain levels). We want to avoid the trap where people won't be able to accumulate capital.
And not to belabor a point, but our current strategies are abusing savers and impairing their ability to accumulate capital. If you are an average person, getting less than inflation on your savings makes life very difficult.
And any further income tax increases should be small. You'll get better returns on small increases but start them far below the 200K level they are discussing now.
The last thing we should do is a VAT. It's a huge cost multiplier for businesses, and it's regressive as all hell. Might as well just declare war on the working/middle class and be honest about it.
Of course, you've also got to roll back a bunch of silliness from the last couple of years--but that's another story.
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