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US Economy Contracts in 4Q/2012, Let’s Review

Posted by Larry Doyle on January 30, 2013 9:44 AM |

The positive tone to the equity markets and other risk-based assets may provide a degree of cover to developments within the real economy but it cannot totally negate the fact that our nation’s economy continues to move along with all the speed of a pack mule.

In fact, Uncle Sam just reported that the old warhorse, that is our domestic economy, contracted in the 4th quarter of 2012 by 0.1%. Let’s navigate and take a harder look at what might be weighing us down. 

The Bureau of Economic Analysis release highlights,

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.

The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.

Be mindful that private inventories were a primary driver of the 3.1% GDP increase in the 3rd quarter. Averaging 3Q and 4Q, we get a less than robust reading of 1.5%.

In regard to federal spending, be mindful that the sequester takes center stage on our economic landscape on March 1st when a mere $1.2 trillion in spending cuts will start to kick in. Yes, that is only 30 days from now. This is what happens when deficits are run into the trillions and trillions of dollars. At some point the spending must stop and the bills come due.

What about inflation? Any signs of that?

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.3 percent in the fourth quarter, compared with an increase of 1.4 percent in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 1.1 percent in the fourth quarter, compared with an increase of 1.2 percent in the third.

If we were to exclude everything, then prices would not have changed at all. You do not eat do you? What about health care? I only saw another increase of approximately 30% in my health care premiums this year. But that must not be an input. Those premiums have increased an unsightly 65% in the last three years. Inflation? Try hyper-inflation!!

In positive territory, we saw growth in the following areas:

Real personal consumption expenditures increased 2.2 percent in the fourth quarter, compared with an increase of 1.6 percent in the third. Durable goods increased 13.9 percent, compared with an increase of 8.9 percent. Services increased 0.9 percent, compared with an increase of 0.6 percent.

Real nonresidential fixed investment increased 8.4 percent in the fourth quarter, in contrast to a decrease of 1.8 percent in the third. Equipment and software increased 12.4 percent in the fourth quarter, in contrast to a decrease of 2.6 percent in the third. Real residential fixed investment increased 15.3 percent, compared with an increase of 13.5 percent.

A benefit from a small bump in holiday sales and housing certainly helped our mule limp along. But where is the big drag on the mule? From Uncle Sam himself and his cousins scattered across most cities, states, and towns in our nation.

Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.4 percent, compared with an increase of 3.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.7 percent, in contrast to an increase of 0.3 percent.

Why such a decline in government spending? Well, when demand is dragged forward as it has been over the course of the last four years and the can gets perpetually kicked down the road, the basic laws of economics ultimately kick in.  (A large part of the decline in government spending emanated from within the defense sector.) The end of the road along which we have kicked the can eventually starts to appear on the horizon and the games played to cook the books and impact the economy have a lessened effect. Many municipalities are struggling to keep their heads above water so to speak.

Add it all up and an economy that is plodding along at call it 2% will not do much in terms of generating meaningful improvement on the unemployment front. With the sequester kicking in, do not be surprised if growth actually trends down from here and the economy “grows” closer to 1%. If we can call that growth.

What will the Fed do? Look for Big Ben Bernanke and his minions within the Fed to keep the liquidity flowing and asset prices pumped up so they can tell everybody how great things are. Problem is the people out of work and struggling to make ends meet really do not care about the equity markets. They need a job and a good one at that. The labor participation rate continues to languish at a 30 year low.

Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Rick

    In regard to developments within the municipal sector, I thought you may find this of interest:

    The American City Is Dying

    In an interview with the New Republic, Obama finally admitted that gun control was an urban problem. “The reality of guns in urban areas are very different from the realities of guns in rural areas,” he said. That admission might have been welcome if it had been packaged along with a serious conversation about what is wrong with cities like Chicago. Instead all the big problems are covered over with more claptrap about doing it for the children.

    Speaking of the children, Mayor Emanuel and Mayor Bloomberg, Obama’s favorite big city mayors who can be reliably counted on to push his agenda, found themselves kneecapped by education unions who aren’t there for the children, but are there for themselves.

    The New York City bus driver strike is underway along with the usual tire slashings and union leaders insisting that they’re only slashing the tires for the children. These tactics usually work, they did in Chicago, as harried parents can be counted on to tell the city to shut up and give the nice teachers what they want so that the behemoth of the educational system can roll on. But what they want is quickly becoming impossible.

    Chicago teachers have the highest average salary of any city, $75,000 a year, while administrators make $120,000, even though only 20 percent of their 8th grade students are grade-proficient in math. Chicago schools have an annual budget of $5.11 billion for a student body that is 87% low-income and likely to stay that way for the foreseeable future.

    In 1985, the budget for all of Chicago was $2.1 billion or less than half of the current school budget. But that doesn’t work too well now when Chicago teacher pensions alone account for $1 billion a year. Arne Duncan tried and failed to reform the system, and as a reward got kicked upstairs to become Obama’s Secretary of Education. Rahm Emanuel tried to buy off the teachers with a pay hike in exchange for evaluations and had his teeth handed to him.

    In New York City, Mayor Bloomberg was too busy pushing big issues like gun control and global warming to be ready to cope with a strike by bus drivers. Transporting students to school now costs over 1 billion dollars a year or $7,000 per student. New York City has 1.1 million students of whom 165,000 are special education students. That percentage is similar to that of Chicago and Los Angeles, which speaks volumes about resident demographics.

    Bloomberg came into office as the education mayor and during his time in office the city’s debt doubled to $110 billion. In 1975, New York City almost went bankrupt over $14 billion of debt. The reasons for that crisis were the same bad habits that the city and most cities are still governed by today. Pensions are underfunded, budgets are based on imaginary revenues and accounting tricks are used to hide debt and inflate revenue until the bottom falls out.

    In Chicago, in Daley’s last ten years, its debt rose 96.9 percent and almost a quarter of the city budget goes to servicing that debt. The worst is yet to come with unfunded pensions in Chicago, in New York City and across the country spilling over and eventually consuming as much as 75% of tax revenues. Not that this is likely to happen, because by then most of the tax base will be gone, leaving behind schools full of low-income special education students waiting to be put through a unionized educational bridge to nowhere that no one can afford to pay for anymore.

    That’s not some wild post-apocalyptic fantasy; it’s the near future.

    The American city is dying. It used to serve as a center of transportation and industry. Today the city holds a few knowledge industries and some secondary industries catering to them, but is mostly full of low-income immigrants whose big dream is to get a government job with good benefits. Until then there are government benefits that don’t require government jobs.

    Chicago’s population fell by 150,000 in the last 3 years. New York City lost 200,000 people around the same time. Most American cities have been facing population declines, and while they haven’t entered the population freefall zone of Detroit or New Orleans, which are permanently broken, even those that haven’t gone all the way down the hole have an uncertain future.

    The social reformers who used to be the band aids on the city’s growth have become its entire reason for being. Social welfare is the only thing that cities do anymore. Its broken school systems are forever trying to dig their students out of a hole while plunging their economy deeper into it. The alliance between community activists and public sector unions has created a runaway monster that no one from Arnold Schwarzenegger to Rahm Emanuel has been able to stop.

    Politicians have usually found it easier to pay off the representatives of human dysfunction and their caretakers than put up a fight. With the coming of the recession even liberal politicians have discovered that they may need to fight, but it’s too late.

    It’s easier for cities like New York City and Chicago to shake down their remaining financial industries than to try and win the bloody fight against the unions and their affiliated parasites. Unlike unions, corporations are willing to pay out, but they will also move on. Financial industries are now less tied to cities than ever before. The city is a matter of image and convenience, and a collapsing city is good for neither.

    It’s no wonder that the cities voted for Obama and that their vote carried him over the top. Unlike the rest of the country, there is no answer to the problems of the cities except more government money. Their tottering educational systems depend on large infusions of federal cash. So does the rest of it.

    When New York City hit the wall in 1975, it needed federal help. But most of the major cities are going to hit the wall sooner or later. Whether or not there will be enough federal money by then to bail them out is an open question, but for the moment federal money can delay the moment of collision. And the worst news is that the federal government is the city on a macroscopic scale run by a representative of the worst in urban politics.

    The Obama administration has won a triumphant victory in imposing the irrational social and economic values of the city on the rest of the country. But while the liberal tycoons and college students who made it happen are celebrating, it’s a coup with no future. All that they have done is put the country on the same dead end track as the city.

  • Rick

    Obama’s Economy: The Excuses Begin

    Posted By Tom Blumer

    Just days [1] after the November presidential and congressional elections which gave President Barack Obama a non-mandate of 50.6% of the popular vote [2] and the demonstrated supported of less than 27% [2] of all U.S. adults, NBC’s Brian Williams actually told viewers [1]:

    With the election now over, it is once again safe to talk about the economy and jobs. Now that it is not a campaign issue, it’s back to reality.

    Still in Democrat-supportive campaign mode, Williams then introduced a report [3] by correspondent Harry Smith about how “the idea that manufacturing in America is dead … is an outright falsehood.” Mary Andringa, president and CEO of Iowa manufacturer Vermeer Corporation [4] and then-board chair [5] at the National Association of Manufacturers, told Smith:

    What’s really outstanding is the fact that in 2010, the U.S. had an output of $4.8 trillion of manufactured goods. That was up from $4.1 (trillion) in 2000 — and we’ve been through two recessions in the past decade.

    That is undoubtedly an impressive achievement which should not be discounted. But then Smith delivered the kicker:

    Five million manufacturing jobs were lost in the U.S. in the last decade. But new jobs have been created too, and believe it or not, many manufacturers in the U.S. are looking for help.

    This highlights two problems. The first, which is that our educational system and culture are not preparing enough people for the jobs which need to be filled, is self-evident to anyone with open eyes.

    The second, despite the unfilled positions just noted, is even more important: unlike what occurred after every other post-World War II downturn, not enough new jobs are currently being created to make up for the ones being lost. The new companies and entire industries which have always emerged and generated enough new jobs to replace those lost as a result of increased productivity in existing industries aren’t appearing at a rate necessary to reduce unemployment to an acceptable level.

    Why not?

    At the Associated Press, aka the Administration’s Press [6], the post-election search for an explanation clearly had two important constraints. First: do not blame the Obama administration or the federal government for anything. Second: find something to blame which appears to be plausible and can’t be immediately refuted.

    What resulted was a three-part series bemoaning the rapid advancements in technology and smart machines. It can be summarized in four words: “This time it’s different.” Well, it sadly is, and more than likely for the next four years, but not for the reasons AP cites. AP’s premise [7]:

    For decades, science fiction warned of a future when we would be architects of our own obsolescence, replaced by our machines. … [T]he future has arrived.

    The team which produced the report believes that technology is advancing so quickly and on so many fronts that it’s simply unreasonable to expect new jobs to appear fast enough to replace the ones being destroyed.

    While the pace and nature of tech advancements have been and continue to be phenomenal, the notion that they are unique to the point of causing insurmountable economic and employment problems should be absurd. As economist and George Mason University Professor Walter Williams pointed out in a 2011 column [8]:

    (In) 1900 … about 41 percent of our labor force was employed in agriculture. By 2008, fewer than 3 percent of Americans were employed in agriculture. … [O]ur farmers are the world’s most productive. As a result, Americans are better off.

    In 1970, the telecommunications industry employed 421,000 workers as switchboard operators, annually handling 9.8 billion long-distance calls. Today the telecommunications industry employs only 78,000 operators … (processing) more than 100 billion long-distance calls a year.

    Fifty years ago, a typical textile worker operated five machines capable of running thread through a loom 100 times a minute. Today machines run six times as fast, and one worker can oversee 100 of them.

    You say, “Williams, certain jobs are destroyed by technology.” You’re right, but many more are created.

    Defying Professor Williams’ optimism, AP’s team of reporters left readers with three unacceptable choices [9] as to what will result:

    The best-case scenario is that “the economy returns to health after a wrenching transition.” AP quotes leftist economist Joseph Stiglitz [10] as claiming that it will take at least “half a decade,” meaning after Obama’s time in the White House has (hopefully) ended. How convenient.
    “The economy continues to produce jobs, just not enough good ones.”

    “Technology leads to mass unemployment.”
    If this “blame tech” mantra sounds mildly familiar, it’s because Obama himself has on a few unguarded occasions commented on how technology has destroyed jobs, indicting ATMs, airport kiosks [11], and the Internet [12] for sending bank tellers, airline reservation agents, and others to the unemployment line. Apparently, never to return except perhaps as burger flippers or cashiers. I fear that the AP’s decision to identify tech as the scapegoat is no mere coincidence, and may foreshadow foolish attempts by the administration to slow down technological progress in the name of “saving jobs.”

    Obamacare is already slated to do that very thing to the entire healthcare sector.

    With all due respect to Professor Williams above, he would be right about enough replacement jobs being created if we were living in a genuine free-market economy. Unfortunately, that’s not where we are in this nation. Virtually all of the reasons why sufficient job growth isn’t occurring can be traced to the Obama administration’s market-hostile economic policies and postures.

    Here are ten of the most obvious out of a list which could easily reach several dozen:

    The war on fossil fuels, which has limited job growth in energy-related industries and caused prices to be higher than they should be for everyone else.

    Cronyism on steroids.

    Trillion-dollar deficit spending.

    New bureaucracies like Dodd-Frank’s Consumer Financial Bureau, which Congress can’t legally touch.

    Sarbanes Oxley, a relic of the 2001 Enron debacle which the administration has done nothing to reform, and which has closed off the going-public option for many companies which would have done so before “Sarbox” became law.

    Unemployment and other government benefits which make remaining unemployed relatively attractive, or a least a more tolerable circumstance than it should be, and for a longer period of time than should be necessary.

    Onerous labor laws and regulations. I’ve spoken with many entrepreneurs in the past year, some of whom have had employees in the past. A vast majority of them have told me that they won’t hire any new employees in the current regulatory environment, even if the economy improves. Most start-up entrepreneurs likely feel the same way.

    Trade policy, a problem which spans the past four administrations but is being most acutely felt now.

    Federal, state, and local tax increases.

    Last but certainly not least, Obamacare, especially its career-killing definition of a full-time employee as anyone who works 30 or more hours per week, and the destructive impact it will have in slowing medical innovation and research to a crawl.

    What the AP series really tells us is that the economy wasn’t performing as well as the government and the establishment press claimed it was during the presidential campaign — something I believe this week’s report on fourth-quarter gross domestic product will confirm — and that the White House really doesn’t expect the malaise to lift during most of Obama’s second term.

  • Dan

    Meanwhile, and right on cue for Wall Street, the Fed announced Wednesday after its two-day meeting that it will stick with its bond-buying spectacular. This means buying $40 billion in mortgage-backed securities a month and another $45 billion in longer-term Treasurys. The Fed is on pace to expand its balance sheet by another $1 trillion or so through the end of this year—its fifth in a row of near-zero interest rates and some form of “quantitative easing.”

    These have been heady days at the Eccles Building, or at least they were before the GDP report. Stock and housing prices have been rising, and investors are walking further out on the risk curve, just as Chairman Ben Bernanke hopes. The Fed has also led a parade of easing around the world, as other central bankers follow to prevent their currencies from rising too much. Even Japan has finally succumbed, raising its inflation target.

    Yet the economic paradox of our time is slow growth and lousy job creation despite these monetary exertions. This continues to be the 2% recovery, the slowest in the modern era. The Keynesian explanation is that we’re still recovering from the financial panic, though it’s worth recalling that in January 2010 the Fed predicted that growth in 2012 would be 3.5% to 4.5%, not 2.2%.

    Stanford economist John Taylor offered a different explanation this week, saying on these pages that the Fed’s excessive ease may actually be hampering growth thanks to unintended consequences. These include the misallocation of capital as investors chase yield above all, a subsidy for excessive federal spending by disguising the real cost of repaying debt, and the uncertainty of when the Fed will finally have to stop the party.

    This debate won’t be settled for years, and in any case Mr. Bernanke doesn’t listen to Mr. Taylor or us. By now the world knows he’ll keep doing what he’s been doing until faster growth returns or the markets force him to stop. Risk on, baby.

    As Contractions Go. . . .

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