More Trouble in the U.S. Economy

By Peter Lindfield, published in the Telegraph-Journal 31st July 2012

Last week’s numbers confirmed what many economists and analysts had feared for the last three months—the U.S. economy is slowing down. Gross domestic product (GDP) for the second quarter grew only 1.5 per cent, down from 1.9 per cent during the first quarter of 2012. These postings were down from 4 per cent at the close of 2011. Even so, growth in the second quarter was actually greater than many had forecast.

According to the U.S. Department of Commerce (DoC), GDP, which accounts for the value of all goods and services produced, rose at a 1.5 per cent annual rate after a 2 per cent gain in the previous quarter. Household purchases, which account for about 70 per cent of GDP, grew at the slowest pace in a year. The DoC reported that in the first 12 months of the recovery which began in June 2009, the economy grew by just 2.5 per cent, not the 3.3 percent that was earlier forecast. That is inconsistent with the known history of economic cycles that states the deeper the downturn, the higher the bounce. According to this model, recoveries start aggressively with a bang, especially when so much fiscal and monetary stimulus has been injected into the system.

There’s no doubt that the coming November elections, Europe’s debt crisis, and the so-called fiscal cliff threaten to keep what has been a fragile expansion from taking hold. The fiscal cliff represents more than $600 billion in pending U.S. tax changes, reductions in defense and other government programs that will take effect automatically without any action by U.S. lawmakers. These complex dynamics have already adversely affecting retail, wholesale and commercial sales across the economy. The impact of uncertainty has been to constrain the willingness of business to make important decisions such as hiring new employees, making capital investments and restocking inventories.

Federal Reserve chairman Ben Bernanke is scheduled to meet with policymakers next week to discuss whether further measures will be required to boost growth and drive down an unemployment rate that has remained above 8 per cent for more than three years. Speaking to Congress, Bernanke had declared that the Fed was prepared to take further action in response to “economic activity (which) appears to have decelerated somewhat during the first half of this year.”

Mario Draghi, president of the European Central Bank (ECB), has stated that the ECB “is ready to do whatever it takes to preserve the euro.” But the European Union is now on life support and no-one is taking bets on its survival. Without unconditional support from Germany, the EU may still be a political, economic and social experiment that failed to catch on.

Against this backdrop, it is surprising that such significant disagreements continue among policymakers and economists on the issue of economic activism, as represented by the 2009 $814 billion program of fiscal stimulus, housing and  automotive subsidies and numerous other regulatory interventions. That there is still disagreement about whether activist government support was even necessary in the immediate aftermath of the 2007-2009 crisis is unfathomable. The U.S. Treasury’s equity support of banks through the Troubled Asset Relief Program, and the Federal Reserve’s support of commercial paper market and money market mutual funds may have been the only factors to slow the free-fall. It is astounding that there should exist such patent unwillingness among some policymakers and economists to concede that government saved the world from sliding into an economic abyss worse than the Great Depression.

Now, as the recovery continues to fade in the U.S., many are asking whether it ever really had caught hold. It is a reasonable question for the more than 12 million people unemployed in the U.S. contemplating the difference between slow growth and no growth.

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Filed under Economics, Fiscal Policy, Job creation, U.S. Election 2012

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