Monday, January 29, 2018

Q4 Growth Misses 3 Percent

Popular Economics Weekly

Consumers and businesses powered the economy to a 2.6 percent rate of gross domestic product growth in the final three months of 2017, according to the Commerce Department. But declining inventories and a wider trade deficit kept the U.S. from hitting the 3 percent mark for the third quarter in a row for the first time in 13 years. 


Q4 growth did not reach 3 percent as many pundits had hoped because producers produced less, depleting inventories. And imports grew faster than exports, because consumers are buying more, as more consumers are working in this full employment economy. Both numbers subtract from GDP growth, however.

On the plus side, consumer spending accelerated to a 3.8 percent annual pace of growth, the fastest pace in almost two years. Americans spent more on new cars and trucks, clothing and health care, among other things.

Businesses also invested more, after a long drought in capital expenditures. They increased spending on equipment by 11.4 percent, while investment in new housing jumped 11.6 percent. Inventories fell because companies slowed production in the fourth quarter. The value of unsold goods, or inventories, fell by $29.3 billion.

Imports rose 13.9 percent, while exports grew just 6.9 percent, and imports subtract from growth. That cut 1.1 percentage points off fourth-quarter GDP, and there is still very little inflation. The annual rate of inflation, measured by the PCE index is climbing; it rose to 2.8 percent, the highest pace since 2011. But the core PCE without more volatile food and energy prices rose at a slower 1.9 percent clip.

What does this mean? There is more room to grow, if consumers continue to spend as they have been, and businesses continue to invest in new plants and equipment, as they have in 2017, because more investment will increase worker productivity.

And economic growth needs higher productivity plus a growing population. Yet developed countries such as the US have slowing population growth, so robots, AI and other tech innovations have to replace the declining worker population. Republicans’ tax cuts should aid the corporate investment in more robots, which is good. But their wish to cut government spending is bad, because government is historically a 20 percent contributor to economic activity—and growth.

That’s because governments maintain our roads, bridges, energy grid, educational system, clean air and water; R&D for space exploration, Internet and airports—the list goes on and on. And government expenditures have been reduced since 2011, due to misplaced austerity measures in the US and Europe in particular.

This is a major reason GDP growth both here and in Europe has averaged just 2 percent since the end of the Great Recession. Corporations have garnered record profits over this time, but hoarded those profits, or returned them to their CEOs and stockholders, but not their employees.


That has to change for real economic growth to continue. Raising minimum wages in some states will help, but lower taxes don’t help with such a huge national debt and another $1.5 trillion being added over ten years in the new tax bill. Real wage growth has been declining for years, as collective bargaining and workers’ rights have been curtailed in the name of greater corporate profits.
We can hope GDP growth will continue, if paying down the national debt doesn’t become a priority.

The US dollar’s value has already declined 10 percent against other currencies, and the reason is not clear. But any further decline could motivate other countries to decide that investment in the US may not be a good idea; since much of our national debt is financed by other countries.

It is not a good idea to ignore what could happen to the $trillions in Treasury securities we have sold to the Chinese, in particular, that have financed that debt. Because it could suddenly become much more expensive to finance, should foreign governments and private entities no longer have confidence in the US economy.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

1 comment:

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