Inequality.org

connecting the dots on a growing divide

What’s Holding Back the US Economy?

The headline figures say that real gross domestic (GDP) product grew at an annualized rate of 2.8% in the fourth quarter of 2011 (October through December).  This is good news.  Growth in the third quarter was only 1.8%.

So is the recovery finally here?

Hardly.  Read past the headlines and the figures start to look pretty glum.

For example, final sales in the US economy — defined as GDP less change in private inventories — increased at a rate of only 0.8% in the fourth quarter.  In the third quarter, final sales were rising at a 3.2% annual rate.

In other words, out of the 2.8% growth in the US economy in the fourth quarter of 2011, 2.0% came from businesses building inventory.  Only 0.8% came from actual sales of goods and services.

What does that mean?  As with most economic statistics, there are two possible interpretations.

The optimistic interpretation is that businesses were building up inventories in late 2011 because they are expecting high sales in 2012.

The pessimistic interpretation is that inventories rose because businesses just couldn’t sell stuff.

Unfortunately, there’s strong circumstantial evidence for the pessimistic interpretation.

The only reason real GDP rose faster in the fourth quarter was that inflation declined from 2% to under 1%.

When measured in actual dollars, without adjusting for inflation, GDP rose at an annual rate of 3.2% annual rate in the fourth quarter, compared with a 4.4% rate in the third.

The only reason real GDP — adjusted for inflation — rose faster in the fourth quarter was that inflation declined from 2% to under 1%.

So GDP growth actually slowed in the fourth quarter of 2011, but inflation slowed as well, resulting in a net increase in GDP growth.

When do prices go down?  When stores can’t sell stuff.  That’s why the pessimistic interpretation of the inventory buildup is probably the right one.  Inventory up, prices down … that’s great for consumers, but terrible for GDP.

Looking at the full year 2011, real GDP increased just 1.7%, compared with 3.0% in 2010.  Factor in 1% annual population growth and GDP per capita hardly increased at all in 2011.

Why is the economy at a standstill and teetering on the edge of a new downturn?

In two words: government spending.

We are cutting our way from a recession into a depression.

Though you wouldn’t know it from the rhetoric coming out of Washington, both federal and local government spending fell in 2011.  With the decline in spending has come declining employment.  US governments at all levels are cutting us back into recession.

The government simply has to start spending.  Not on corporate subsidies and tax incentives in the Plutonomy, but on the things people need here and now in America’s Realonomy.  Schools, hospitals, libraries, and public services of all kinds should be hiring, not firing.

We are cutting our way from a recession into a depression.  Now is the time for government action.  The economy can’t wait until after the elections.  Americans need jobs now, not in 2013.

We need 15 million new jobs — now.  If the government created just 5 million, the multiplier effect of those 5 million people spending their paychecks would do the rest.  Governments at all levels should be hiring, hiring, hiring.  The time to prevent a depression is yesterday.  For too many people, it’s already be too late.

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When Does a Recession Become a Depression?

Recession or Depression? The FOMC expects current conditions to last at least until 2014.

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