“History repeats itself, first as tragedy, second as farce.”
Back when I was a young man, way back in the first quarter of 2015, all we got was 0.2% GDP growth — and we liked it!
But then came the downward revision… unexpectedly:
The U.S. economy went into reverse in the first three months of this year as a severe winter and a widening trade deficit took a harsher toll than initially estimated.
The Commerce Department says the overall economy as measured by the gross domestic product contracted at an annual rate of 0.7 percent in the January-March period.
The revised figure, even weaker than the government’s initial estimate of a 0.2 percent growth rate, reflects a bigger trade gap and slower consumer spending.
I don’t happen to worry too much about the widening trade gap. That’s an inevitable result of the strengthening dollar, and there are going to be dislocations as King Dollar returns to his throne. Central Banks around the world have been in a years-long “race to the bottom,” with each country trying to weaken its currency the most. And in chaotic times like this, that’s a race the US is going to lose — people (and central banks) hoard dollars when times get weird. The result is that the dollar appreciates against other currencies, which normally takes a bite out of our exports.
What’s worrisome is that the trade gap is growing while consumer spending is shrinking. Relatively cheaper foreign goods (thanks, King Dollar!) should encourage more consumer spending, or free up more consumer dollars to spend on domestic goods. Gas prices are above their recent lows (although still well below their “new normal” highs), so that can’t be the cause of the consumer slowdown.
Maybe something more fundamental is wrong:
The new data for the first quarter, and signs of only a tepid rebound in the current, second quarter of 2015, are now forcing some economists to rethink earlier assumptions.
“This isn’t the off-to-the-races kind of expansion we envisioned six months ago,” said Scott Anderson, chief economist at Bank of the West in San Francisco. “More and more folks are coming around to the view that the long-term growth rate of the American economy is 2 percent, at best. We can’t sustain 3 or 4 percent growth for very long, so it’s two steps forward, one step back.”
Your typical economic recovery is V-shaped. That is, things come bounding back at about the opposite rate they declined. A short, sharp recession leads to a short, sharp recovery before evening back out at 3-4% growth. A longer but less dramatic recession gives you a longer but less dramatic recovery.
There are only two times in 20th or 21st Century American history that this hasn’t been true.
The first time was during the Great Depression, when the Roosevelt Administration’s response to the financial crisis was to endlessly muck around with the money supply, while foisting reams of new regulations and requirements and taxes on the economy. The second time was the aftermath to the Great Recession, when the Obama Administration’s response to the financial crisis was to endlessly muck around with the money supply, while foisting reams of new regulations and requirements and taxes on the economy.
I know history repeats itself, but I can’t tell if this time is the tragedy or the farce.