Is the Economy Already in Another Recession?
Very few press reports have acknowledged that health care spending, originally thought to have increased during the quarter at an annual rate of over 9 percent, instead decreased by about 1.5 percent in last week's third estimate. Almost none identified the probable culprit: O-, O-, ... Obamacare.
Consumers herded into Obamacare, many of them belatedly recognizing the obscenely high deductibles their new policies contain, are likely putting off doctor visits and other medical services — a situation the Affordable Care Act's insufferable promoters promised would end. Many of those with no immediate medical needs understand how their Obamacare policies will hang them out to dry if anything serious does happen, and — assuming they have any money left after paying their premiums — are restricting their spending on other items. Many of the newly uninsured who either can't afford their premiums, or who have been added to the de facto uninsured ranks after getting lost in the Obamacare maze, also realize that they need to keep a lid on their other spending. Meanwhile, Americans with employer-based insurance are also playing it close to the vest, trembling at the thought of the premium increases and policy restrictions they'll face during their next open enrollment period.
Naturally, consumer spending has cratered, declining in real terms in both April and May. Obamacare's deliberately chaotic rollout prevented much of the fourth-quarter spending meltdown I thought might occur from taking place, but it couldn't defer the inevitable forever. Since personal consumption expenditures make up about 70 percent of reported GDP, those who are predicting the return of good times in the second quarter need to identify other sources for their predicted stellar growth.
Inventories? While this element may come in positive in the second quarter after the first quarter's big drawdown, has anyone noticed how awful retail traffic has been this quarter? There has been no post-winter rebound. Does anyone really think that stores aren't being extremely careful about their purchases and stock levels?
Net exports? C'mon. Worse than expected deterioration here is the other major reason for June's large downward GDP revision. April's trade imbalance was worse than March's. May will apparently be almost as weak as April, and still worse than March.
A turnaround in non-inventory business investment? There may be a bit of an improvement from a currently depressed level, but it's hard to see how it will provide a major contribution. Three reasons to cool the enthusiasm: Shipments of durable goods barely budged in April and May, factory orders fell in May, and May construction spending was flat.
The anomaly which would seem to refute the idea that the economy may really be contracting is job growth, which, seasonally adjusted, has averaged about 214,000 per month so far this year and was predicted to come in at about the same level in June when this column was submitted. The problem is that job gains are not sufficiently translating into production income growth.
First-quarter productivity fell by an annualized 3.5 percent. If workers collectively produce less, it doesn't matter how many of them there are. GDP will still decline. Additionally, Sentier Research reported this week that median household income in May 2014 "was ony 1.3 percent higher than in May 2013."
Thus, if growth returned at all in the second quarter, it's overwhelmingly likely that it won't impress anyone. Given that last-week's GDP writedown was the largest in a third revision in 38 years, we'll probably have to wait until late September for a (we hope) somewhat reliable final word. The default assumption for the time being has to be that the BEA has lost its handle on timely, accurate data collection.
Also looming is the impact of the bureau's comprehensive five-year revision at the end of July. Barring major changes it might retroactively make to the first quarter, it seems virtually certain that any reported second-quarter growth won't offset the first quarter's contraction, which would mean that the economy really shrank during this year's first six months.
The day after June's GDP report, economists and analysts, who just days earlier were predicting up to 4 percent annualized second-quarter growth, began wearing out their erasers. Most of them revised their formerly rosy forecasts down to 3 percent or less. An Associated Press report projected only 2.5 percent.
Here's a prediction I'll confidently make: These "experts," who have been so wrong for so long that it's amazing they still have any clients, are nowhere near done backtracking.
(Artwork based on a modified Shutterstock.com image.)