The Economy Has No Clothes


On Friday, the government’s Bureau of Economic Analysis reported that the nation’s economy contracted at an annual rate of 0.7 percent during this year’s first quarter, a sharp drop from the barely positive 0.2 percent it estimated a month ago.


Ignoring for now the current absurd allegations that Friday’s reported decline overstates how bad things are because the BEA must not be properly performing its seasonal adjustment calculations — a matter I will address in my next column — I’m more than a little surprised that the contraction wasn’t worse.

Many key components of what the nation’s gross domestic product truly is — “the (real) value of the production of goods and services in the United States” — turned in seasonally adjusted first-quarter results far below those seen last summer and fall. In certain key instances, the first quarter of 2015 actually came in below the far more winter-ravaged first quarter of 2014, effectively reversing all of the growth occurring during the quarters in between.

A few examples follow; all dollar amounts presented are in millions of current dollars. Remember that the government’s reported 0.7 percent contraction is annualized, meaning that the raw decline during the quarter was roughly one-fourth of that figure, or 0.17 percent.

Retail Sales. The government has been especially notorious for initially presenting rosy figures for this metric and subsequently revising them down, often significantly. Hence, many readers likely believe that seasonally adjusted retail sales have been on a continual upward trend. It isn’t so:



The effect of the first quarter’s 1.16 percent decline from last year’s final quarter is roughly 4.5 percent on an annualized basis. This is what happens when household income is still in the pits and job growth is disproportionately in part-time and low-wage work.

Manufacturing Orders and Shipments. The carnage has been truly awful in these two key areas:


As calculated above, 1Q15 orders and shipments were both well below last year’s first quarter. They also trailed last year’s fourth quarter, and even the first quarter two years ago. It’s hard to see how all of this can be happening in a genuinely growing economy. The annualized contraction in shipments based on the 4Q14 to 1Q15 decline is a shocking 11.6 percent.

Construction spending. This component, presented in annualized amounts, fell by almost 1 percent during the first quarter from last year’s fourth quarter, or about 3.6 percent on an annualized basis — over five times the economy’s reported overall drop:


By contrast, last year’s first-quarter construction spending decline, during a much more brutal winter, was less than 0.2 percent (0.64 percent annualized).

Even if Friday’s reported GDP contraction is accurate, the factors I have cited here should be cause for serious concern going forward.


There’s an additional worrisome item: inventories.

In September 2009, shortly after the recession’s official end, seasonally adjusted total business inventories troughed at $1.31 trillion. In the subsequent 5-1/2 years, they have shot up by over $450 billion, or more than one-third. Inventory growth has been responsible for about 14 percent of all current-dollar growth in GDP during that time.

Inventories are also 16 percent higher than their mid-2008 peak. Inflation only explains half of that increase. They are even further above where they were in 2006 and 2007, the last time the economy could fairly have been described as prospering.

It’s highly unlikely that inventory growth can continue at its post-recession pace, especially considering the sharp drops in orders and shipments noted above, even if the Federal Reserve doesn’t touch interest rates this year. If rates do go up, inventory holding costs will increase significantly, which could also contribute to a decline.

Last year, contrary to expectations, frankly including mine, the economy turned in strong second and third quarters after contracting sharply during the first. This year, the chances of that happening again appear to be far lower.

Many economists and analysts have revised their original estimates of second-quarter growth dramatically downward. As of May 26, the Atlanta Branch of the Federal Reserve, whose GDP model based on the data available in late April almost exactly nailed the government’s original positive 0.2 percent first-quarter growth estimate, projected that the second quarter will come in at an annualized 0.8 percent. As of Friday, even the incorrigible Keynesians at Moody’s were predicting only 1.5 percent.


You might expect that policymakers and pundits would be looking into why the economy continues to crawl along at subpar speed and occasionally contract, which has now happened three times since the recession’s official end. Dream on. In addition to the whining about seasonal adjustments noted earlier, they’re also declaring that the U.S. economy simply can’t grow any faster, no matter who’s in charge and no matter what their public policy prescriptions are.

Late last week, Goldman Sachs told its clients that it had revised its “potential GDP growth estimate” down by a half-point from an already unacceptable 2.25 percent to an annualized 1.75 percent, citing two apparently incurable factors: “a slower rate of productivity growth in the private sector vs. the historical average in the future,” and sluggish labor force growth.

So it would now appear that any performance which meets or exceeds this pathetic new benchmark will now merit hosannahs. We’re supposed to forget that from the 1983-2007, the quarter-century which was primarily propelled by Reaganomics instead of being ushered into calamity by Keynesians, economic growth came in four times higher once (7.3 percent in 1984), met or exceeded 4 percent nine times, and topped 3 percent 16 times.


Thanks to this lowering of the bar, it would now appear that the Obama economy, with its average annual growth of 2.2 percent during the past five post-recession calendar years, all of a sudden is supposed to be accepted as just fine, and the best we can ever hope to do.

What rubbish.


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