Sunday, 31 July 2011

US GDP figures even worse than they look

By John Ross

The 2nd quarter 2011 US GDP figures, showing annualised growth of 1.3% in that quarter and a newly revised downwards annualised 0.4% in the 1st quarter of 2011, were interpreted as bad. But they are far worse even than they look at first sight.

First, the downward revision to the depth of the recession, to a trough of 5.1% in the 2nd quarter of 2009, means that instead of having already recovered its pre-recession GDP level the US economy remains 0.4% below its peak in the 4th quarter of 2007. This is shown in Figure 1.

Figure 1

11 07 29 Components of US GDP

Second, as shown in Figures 1, 2 and 3, it is misleading to draw attention to personal consumption expenditure, and its weak annualised 0.1 per cent increase in the 2nd quarter of 2011, as the key feature of the downturn. The really fundamental cause of the US recession is the collapse in fixed investment.

As may be seen from Figure 2, in the 2nd quarter of 2011 US GDP, in 2005 constant prices, was $56 billion below its peak level in the 4th quarter of 2007. However all major components of GDP except for fixed investment were already above their 4th quarter of 2007 levels – private inventories $37 billion above, government consumption $51 billion above, personal consumption $66 billion above, and net exports $159 billion above. However private fixed investment was $342 billion below its 4th quarter 2007 level – i.e. the entire decline in US GDP was due to the fall in fixed investment.

Figure 2

11 07 29 Change in Components of GDP

Nor was this decline in fixed investment entirely accounted for by the residential sector – see Figure 3. The overall fixed investment fall was divided essentially half and half between residential and non-residential fixed investment – the decline in residential fixed investment being $199 billion and the decline in non-residential fixed investment being $192 billion.

Figure 3

11 07 29 Change in Components of GDP Res

In short, as this blog has continuously pointed out, the core of the ‘Great Recession’ in the US, as in other countries, is not a decline in consumption but a huge fall in fixed investment. The ‘Great Recession’ is actually ‘The Great Investment Collapse’. Until this reality is grasped, and the policy consequences drawn, US GDP figures are likely to continue to surprise on the downside.

Meanwhile the latest US GDP data is shockingly bad - worse even than the features the official press release and initial press commentary concentrates on.

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This article originally appeared on the blog Key Trends in Globalisation.

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