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US economy - the combination of structural slowdown and cyclical recession

US economy - the combination of structural slowdown and cyclical recession

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Published by John Ross
This article focuses on evidence confirming long-term slowdown, as well as cyclical recession, of the US economy as indicated in the latest release of the 2nd quarter 2010 US GDP figures.
This article focuses on evidence confirming long-term slowdown, as well as cyclical recession, of the US economy as indicated in the latest release of the 2nd quarter 2010 US GDP figures.

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Published by: John Ross on Aug 29, 2010
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08/30/2010

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Structural Slowdown and Cyclical Downturn in the US Economy
 
Page
1
US Economy
 –
The Combination of Structural Slowdown and Cyclical RecessionBy John Ross28 August 2010Summary
This article focuses on evidence confirming long-term slowdown, as well as cyclical recession,of the US economy as indicated in the latest release of the 2
nd
quarter 2010 US GDP figures.
Introduction
As widely reported, the second estimate of 2
nd
quarter 2010 US GDP revised annualised USgrowth down from 2.4% to 1.6% - i.e. US GDP grew by 0.4% during the 2
nd
quarter. The mainchanges compared to the first GDP estimate, in constant and annualised 2005 price terms,were a downward revision of net exports by -$19bn, due primarily to an upward re-estimation of imports by $14bn, and a revision of inventories downwards by -$13bn. Fixedinvestment remained essentially unchanged compared to the earlier first GDP estimate,with a revision downwards of -$1bn, and personal consumption was recalculated as $8bnhigher than in the first GDP estimate (Bureau of Economic Analysis, 2010b) (Bureau of Economic Analysis, 2010a). An earlier article made a detailed examination of 2
nd
quarter USGDP data and therefore only the implications for long-term trends are dealt with here. (Ross,2010)
Slow recovery
The downward revision of 2
nd
quarter GDP naturally highlights how much slower present USrecovery is than in previous post-World War II business cycles. Ten quarters into thedownturn US GDP still remains 1.3% below its peak in the 4
th
quarter of 2007
 –
seeFigure 1. In the previous worst post-World War II business cycle, that following 1973, recovery to theprevious peak level of GDP was complete after eight quarters. Unless there is a significantacceleration of growth, US GDP will not regain its peak level until 2011
 –
meaning at leastthree years of net zero percent growth.This slow recovery is, however, in line with a gradual but clear deceleration of long-termgrowth in the US economy
 –
see Figure 2. The moving 20 year average of US GDP growthhas now fallen gradually to 2.5% - significantly below its 3.5% historical average. Reasonsthe US is unlikely to reverse this trend in the foreseeable future are analysed below.
 
Structural Slowdown and Cyclical Downturn in the US Economy
 
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Fixed Investment fall
The new GDP figures also cast clear light on the issues of whether the recession in the US isprimarily created by trends in consumption or investment. A number of analyses suggestedthat the core of the US economic crisis would be deleveraging by US consumers
 –
see forexample (Roach, 2009). If so the decline in US GDP would be centred in US consumption.The present author has consistently argued that this analysis is in error and that the core of  the recession in the US is the decline in fixed investment. (Ross, 2010a) This is again stronglyconfirmed by the new revision of US GDP data.Due to the significant downward revision of the US GDP figures, and the small upwardrevision of the consumer expenditure figures, consumption as a percentage of US GDPclearly remains well above its pre-financial crisis level
 –
seeFigure 3.Between the peak of US GDP, in the 4
th
quarter of 2007, and the 2
nd
quarter of 2010, US personal consumptionhas risen from 69.9% of GDP to 70.5% and total US consumption has risen from 85.8% of GDP to 87.6%.
-5%-4%-3%-2%-1%0%1%2%Q1Q2Q3Q4Q5Q6Q7Q8Q9Q10Q11Quarters since peak of the previous business cycle
US GDP During Business Cycles
% change compared to peak of the previous cycle19731981199020002007Source:Calculated from Bureau of Economic Analysis NIPA Table 1.1.3
Figure 1
 
Structural Slowdown and Cyclical Downturn in the US Economy
 
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The 1.8% of GDP increase in consumption as a percentage of US GDP is accounted for by a0.8% of GDP increase in the share of military expenditure, a 0.6% of GDP increase in theshare of personal consumption, and a 0.4% of GDP increase in the share of Federal non-military consumption.In contrast the share of fixed investment in US GDP has fallen sharply by 3.6% of GDP. Theshare of non-residential fixed investment has fallen by 2.1% of GDP and the share of residential fixed investment by 1.5% of GDP.The changes in components of US GDP, in terms of fixed price annualised 2005 dollars, areshown inFigure 4.US GDP remains $172bn below its previous peak level. However netexports, inventories, and government consumption are already above their 4
th
quarter 2007level
 –
by $116bn, $51bn and $112bn respectively. Personal consumption is below its 4
th
 quarter 2007 level but only by $72bn. The US recession is entirely dominated by the $410bndecline in fixed investment.The US economy, therefore, has not responded to the financial crisis primarily by reducingconsumption, through personal debt deleveraging or other means, but by sharply reducingfixed investment.
0%1%2%3%4%5%6%7%1930193519401945195019551960196519701975198019851990199520002005
US GDP -Annual Average Growth
20 Year Moving Average, Annual DataSource: Calculated from Bureau of Economic Analysis NIPA Table 1.1.3
Figure 2

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