Sunday, December 27, 2015

Dollar Revaluation and Decreasing Corporate Profits, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend, Real Fixed Investment below Trend, Swelling Undistributed Profits, Stagnating Real Disposable Income below Trend, Financial Repression, United States Housing, World Cyclical Slow Growth and Global Recession Risk: Part II

 

Dollar Revaluation and Decreasing Corporate Profits, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend, Real Fixed Investment below Trend, Swelling Undistributed Profits, Stagnating Real Disposable Income below Trend, Financial Repression, United States Housing, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015

I Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend

IA Mediocre Cyclical United States Economic Growth

IA1 Stagnating Real Private Fixed Investment

IA2 Swelling Undistributed Corporate Profits

II Stagnating Real Disposable Income and Consumption Expenditures

IB1 Stagnating Real Disposable Income and Consumption Expenditures

IB2 Financial Repression

IIA United States Housing Collapse

IIB United States House Prices

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

   I Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend. Section IA Mediocre Cyclical United States Economic Growth provides the analysis of long-term and cyclical growth of GDP in the US with GDP two trillion dollars or 12.9 percent below trend. Section IA1 Contracting Real Private Fixed Investment analyzes weakness in investment. IA2 Swelling Undistributed Corporate Profits analyzes corporate profits. There is socio-economic stress in the combination of adverse events and cyclical performance:

Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 25 quarters from IIIQ2009 to IIIQ2015. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the third estimate of GDP for IIIQ2015 (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp3q15_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[$14,745.9/$14,355.6 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/11/dollar-revaluation-constraining.html and earlier http://cmpassocregulationblog.blogspot.com/2015/11/interest-rate-increase-considered.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988, 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/11/dollar-revaluation-constraining.html and earlier http://cmpassocregulationblog.blogspot.com/2015/11/interest-rate-increase-considered.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IIIQ2015 would have accumulated to 25.7 percent. GDP in IIIQ2015 would be $18,844.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,430.7 billion than actual $16,414.0 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.7 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/12/liftoff-of-fed-funds-rate-followed-by.html and earlier http://cmpassocregulationblog.blogspot.com/2015/11/live-possibility-of-interest-rates.html). US GDP in IIIQ2015 is 12.9 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,414.0 billion in IIIQ2015 or 9.5 percent at the average annual equivalent rate of 1.2 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.2 percent per year from Nov 1919 to Nov 2015. Growth at 3.2 percent per year would raise the NSA index of manufacturing output from 107.6075 in Dec 2007 to 138.0830 in Nov 2015. The actual index NSA in Nov 2015 is 106.0586, which is 23.2 percent below trend. Manufacturing output grew at average 2.2 percent between Dec 1986 and Dec 2014. Using trend growth of 2.2 percent per year, the index would increase to 127.8387 in Nov 2015. The output of manufacturing at 106.0586 in Nov 2015 is 17.0 percent below trend under this alternative calculation.

The economy of the US can be summarized in growth of economic activity or GDP as fluctuating from mediocre growth of 2.5 percent on an annual basis in 2010 to 1.6 percent in 2011, 2.2 percent in 2012, 1.5 percent in 2013 and 2.4 percent in 2014. The following calculations show that actual growth is around 2.2 percent per year. The rate of growth of 1.0 percent in the entire cycle from 2007 to 2014 is well below 3 percent per year in trend from 1870 to 2010, which the economy of the US always attained for entire cycles in expansions after events such as wars and recessions (Lucas 2011May). Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) provide important information on long-term growth and cyclical behavior. Table Summary provides relevant data.

Table Summary, Long-term and Cyclical Growth of GDP, Real Disposable Income and Real Disposable Income per Capita

 

GDP

  

Long-Term

    

1929-2014

3.2

  

1947-2014

3.2

  

Whole Cycles

    

1980-1989

3.5

  

2006-2014

1.1

  

2007-2014

1.0

  

Cyclical Contractions ∆%

    

IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982

-4.7

  

IVQ2007 to IIQ2009

-4.2

  

Cyclical Expansions Average Annual Equivalent ∆%

    

IQ1983 to IVQ1985

IQ1983-IQ1986

IQ1983-IIIQ1986

IQ1983-IVQ1986

IQ1983-IQ1987

IQ1983-IIQ1987

IQ1983-IIIQ1987

IQ1983 to IVQ1987

IQ1983 to IQ1988

IQ1983 to IIQ1988

IQ1983 to IIIQ1988

IQ1983 to IVQ1988

IQ1983 to IQ1989

5.9

5.7

5.4

5.2

5.0

5.0

4.9

5.0

4.9

4.9

4.8

4.8

4.8

  

First Four Quarters IQ1983 to IVQ1983

7.8

  

IIIQ2009 to IIIQ2015

2.2

  

First Four Quarters IIIQ2009 to IIQ2010

2.7

  
 

Real Disposable Income

Real Disposable Income per Capita

Long-Term

    

1929-2014

3.2

2.0

1947-1999

3.7

2.3

Whole Cycles

    

1980-1989

3.5

2.6

2006-2014

1.4

0.6

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace around 2.1 percent per year. Table Summary GDP provides the data.

1. Average Annual Growth in the Past Fifteen Quarters. GDP growth in the four quarters of 2012, the four quarters of 2013, the four quarters of 2014 and the three quarters of Q2015 accumulated to 8.1 percent. This growth is equivalent to 2.1 percent per year, obtained by dividing GDP in IIIQ2015 of $16,414.0 billion by GDP in IVQ2011 of $15,190.3 billion and compounding by 4/15: {[($16,414.0/$15,190.3)4/15 -1]100 = 2.1 percent.

2. Average Annual Growth in the Past Four Quarters. GDP growth in the four quarters of IIIQ2014 to IIIQ2015 accumulated to 2.1 percent that is equivalent to 2.1 percent in a year. This is obtained by dividing GDP in IIIQ2015 of $16,414.0 billion by GDP in IIIQ2014 of $16,068.8 billion and compounding by 4/4: {[($16,414.0/$16,068.8)4/4 -1]100 = 2.1 %}. The US economy grew 2.1 percent in IIIQ2015 relative to the same quarter a year earlier in IIIQ2014. Growth was at annual equivalent 4.6 percent in IIQ2014 and 4.3 percent IIIQ2014 and only at 2.1 percent in IVQ2014. GDP grew at annual equivalent 0.6 percent in IQ2015, 3.9 percent in IIQ2015 and 2.0 percent in IIIQ2015. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012, which is in the borderline of contraction, and negative in IQ2014. US GDP fell 0.2 percent in IQ2014. The rate of growth of GDP in the revision of IIIQ2013 is 3.0 percent in seasonally adjusted annual rate (SAAR).

Table Summary GDP, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

 

Real GDP, Billions Chained 2009 Dollars

∆% Relative to IVQ2007

∆% Relative to Prior Quarter

∆%
over
Year Earlier

IVQ2007

14,991.8

NA

0.4

1.9

IVQ2011

15,190.3

1.3

1.1

1.7

IQ2012

15,291.0

2.0

0.7

2.8

IIQ2012

15,362.4

2.5

0.5

2.5

IIIQ2012

15,380.8

2.6

0.1

2.4

IVQ2012

15,384.3

2.6

0.0

1.3

IQ2013

15,457.2

3.1

0.5

1.1

IIQ2013

15,500.2

3.4

0.3

0.9

IIIQ2013

15,614.4

4.2

0.7

1.5

IVQ2013

15,761.5

5.1

0.9

2.5

IQ2014

15,724.9

4.9

-0.2

1.7

IIQ2014

15,901.5

6.1

1.1

2.6

IIIQ2014

16,068.8

7.2

1.1

2.9

IVQ2014

16,151.4

7.7

0.5

2.5

IQ2015

16,177.3

7.9

0.2

2.9

IIQ2015

16,333.6

9.0

1.0

2.7

IIIQ2015

16,414.0

9.5

0.5

2.1

Cumulative ∆% IQ2012 to IQ2015

8.1

  

8.2

  

Annual Equivalent ∆%

2.1

  

2.1

  

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart GDP provides quarter-on-quarter seasonally adjusted annual rate of GDP growth. There is significant volatility in growth rates. US GDP is underperforming relative to earlier cyclical expansions.

clip_image002

Chart GDP, Seasonally Adjusted Quarterly Rates of Growth of United States GDP, ∆%

Source: US Bureau of Economic Analysis

http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm

Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s. The growth rates and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table I-1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.0, 11.9 and 6.7. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.6, 9.7, 7.7 and 10.1. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IQ1976: 3.1, 6.8, 5.5 and 9.3. The disaster of the Great Inflation and Unemployment of the 1970s, which made stagflation notorious, is even better in growth rates during the expansion phase in comparison with the current slow-growth recession.

Table I-1, US, Seasonally Adjusted Quarterly Percentage Growth Rates in Annual Equivalent of GDP in Cyclical Recessions and Following Four Quarter Expansions ∆%

 

IQ

IIQ

IIIQ

IV

R IIQ1953-IIQ1954

        

1953

    

-2.2

-5.9

1954

-1.8

      

E IIIQ1954-IIQ1955

        

1954

    

4.6

8.0

1955

11.9

6.7

    

R IIIQ1957-IIQ1958

        

1957

      

-4.0

1958

-10.0

      

E IIIQ1958-IIQ1959

        

1958

    

9.6

9.7

1959

7.7

10.1

    

R IVQ1969-IV1970

        

1969

      

-1.7

1970

-0.7

      

E IIQ1970-IQ1971

        

1970

  

0.7

3.6

-4.0

1971

11.1

      

R IVQ1973-IQ1975

        

1973

      

3.8

1974

-3.3

1.1

-3.8

-1.6

1975

-4.7

      

E IIQ1975-IQ1976

        

1975

  

3.1

6.8

5.5

1976

9.3

      

R IQ1980-IIIQ1980

        

1980

1.3

-7.9

-0.6

  

R IQ1981-IVQ1982

        

1981

8.5

-2.9

4.7

-4.6

1982

-6.5

2.2

-1.4

0.4

E IQ1983-IVQ1983

        

1983

5.3

9.4

8.1

8.5

R IVQ2007-IIQ2009

        

2008

-2.7

2.0

-1.9

-8.2

2009

-5.4

-0.5

    

E IIIQ2009-IIQ2010

        

2009

    

1.3

3.9

2010

1.7

3.9

    

Source: Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.7 percent is more comparable to the latest revised 4.2 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). Table I-2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981 to 1982 and 2007 to 2009, using the latest major revision published on July 30, 2015 and the third estimate for IIIQ2015 GDP (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp3q15_3rd.pdf), which are available in the dataset of the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). There were four quarters of contraction in 1981-1982 ranging in rate from -1.4 percent to -6.5 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.5 percent to -8.2 percent. The striking difference is that in the first twenty-four quarters of expansion from IQ1983 to IQ1989, shown in Table I-2 in relief, GDP grew at the high quarterly percentage growth rates of 5.3, 9.4, 8.1, 8.5, 8.2, 7.2, 4.0, 3.2, 4.0, 3.7, 6.4, 3.0, 3.8, 1.9, 4.1, 2.1, 2.8, 4.6, 3.7, 6.8, 2.3, 5.4, 2.3, 5.4 and 4.1. In contrast, the percentage growth rates in the first twenty-four quarters of expansion from IIIQ2009 to IIIQ2015 shown in relief in Table I-2 were mediocre: 1.3, 3.9, 1.7, 3.9, 2.7, 2.5, -1.5, 2.9, 0.8, 4.6, 2.7, 1.9, 0.5, 0.1, 1.9, 1.1, 3.0, 3.8, minus 0.9, 4.6, 4.3, 2.1, 0.6, 3.9 and 2.0. Economic growth and employment creation continued at slow rhythm during 2012 and in 2013-2015 while much stronger growth would be required in movement to full employment. The cycle is now long by historical standards and growth rates are typically weaker in the final periods of cyclical expansions

Table I-2, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA

Q

1981

1982

1983

1984

2008

2009

2010

I

8.5

-6.5

5.3

8.2

-2.7

-5.4

1.7

II

-2.9

2.2

9.4

7.2

2.0

-0.5

3.9

III

4.7

-1.4

8.1

4.0

-1.9

1.3

2.7

IV

-4.6

0.4

8.5

3.2

-8.2

3.9

2.5
       

1985

    

2011

I

      

4.0

    

-1.5

II

      

3.7

    

2.9

III

      

6.4

    

0.8

IV

      

3.0

    

4.6
       

1986

    

2012

I

      

3.8

    

2.7

II

      

1.9

    

1.9

III

      

4.1

    

0.5

IV

      

2.1

    

0.1

       

1987

    

2013

I

      

2.8

    

1.9

II

      

4.6

    

1.1

III

      

3.7

    

3.0

IV

      

6.8

    

3.8
       

1988

    

2014

I

      

2.3

    

-0.9

II

      

5.4

    

4.6

III

      

2.3

    

4.3

IV

      

5.4

    

2.1
       

1989

    

2015

I

      

4.1

    

0.6

II

      

3.2

    

3.9

III

      

3.0

    

2.0

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-1 of the Bureau of Economic Analysis (BEA) provides strong growth of real GDP in the US between 1929 and 1999 at the yearly average rate of 3.5 percent. There is an evident acceleration of the rate of GDP growth in the 1990s as shown by a much sharper slope of the growth curve. Cobet and Wilson (2002) define labor productivity as the value of manufacturing output produced per unit of labor input used (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). Between 1950 and 2000, labor productivity in the US grew less rapidly than in Germany and Japan. The major part of the increase in productivity in Germany and Japan occurred between 1950 and 1973 while the rate of productivity growth in the US was relatively subdued in several periods. While Germany and Japan reached their highest growth rates of productivity before 1973, the US accelerated its rate of productivity growth in the second half of the 1990s. Between 1950 and 2000, the rate of productivity growth in the US of 2.9 percent per year was much lower than 6.3 percent in Japan and 4.7 percent in Germany. Between 1995 and 2000, the rate of productivity growth of the US of 4.6 percent exceeded that of Japan of 3.9 percent and the rate of Germany of 2.6 percent.

clip_image003

Chart I-1, US, Real GDP 1929-1999

Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm

Chart I-1A provides real GDP annually from 1929 to 2014. Growth after the global recession from IVQ2007 to IIQ2009 has not been sufficiently high to compensate for the contraction as it had in past economic cycles. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery compared with return to trend at 3.0 percent from 1870 to 2010 after events such as wars and recessions (Lucas 2011May) and a standstill that can lead to growth recession, or low rates of economic growth. The expansion is relatively long compared to earlier expansion and there could be even another contraction or conventional recession in the future. The average rate of growth from 1947 to 2014 is 3.2 percent. The average growth rate from IV2007 to IIIQ2015 is only 1.2 percent with 2.8 percent annual equivalent from the end of the recession in IVQ2001 to the end of the expansion in IVQ2007. There are about two trillion dollars of GDP less than at trend, explaining the 24.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.7 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/12/liftoff-of-fed-funds-rate-followed-by.html and earlier http://cmpassocregulationblog.blogspot.com/2015/11/live-possibility-of-interest-rates.html). US GDP in IIIQ2015 is 12.9 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,414.0 billion in IIIQ2015 or 9.5 percent at the average annual equivalent rate of 1.2 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.2 percent per year from Nov 1919 to Nov 2015. Growth at 3.2 percent per year would raise the NSA index of manufacturing output from 107.6075 in Dec 2007 to 138.0830 in Nov 2015. The actual index NSA in Nov 2015 is 106.0586, which is 23.2 percent below trend. Manufacturing output grew at average 2.2 percent between Dec 1986 and Dec 2014. Using trend growth of 2.2 percent per year, the index would increase to 127.8387 in Nov 2015. The output of manufacturing at 106.0586 in Nov 2015 is 17.0 percent below trend under this alternative calculation.

clip_image004

Chart I-1A, US, Real GDP 1929-2014

Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm

Chart I-2 provides the growth of real quarterly GDP in the US between 1947 and 2015. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery compared with return to trend at 3.0 percent from 1870 to 2010 after events such as wars and recessions (Lucas 2011May) and a standstill that can lead to growth recession, or low rates of economic growth. The expansion is relatively long compared to earlier expansions and there could be another contraction or conventional recession in the future. The average rate of growth from 1947 to 2014 is 3.2 percent. The average growth rate from IVQ2007 to IIIQ2015 is only 1.2 percent with 2.8 percent from the end of the recession in IVQ2001 to the end of the expansion in IVQ2007.

clip_image005

Chart I-2, US, Real GDP, Quarterly, 1947-2015

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-3 provides real GDP percentage change on the quarter a year earlier for 1983-1989. The objective is simply to compare expansion in two recoveries from sharp contractions as shown in Table I-5. Growth rates in the early phase of the recovery in 1983 and 1984 were very high, which is the opportunity to reduce unemployment that has characterized cyclical expansion in the postwar US economy.

clip_image006

Chart I-3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

In contrast, growth rates in the comparable first twenty-three quarters of expansion from 2009 to 2015 in Chart I-4 have been mediocre. As a result, growth has not provided the exit from unemployment and underemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions.

clip_image007

Chart I-4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2015

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table I-3 provides percentage change of real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). Data are available for the 1930s only on a yearly basis. US GDP fell 4.7 percent in the two recessions (1) from IQ1980 to IIIQ1980 and (2) from III1981 to IVQ1981 to IVQ1982 and 4.2 percent cumulatively in the recession from IVQ2007 to IIQ2009. It is instructive to compare the first years of the expansions in the 1980s and the current expansion. GDP grew at 4.6 percent in 1983, 7.3 percent in 1984, 4.2 percent in 1985, 3.5 percent in 1986, 3.5 percent in 1987 and 4.2 percent in 1988. In contrast, GDP grew 2.5 percent in 2010, 1.6 percent in 2011, 2.2 percent in 2012, 1.5 percent in 2013 and 2.4 percent in 2014. Actual annual equivalent GDP growth in the four quarters of 2012, and ten quarters from IQ2013 to IIIQ2015 is 2.1 percent and 2.2 percent in the four quarters ending in IIIQ2015. GDP grew at 4.2 percent in 1985, 3.5 percent in 1986, 3.5 percent in 1987 and 4.2 percent in 1988. The forecasts of the central tendency of participants of the Federal Open Market Committee (FOMC) are in the range of 2.3 to 2.5 percent in 2016 (http://www.federalreserve.gov/monetarypolicy/fomcprojtabl20151216.htm) with less reliable forecast of 2.0 to 2.3 percent in 2017 (http://www.federalreserve.gov/monetarypolicy/fomcprojtabl20151216.htm). Growth of GDP in the expansion from IIIQ2009 to IIIQ2015 has been at average 2.2 percent in annual equivalent.

Table I-3, US, Percentage Change of GDP in the 1930s, 1980s and 2000s, ∆%

Year

GDP ∆%

Year

GDP ∆%

Year

GDP ∆%

1930

-8.5

1980

-0.2

2000

4.1

1931

-6.4

1981

2.6

2001

1.0

1932

-12.9

1982

-1.9

2002

1.8

1933

-1.3

1983

4.6

2003

2.8

1934

10.8

1984

7.3

2004

3.8

1935

8.9

1985

4.2

2005

3.3

1936

12.9

1986

3.5

2006

2.7

1937

5.1

1987

3.5

2007

1.8

1938

-3.3

1988

4.2

2008

-0.3

1930

8.0

1989

3.7

2009

-2.8

1940

8.8

1990

1.9

2010

2.5

1941

17.7

1991

-0.1

2011

1.6

1942

18.9

1992

3.6

2012

2.2

1943

17.0

1993

2.7

2013

1.5

1944

8.0

1994

4.0

2014

2.4

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-5 provides percentage change of GDP in the US during the 1930s. There is vast literature analyzing the Great Depression (Pelaez and Pelaez, Regulation of Banks and Finance (2009), 198-217). Cole and Ohanian (1999) find that US real per capita output was lower by 11 percent in 1939 than in 1929 while the typical expansion of real per capita output in the US during a decade is 31 percent. Private hours worked in the US were 25 percent lower in 1939 relative to 1929.

clip_image008

Chart I-5, US, Percentage Change of GDP in the 1930s

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

In contrast, Chart I-6 shows rapid recovery from the recessions in the 1980s. High growth rates in the initial quarters of expansion eliminated the unemployment and underemployment created during the contraction. The economy then returned to grow at the trend of expansion, interrupted by another contraction in 1991.

clip_image009

Chart I-6, US, Percentage Change of GDP in the 1980s

Source: US Bureau of Economic Analysis9

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-7 provides the rates of growth during the 2000s. Growth rates in the initial eighteen quarters of expansion have been relatively lower than during recessions after World War II. As a result, unemployment and underemployment continue at the rate of 14.7 percent of the effective US labor force (http://cmpassocregulationblog.blogspot.com/2015/12/liftoff-of-fed-funds-rate-followed-by.html and earlier http://cmpassocregulationblog.blogspot.com/2015/11/live-possibility-of-interest-rates.html).

clip_image010

Chart I-7, US, Percentage Change of GDP in the 2000s

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Characteristics of the four cyclical contractions are provided in Table I-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.7 percent, which is almost equal to the decline of 4.2 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

Table I-4, US, Number of Quarters, GDP Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions   

 

Number of Quarters

Cumulative Percentage Contraction

Average Percentage Rate

IIQ1953 to IIQ1954

3

-2.4

-0.8

IIIQ1957 to IIQ1958

3

-3.0

-1.0

IVQ1973 to IQ1975

5

-3.1

-0.6

IQ1980 to IIIQ1980

2

-2.2

-1.1

IIIQ1981 to IVQ1982

4

-2.5

-0.64

IVQ2007 to IIQ27009

6

-4.2

-0.72

Sources: Source: Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table I-5 shows the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the twenty-five quarters of the current cyclical expansion from IIIQ2009 to IIIQ2015. In sharp contrast, the average growth rate of GDP was:

  • 5.7 percent in the first thirteen quarters of expansion from IQ1983 to IQ1986
  • 5.4 percent in the first fifteen quarters of expansion from IQ1983 to IIIQ1986
  • 5.2 percent in the first sixteen quarters of expansion from IQ1983 to IVQ1986
  • 5.0 percent in the first seventeen quarters of expansion from IQ1983 to IQ1987
  • 5.0 percent in the first eighteen quarters of expansion from IQ1983 to IIQ1987
  • 4.9 percent in the first nineteen quarters of expansion from IQ1983 to IIIQ1987
  • 5.0 percent in the first twenty quarters of expansion from IQ1983 to IVQ1987
  • 4.9 percent in the first twenty-first quarters of expansion from IQ1983 to IQ1988
  • 4.9 percent in the first twenty-two quarters of expansion from IQ1983 to IIQ1988
  • 4.8 percent in the first twenty-three quarters of expansion from IQ1983 to IIIQ1988
  • 4.8 percent in the first twenty-four quarters of expansion from IQ1983 to IVQ1988
  • 4.8 percent in the first twenty-five quarters of expansion from IQ1983 to IQ1989

The line “average first four quarters in four expansions” provides the average growth rate of 7.7 percent with 7.8 percent from IIIQ1954 to IIQ1955, 9.2 percent from IIIQ1958 to IIQ1959, 6.1 percent from IIIQ1975 to IIQ1976 and 7.8 percent from IQ1983 to IVQ1983. The United States missed this opportunity of high growth in the initial phase of recovery. BEA data show the US economy in standstill with annual growth of 2.5 percent in 2010 decelerating to 1.6 percent annual growth in 2011, 2.2 percent in 2012, 1.5 percent in 2013 and 2.4 percent in 2014 (http://www.bea.gov/iTable/index_nipa.cfm) The expansion from IQ1983 to IQ1986 was at the average annual growth rate of 5.7 percent, 5.2 percent from IQ1983 to IVQ1986, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IQ1988, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988. 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989 and at 7.8 percent from IQ1983 to IVQ1983. GDP grew 2.7 percent in the first four quarters of the expansion from IIIQ2009 to IIQ2010. GDP growth in the four quarters of 2012, the four quarters of 2013, the four quarters of 2014 and three quarters of 2015 accumulated to 8.1 percent. This growth is equivalent to 2.1 percent per year, obtained by dividing GDP in IIIQ2015 of $16,414.0 billion by GDP in IVQ2011 of $15,190.3 billion and compounding by 4/15: {[($16,414.0/$15,190.3)4/15 -1]100 = 2.1 percent.

Table I-5, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

 

Number
of
Quarters

Cumulative Growth

∆%

Average Annual Equivalent Growth Rate

IIIQ 1954 to IQ1957

11

12.8

4.5

First Four Quarters IIIQ1954 to IIQ1955

4

7.8

  

IIQ1958 to IIQ1959

5

10.0

7.9

First Four Quarters

IIIQ1958 to IIQ1959

4

9.2

  

IIQ1975 to IVQ1976

8

8.3

4.1

First Four Quarters IIIQ1975 to IIQ1976

4

6.1

  

IQ1983-IQ1986

IQ1983-IIIQ1986

IQ1983-IVQ1986

IQ1983-IQ1987

IQ1983-IIQ1987

IQ1983 to IIIQ1987

IQ1983 to IVQ1987

IQ1983 to IQ1988

IQ1983 to IIQ1988

IQ1983 to IIIQ1988

IQ1983 to IVQ1988

IQ1983 to IQ1989

13

15

16

17

18

19

20

21

22

23

24

25

19.9

21.6

22.3

23.1

24.5

25.6

27.7

28.4

30.1

30.9

32.6

34.0

5.7

5.4

5.2

5.0

5.0

4.9

5.0

4.9

4.9

4.8

4.8

4.8

First Four Quarters IQ1983 to IVQ1983

4

7.8

  

Average First Four Quarters in Four Expansions*

  

7.7

  

IIIQ2009 to IIIQ2015

25

14.3

2.2

First Four Quarters IIIQ2009 to IIQ2010

  

2.7

  

*First Four Quarters: 7.8% IIIQ1954-IIQ1955; 9.2% IIIQ1958-IIQ1959; 6.1% IIIQ1975-IQ1976; 7.8% IQ1983-IVQ1983

Source: Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-8 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.

clip_image011

Chart I-8, US, Real GDP, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-9 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2015. The economy has underperformed during the first twenty-five quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.

clip_image012

Chart I-9, US, Real GDP, 2007-2015

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

As shown in Tables I-4 and I-5 above the loss of real GDP in the US during the contraction was 4.2 percent but the gain in the cyclical expansion has been only 14.4 percent (first to the last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IIIQ2015 with the second estimate and revisions is higher by only 9.5 percent than the level of real GDP in IVQ2007.

The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IIIQ2015 would have accumulated to 25.7 percent. GDP in IIIQ2015 would be $18,844.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,430.7 billion than actual $16,414.0 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.7 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/12/liftoff-of-fed-funds-rate-followed-by.html and earlier http://cmpassocregulationblog.blogspot.com/2015/11/live-possibility-of-interest-rates.html). US GDP in IIIQ2015 is 12.9 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,414.0 billion in IIIQ2015 or 9.5 percent at the average annual equivalent rate of 1.2 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.2 percent per year from Nov 1919 to Nov 2015. Growth at 3.2 percent per year would raise the NSA index of manufacturing output from 107.6075 in Dec 2007 to 138.0830 in Nov 2015. The actual index NSA in Nov 2015 is 106.0586, which is 23.2 percent below trend. Manufacturing output grew at average 2.2 percent between Dec 1986 and Dec 2014. Using trend growth of 2.2 percent per year, the index would increase to 127.8387 in Nov 2015. The output of manufacturing at 106.0586 in Nov 2015 is 17.0 percent below trend under this alternative calculation. Table I-6 shows that the contraction actually concentrated in two quarters: decline of 2.1 percent in IVQ2008 relative to the prior quarter and decline of 1.4 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.5 percent {[(1-0.021) x (1-0.014) -1]100 = -3.5%}, or {[(IQ2009 $14,375.0)/(IIIQ2008 $14,891.6) – 1]100 = -3.5%} except for rounding. Those two quarters coincided with the worst effects of the financial crisis (Cochrane and Zingales 2009). GDP fell 0.1 percent in IIQ2009 but grew 0.3 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in five successive quarters from IVQ2009 to IVQ2010 of growth of 1.0 percent in IVQ2009, 0.4 percent in IQ2010, 1.0 percent in IIQ2010 and nearly equal growth at 0.7 percent in IIIQ2010 and 0.6 percent in IVQ2010 for cumulative growth in those five quarters of 3.8 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.004 x 1.01 x 1.007 x 1.006) – 1]100 = 3.8%} or {[(IVQ2010 $14,939.0)/(IIIQ2009 $14,402.5) – 1]100 = 3.7%} with minor rounding difference. The economy then stalled during the first half of 2011 with decline of 0.4 percent in IQ2011 and growth of 0.7 percent in IIQ2011 for combined annual equivalent rate of 0.6 percent {(0.996 x 1.007)2}. The economy grew 0.2 percent in IIIQ2011 for annual equivalent growth of 0.7 percent in the first three quarters {[(0.996 x 1.007 x 1.002)4/3 -1]100 = 0.7%}. Growth picked up in IVQ2011 with 1.1 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table I-6 slows from over 2.7 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 1.9 percent in IQ2011, 1.7 percent in IIQ2011, 1.2 percent in IIIQ2011 and 1.7 percent in IVQ2011. As shown below, growth of 1.1 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.7 percent relative to IVQ2011 and 2.8 percent relative to IQ2011, decelerating to 0.5 percent in IIQ2012 and 2.5 percent relative to IIQ2011 and 0.1 percent in IIIQ2012 and 2.4 percent relative to IIIQ2011. Growth was 0.0 percent in IVQ2012 with 1.3 percent relative to a year earlier but mostly because of deduction of 1.54 percentage points of inventory divestment and 0.42 percentage points of reduction of one-time national defense expenditures. Growth was 0.5 percent in IQ2013 and 1.1 percent relative to IQ2012 in large part because of burning savings to consume caused by financial repression of zero interest rates. There is similar growth of 0.3 percent in IIQ2013 and 0.9 percent relative to a year earlier. In IIIQ2013, GDP grew 0.7 percent relative to the prior quarter and 1.5 percent relative to the same quarter a year earlier with inventory accumulation contributing 1.48 percentage points to growth at 3.0 percent SAAR in IIIQ2013. GDP increased 0.9 percent in IVQ2013 and 2.5 percent relative to a year earlier. GDP fell 0.2 percent in IQ2014 and grew 1.7 percent relative to a year earlier. Inventory divestment deducted 1.29 percentage points from GDP growth in IQ2014. GDP grew 1.1 percent in IIQ2014, 2.6 percent relative to a year earlier and at 4.3 SAAR with inventory change contributing 1.12 percentage points. GDP grew 1.1 percent in IIIQ2014 and 2.9 percent relative to a year earlier. GDP grew 0.5 percent in IVQ2014 and 2.5 percent relative to a year earlier. GDP increased 0.2 percent in IQ2015 and increased 2.9 percent relative to a year earlier partly because of low level during contraction of 0.2 percent in IQ2014. GDP grew 1.0 percent in IIQ2015 and 2.7 percent relative to a year earlier. GDP grew 0.5 percent in IIIQ2015 and 2.1 percent relative to a year earlier. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area and growth in China are common sources of doubts on the rate and direction of economic growth in the US. There is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.

Table I-6, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2009 Dollars and ∆%

 

Real GDP, Billions Chained 2009 Dollars

∆% Relative to IVQ2007

∆% Relative to Prior Quarter

∆%
over
Year Earlier

IVQ2007

14,991.8

NA

0.4

1.9

IQ2008

14,889.5

-0.7

-0.7

1.1

IIQ2008

14,963.4

-0.2

0.5

0.8

IIIQ2008

14,891.6

-0.7

-0.5

-0.3

IVQ2008

14,577.0

-2.8

-2.1

-2.8

IQ2009

14,375.0

-4.1

-1.4

-3.5

IIQ2009

14,355.6

-4.2

-0.1

-4.1

IIIQ2009

14,402.5

-3.9

0.3

-3.3

IV2009

14,541.9

-3.0

1.0

-0.2

IQ2010

14,604.8

-2.6

0.4

1.6

IIQ2010

14,745.9

-1.6

1.0

2.7

IIIQ2010

14,845.5

-1.0

0.7

3.1

IVQ2010

14,939.0

-0.4

0.6

2.7

IQ2011

14,881.3

-0.7

-0.4

1.9

IIQ2011

14,989.6

0.0

0.7

1.7

IIIQ2011

15,021.1

0.2

0.2

1.2

IVQ2011

15,190.3

1.3

1.1

1.7

IQ2012

15,291.0

2.0

0.7

2.8

IIQ2012

15,362.4

2.5

0.5

2.5

IIIQ2012

15,380.8

2.6

0.1

2.4

IVQ2012

15,384.3

2.6

0.0

1.3

IQ2013

15,457.2

3.1

0.5

1.1

IIQ2013

15,500.2

3.4

0.3

0.9

IIIQ2013

15,614.4

4.2

0.7

1.5

IVQ2013

15,761.5

5.1

0.9

2.5

IQ2014

15,724.9

4.9

-0.2

1.7

IIQ2014

15,901.5

6.1

1.1

2.6

IIIQ2014

16,068.8

7.2

1.1

2.9

IVQ2014

16,151.4

7.7

0.5

2.5

IQ2015

16,177.3

7.9

0.2

2.9

IIQ2015

16,333.6

9.0

1.0

2.7

IIIQ2015

16,417.8

9.5

0.5

2.2

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-10 provides the percentage change of real GDP from the same quarter a year earlier from 1980 to 1989. There were two contractions almost in succession in 1980 and from 1981 to 1983. The expansion was marked by initial high rates of growth as in other recession in the postwar US period during which employment lost in the contraction was recovered. Growth rates continued to be high after the initial phase of expansion.

clip_image013

Chart I-10, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The experience of recovery after 2009 is not as complete as during the 1980s. Chart I-11 shows the much lower rates of growth in the early phase of the current expansion and sharp decline from an early peak. The US missed the initial high growth rates in cyclical expansions that eliminate unemployment and underemployment.

clip_image014

Chart I-11, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2015

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-12 provides growth rates from a quarter relative to the prior quarter during the 1980s. There is the same strong initial growth followed by a long period of sustained growth.

clip_image015

Chart I-12, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-13 provides growth rates in a quarter relative to the prior quarter from 2007 to 2015. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.

clip_image016

Chart I-13, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2015

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The revised estimates and earlier estimates from IQ2008 to IQ2014 in seasonally adjusted annual equivalent rates are shown in Table I-7. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent and minus 8.2 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent but then lowered to contraction of 5.3 percent and 5.4 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent and much lower to minus 1.9 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent and then increased to 4.0 percent but lowered to 3.9 percent. Growth in IQ2010 is lowered from 3.9 percent to 2.3 percent and 1.7 percent. Growth in IIQ2010 is upwardly revised to 3.8 percent but then lowered to 2.2 percent. The final revision increased growth in IIQ2010 to 3.9 percent. Revisions lowered growth of 1.9 percent in IQ2011 to minus 1.5 percent. The revisions increased growth of 1.8 percent in IQ2013 to 2.7 percent and increased growth of 2.0 percent in IQ2012 to 2.3 percent. The revision reduced the decline of GDP from 2.9 percent in IQ2014 to 2.1 percent. The latest revision reduced significantly the rate of growth in 2013. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession with higher risks of contraction and continuing underperformance.

Table I-7, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA, Revised and Earlier Estimates

Quarters

Rev Jul 30, 2015

Rev Jul 30, 2014

Rev

Jul 31, 2013

Rev

Jul 27, 2012

Rev

Jul 29, 2011

Earlier Estimate

2008

            

I

  

-2.7

-2.7

  

-1.8

-0.7

II

  

2.0

2.0

  

1.3

0.6

III

  

-1.9

-2.0

  

-3.7

-4.0

IV

  

-8.2

-8.3

  

-8.9

-6.8

2009

            

I

  

-5.4

-5.4

-5.3

-6.7

-4.9

II

  

-0.5

-0.4

-0.3

-0.7

-0.7

III

  

1.3

1.3

1.4

1.7

1.6

IV

  

3.9

3.9

4.0

3.8

5.0

2010

            

I

  

1.7

1.6

2.3

3.9

3.7

II

  

3.9

3.9

2.2

3.8

1.7

III

  

2.7

2.8

2.6

2.5

2.6

IV

  

2.5

2.8

2.4

2.3

3.1

2011

            

I

  

-1.5

-1.3

0.1

0.4

1.9

II

  

2.9

3.2

2.5

    

III

  

0.8

1.4

1.3

    

IV

  

4.6

4.9

4.1

    

2012

            

I

2.7

2.3

3.7

2.0

    

II

1.9

1.6

1.2

1.3

    

III

0.5

2.5

2.8

3.1

    

IV

0.1

0.1

0.1

0.4

    

2013

            

I

1.9

2.7

1.1

1.8

    

II

1.1

1.8

2.5

      

III

3.0

4.5

4.1

      

IV

3.8

3.5

2.6

      

2014

            

I

-0.9

-2.1

-2.9

      

II

4.6

          

III

4.3

          

IV

2.1

          

2015

            

I

0.6

          

Note: Rev: Revision

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase from IQ1983 to IIQ1988 than from IIIQ2009 to IIQ2015, as shown in Table I-8. GDI provided the impulse of growth in 1983 and 1984, which has not been the case from 2009 to 2015. The investment decision in the US economy has been frustrated in the current cyclical expansion. Growth of GDP in IIIQ2013 at seasonally adjusted annual rate of 3.0 percent consisted of positive contribution of 1.17 percentage points of personal consumption expenditures (PCE) plus positive contribution of 2.07 percentage points of gross private domestic investment (GDI) of which 1.48 percentage points of inventory investment (∆PI), contribution of net exports (trade or exports less imports) of 0.16 percentage points and deduction of 0.36 percentage points of government consumption expenditures and gross investment (GOV) partly because of one-time contribution of national defense expenditures of 0.03 percentage points. Growth at 3.8 percent in IVQ2013 had strongest contributions of 2.36 percentage points of PCE and 1.26 percentage points of trade. Growth of GDP at minus 0.9 percent in IQ2014 is mostly contribution of 0.85 percentage points by PCE with deduction of 0.38 percentage points by GDI, inventory divestment of 1.29 percentage points and trade deducting 1.39 percentage points. Growth at 4.6 percent in IIQ2014 consists of contributions of 2.60 percentage points by PCE and 1.99 percentage points by GDI with 1.12 percentage points by inventory change. Trade deducted 0.24 percentage points and government added 0.21 percentage points mostly because of contribution of 0.29 percentage points of expenditures by state and local government. Growth at 4.3 percent in IIIQ2014 consists of contribution of 2.34 percentage points by PCE, 1.22 percentage points by GDI, 0.39 percentage points by trade and 0.33 percentage points by government of which 0.19 percentage points by national defense expenditures growing at 4.5 percent in annual equivalent. Growth at 2.1 percent in IVQ2014 consists of contribution of 2.86 percentage points by PCE, 0.36 percentage points by GDI with deduction of 0.03 percentage points by inventory investment. Net trade deducted 0.89 percentage points while government deducted 0.26 percentage mostly because of deduction of 0.47 percentage points by national defense expenditure declining at 10.3 percent in IVQ2014. Growth of GDP at 0.6 percent in IQ2015 consisted mostly of contributions of 1.19 percentage points by personal consumption expenditures and 0.87 percentage points by inventory accumulation while trade deducted 1.92 percentage points and government deducted 0.01 percentage points. Growth at 3.9 percentage points in IIQ2015 consisted mostly of contributions of 2.42 percentage points by personal consumption expenditures, 0.85 percentage points by gross domestic investment, 0.18 percentage points by net trade and 0.46 percentage points by government consumption and expenditures. Growth at 2.0 percent in IIIQ2015 consisted mostly of contribution of personal consumption expenditures (PCE) of 2.04 percentage points with government adding 0.32 percentage points. Gross domestic investment (GDI) deducted 0.11 percentage points mostly because of inventory divestment of 0.71 percentage points while net trade deducted 0.26 percentage points. The economy of the United States has lost the dynamic growth impulse of earlier cyclical expansions with mediocre growth resulting from consumption forced by one-time effects of financial repression, national defense expenditures and inventory accumulation.

Table I-8, US, Contributions to the Rate of Growth of GDP in Percentage Points

 

GDP

PCE

GDI

∆ PI

Trade

GOV

2015

            

I

0.6

1.19

1.39

0.87

-1.92

-0.01

II

3.9

2.42

0.85

0.02

0.18

0.46

III

2.0

2.04

-0.11

-0.71

-0.26

0.32

2014

            

I

-0.9

0.85

-0.38

-1.29

-1.39

0.00

II

4.6

2.60

1.99

1.12

-0.24

0.21

III

4.3

2.34

1.22

-0.01

0.39

0.33

IV

2.1

2.86

0.36

-0.03

-0.89

-0.26

2013

            

I

1.9

1.74

1.05

0.28

-0.01

-0.88

II

1.1

0.96

0.78

0.38

-0.24

-0.38

III

3.0

1.17

2.07

1.48

0.16

-0.42

IV

3.8

2.36

0.71

-0.08

1.26

-0.51

2012

            

I

2.7

1.63

1.47

-0.53

-0.02

-0.40

II

1.9

0.45

1.53

0.56

0.28

-0.39

III

0.5

0.72

-0.18

-0.18

0.16

-0.22

IV

0.1

0.78

-0.51

-1.54

0.58

-0.75

2011

            

I

-1.5

1.38

-1.07

-0.96

-0.24

-1.60

II

2.9

0.57

2.14

1.04

0.31

-0.08

III

0.8

1.20

0.15

-2.10

0.01

-0.52

IV

4.6

0.94

4.16

2.80

-0.21

-0.31

2010

            

I

1.7

1.46

1.77

1.66

-0.85

-0.63

II

3.9

2.23

2.86

1.09

-1.77

0.61

III

2.7

1.77

1.86

1.90

-0.83

-0.07

IV

2.5

2.79

-0.51

-1.63

1.12

-0.87

2009

            

I

-5.4

-0.86

-7.02

-2.26

2.30

0.15

II

-0.5

-1.19

-3.25

-1.12

2.34

1.56

III

1.3

1.68

-0.40

-0.38

-0.45

0.48

IV

3.9

-0.01

4.05

4.40

0.06

-0.17

1982

            

I

-6.5

1.61

-7.59

-5.33

-0.49

-0.05

II

2.2

0.89

-0.06

2.26

0.81

0.56

III

-1.4

1.88

-0.62

1.11

-3.22

0.53

IV

0.4

4.51

-5.37

-5.33

-0.10

1.35

1983

            

I

5.3

2.45

2.36

0.92

-0.29

0.82

II

9.4

5.06

5.96

3.43

-2.46

0.89

III

8.1

4.50

4.40

0.57

-2.25

1.42

IV

8.5

4.06

6.94

3.01

-1.14

-1.36

1984

            

I

8.2

2.26

7.23

4.94

-2.31

1.01

II

7.2

3.64

2.57

-0.29

-0.87

1.87

III

4.0

1.95

1.69

0.21

-0.36

0.70

IV

3.2

3.29

-1.08

-2.44

-0.56

1.58

1985

            

I

4.0

4.23

-2.14

-2.86

0.94

1.01

II

3.7

2.35

1.34

0.35

-1.90

1.93

III

6.4

4.82

-0.43

-0.15

-0.01

1.98

IV

3.0

0.62

2.80

1.40

-0.66

0.27

1986

            

I

3.8

2.10

0.04

-0.17

0.92

0.70

II

1.9

2.77

-1.30

-1.30

-1.33

1.70

III

4.1

4.55

-1.97

-1.62

-0.45

1.95

IV

2.1

1.62

0.24

-0.29

0.71

-0.48

1987

            

I

2.8

0.05

1.98

3.28

0.23

0.57

II

4.6

3.54

0.08

-0.99

0.14

0.81

III

3.7

2.97

0.03

-1.19

0.45

0.23

IV

6.8

0.57

4.94

4.95

0.18

1.08

1988

            

I

2.3

4.49

-3.62

-3.68

1.94

-0.54

II

5.4

1.89

1.72

0.33

1.44

0.34

III

2.3

2.17

0.38

0.05

-0.31

0.08

IV

5.4

2.93

1.11

0.27

-0.21

1.56

1999

            

I

4.1

1.18

2.41

1.80

0.85

-0.35

II

3.2

1.20

-0.70

-0.79

1.35

1.34

III

3.0

2.52

-0.64

-1.84

0.44

0.70

IV

0.9

1.13

-0.53

0.37

-0.20

0.45

Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive

GDP: percent change at annual rate; percentage points at annual rates

Source: US Bureau of Economic Analysis

Source: Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

The Bureau of Economic Analysis (BEA) (pages 1) conducted the annual revision of GDP (http://www.bea.gov/national/an1.htm#2015annualrevision).

The Bureau of Economic Analysis (BEA) (pages 1-2) explains growth of GDP in IIIQ2015 as follows (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp3q15_3rd.pdf):

“Real gross domestic product -- the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 2.0 percent in the third quarter of 2015, according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.9 percent.

The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 2.1 percent. With the third estimate for the third quarter, the general picture of economic growth remains the same; private inventory investment decreased more than previously estimated (see "Revisions" on page 2).

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, state and local government spending, residential fixed investment, and exports that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the third quarter primarily reflected a downturn in private inventory investment and decelerations in exports, in PCE, in nonresidential fixed investment, and in state and local government spending that were partly offset by a deceleration in imports.

Real gross domestic income (GDI), which measures the value of the production of goods and services in the United States as the costs incurred and the incomes earned in production, increased 2.7 percent in the third quarter, compared with an increase of 2.2 percent in the second. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 2.3 percent in the third quarter, compared with an increase of 3.0 percent in the second.”

There are positive contributions to growth in IIIQ2015 shown in Table I-9:

  • Personal consumption expenditures (PCE) growing at 3.0 percent
  • Consumption of durable goods growing at 6.6 percent
  • Residential fixed investment growing at 8.2 percent
  • Nonresidential fixed investment growing at 2.6 percent
  • Exports growing at 0.7 percent
  • Government expenditures growing at 1.8 percent

There were negative contributions in IIIQ2015:

  • Imports, which are a deduction from growth, growing at 2.3 percent
  • Inventory divestment deducting 0.71 percentage points
  • National defense expenditures contracting at 1.4 percent

The BEA explains deceleration in real GDP growth in IIIQ2015 by:

  • Growth of consumption of durable goods at 6.6 percent in IIIQ2015 compared with 8.0 percent in IIQ2015
  • Growth of personal consumption expenditures at 3.0 percent in IIIQ2015 compared with 3.6 percent in IIQ2015
  • Growth of exports at 0.7 percent compared with growth at 5.1 percent in IIQ2015
  • Growth of expenditures of state and local government at 2.8 percent compared with increase at 4.3 percent in IIQ2015
  • Growth of nonresidential investment at 2.6 percent in IIIQ2015 compared with 4.1 percent in IIQ2015
  • Growth of residential investment at 8.2 percent in IIIQ2015 compared with 9.3 percent in IIQ2015
  • Growth of government expenditure at 1.8 percent in IIIQ2015 compared with 2.6 percent in IIQ2015

The BEA finds offsetting accelerating factors:

· Growth of imports at 2.3 percent in IIIQ2015 compared with 3.0 percent in the prior quarter

An important aspect of growth in the US is the decline in growth of real disposable personal income, or what is left after taxes and inflation, which decreased at the rate of 0.5 percent in IIIQ2013 compared with a year earlier. Contraction of real disposable income of 2.9 percent in IVQ2013 relative to a year earlier is largely due to comparison with an artificially higher level in anticipations of income in Nov and Dec 2012 to avoid increases in taxes in 2013, an episode known as “fiscal cliff.” Real disposable personal income increased 2.3 percent in IQ2014 relative to a year earlier and 2.4 percent in IIQ2014 relative to a year earlier. Real disposable personal income increased 2.5 percent in IIIQ2014 relative to a year earlier and 3.6 percent in IVQ2014 compared with a year earlier. Real disposable personal income grew 3.6 percent in IQ2015 relative to a year earlier partly because of contraction of energy prices and increased at 3.5 percent in IIQ2015. Real disposable personal income grew at 3.8 percent in IIIQ2015 relative to a year earlier. The effects of financial repression, or zero interest, are vividly shown in the decline of the savings rate, or personal saving as percent of disposable income from 9.2 percent in IVQ2012 to 5.1 percent in IIIQ2013 and 4.4 percent in IVQ2013. The savings rate eased to 5.0 percent in IQ2014, decreasing to 4.8 percent in IIQ2014 and moving to 4.7 percent in IIIQ2014. The savings rate fell to 4.7 percent in IVQ2014, increasing to 5.2 percent in IQ2015. The savings rate fell to 5.0 percent in IIQ2015 and increased to 5.2 percent in IIIQ2015. Anticipation of income in IVQ2012 to avoid higher taxes in 2013 caused increases in income and savings while higher payroll taxes in 2013 restricted income growth and savings in IQ2013. Zero interest rates induce risky investments with high leverage and can contract balance sheets of families, business and financial institutions when interest rates inevitably increase in the future. There is a tradeoff of weaker economy in the future when interest rates increase by meager growth in the present with forced consumption by zero interest rates. Microeconomics consists of the analysis of allocation of scarce resources to alternative and competing ends. Zero interest rates cloud he calculus of risk and returns in consumption and investment, disrupting decisions that maintain the economy in its long-term growth path.

Table I-9, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %

 

IIIQ 2014

IVQ 2014

IQ   

2015

IIQ 

2015

IIIQ 

2015

GDP

4.3

2.1

0.6

3.9

2.0

PCE

3.5

4.3

1.8

3.6

3.0

Durable Goods

7.5

6.1

2.0

8.0

6.6

NRFI

9.0

0.7

1.6

4.1

2.6

RFI

3.4

10.0

10.1

9.3

8.2

Exports

1.8

5.4

-6.0

5.1

0.7

Imports

-0.8

10.3

7.1

3.0

2.3

GOV

1.8

-1.4

-0.1

2.6

1.8

Federal GOV

3.7

-5.7

1.1

0.0

0.2

National Defense

4.5

-10.3

1.0

0.3

-1.4

Cont to GDP Growth % Points

0.19

-0.47

0.04

0.01

-0.06

State/Local GOV

0.6

1.3

-0.8

4.3

2.8

∆ PI (PP)

-0.01

-0.03

0.87

0.02

-0.71

Final Sales of Domestic Product

4.3

2.1

-0.2

3.9

2.7

Gross Domestic Purchases

3.8

2.9

2.5

3.6

2.2

Prices Gross
Domestic Purchases

1.5

-0.1

-1.6

1.5

1.3

Prices of GDP

1.6

0.1

0.1

2.1

1.3

Prices of GDP Excluding Food and Energy

1.8

0.8

0.5

1.5

1.4

Prices of PCE

1.2

-0.4

-1.9

2.2

1.3

Prices of PCE Excluding Food and Energy

1.4

1.0

1.0

1.9

1.4

Prices of Market Based PCE

1.1

-0.9

-2.5

2.2

1.1

Prices of Market Based PCE Excluding Food and Energy

1.3

0.7

0.7

1.8

1.2

Real Disposable Personal Income*

2.5

3.6

3.6

3.5

3.8

Personal Saving As % Disposable Income

4.7

4.7

5.2

5.0

5.2

Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in

private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income

*Percent change from quarter one year ago

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Percentage shares of GDP are in Table I-10. PCE (personal consumption expenditures) is equivalent to 68.4 percent of GDP and is under pressure with stagnant real disposable income per person, high levels of unemployment and underemployment and higher savings rates than before the global recession, temporarily interrupted by financial repression in the form of zero interest rates. Gross private domestic investment is also growing slowly even with about two trillion dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth. Bouts of risk aversion revalue the dollar relative to most currencies in the world as investors increase their holdings of dollar-denominated assets.

Table I-10, US, Percentage Shares of GDP, %

 

IIIQ2015

GDP

100.0

PCE

68.4

   Goods

22.3

            Durable

7.4

            Nondurable

14.9

   Services

46.2

Gross Private Domestic Investment

16.8

    Fixed Investment

16.3

        NRFI

12.8

            Structures

2.7

            Equipment & Software

6.0

            Intellectual Property

4.1

        RFI

3.4

     Change in Private
      Inventories

0.5

Net Exports of Goods and Services

-2.9

       Exports

12.5

                    Goods

8.4

                    Services

4.2

       Imports

15.4

                     Goods

12.7

                     Services

2.8

Government

17.7

        Federal

6.8

           National Defense

4.1

           Nondefense

2.7

        State and Local

10.9

PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table I-11 shows percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009, 2010, 2011, 2012, 2013 and 2014. The data incorporate the new revisions released by the BEA. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 6.9 percent in 1959, 5.4 percent in 1976, and 4.6 percent in 1983 followed by 7.3 percent in 1984 and 4.2 percent in 1985. In contrast, GDP grew 2.5 percent in 2010 after six consecutive quarters of growth, 1.6 percent in 2011 after ten consecutive quarters of expansion, 2.2 percent in 2012 after 14 quarters of expansion, 1.5 percent in 2013 after 18 consecutive quarters of expansion and 2.4 percent in 2014 after 22 consecutive quarters of expansion. Annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions than in the expansion after the global recession of 2007. Gross domestic investment was much stronger in the earlier expansions than in 2010, 2011, 2012, 2013 and 2014.

Table I-11, US, Percentage Point Contributions to the Annual Growth Rate of GDP

 

GDP

PCE

GDI

∆ PI

Trade

GOV

1958

-0.7

0.52

-1.16

-0.17

-0.87

0.77

1959

6.9

3.49

2.82

0.83

0.00

0.59

1975

-0.2

1.36

-2.90

-1.23

0.86

0.49

1976

5.4

3.41

2.91

1.37

-1.05

0.12

1982

-1.9

0.86

-2.55

-1.30

-0.59

0.38

1983

4.6

3.54

1.60

0.28

-1.32

0.81

1984

7.3

3.32

4.73

1.90

-1.54

0.76

1985

4.2

3.25

-0.01

-1.03

-0.39

1.38

1986

3.5

2.63

0.03

-0.31

-0.29

1.14

1987

3.5

2.14

0.53

0.41

0.17

0.63

2009

-2.8

-1.08

-3.52

-0.76

1.19

0.64

2010

2.5

1.32

1.66

1.45

-0.46

0.02

2011

1.6

1.55

0.73

-0.14

-0.02

-0.65

2012

2.2

1.01

1.52

0.14

0.08

-0.38

2013

1.5

1.16

0.70

0.06

0.20

-0.58

2014

2.4

1.84

0.87

0.05

-0.18

-0.11

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table I-12 provides more detail of the contributions to growth of GDP from 2009 to 2014 using annual-level data. PCEs contributed 1.32 PPs to GDP growth in 2010 of which 0.77 percentage points (PP) in goods and 0.55 PP in services. Gross private domestic investment (GPDI) deducted 3.52 PPs of GDP growth in 2009 of which -2.77 PPs by fixed investment and -0.76 PPs of inventory change (∆PI) and added 1.66 PPs of GPDI in 2010 of which 0.21 PPs of fixed investment and 1.45 PPs of inventory accumulation (∆PI). Trade, or exports of goods and services net of imports, contributed 1.19 PPs in 2009 of which exports deducted 1.07 PPs and imports added 2.26 PPs. In 2010, trade deducted 0.46 PPs with exports contributing 1.33 PPs and imports deducting 1.79 PPs likely benefitting from dollar revaluation. In 2009, government added 0.64 PP of which 0.44 PPs by the federal government and 0.20 PPs by state and local government; in 2010, government added 0.02 PPs of which 0.37 PPs by the federal government with state and local government deducting 0.35 PPs. Table I-12 provides the estimates for 2011, 2012, 2013 and 2014. PCE contributed 1.55 PPs in 2011 after 1.32 PPs in 2010. The contribution of PCE fell to 1.01 points in 2012 and increased to 1.16 PPs in 2013 and 1.84 PPs in 2014. The breakdown into goods and services is similar but with contributions in 2012 of 0.63 PPs of goods and 0.38 PPs of services. In 2013, goods contributed 0.71 PPs and services 0.45 PPs. Goods contributed 0.75 PPs in 2014 and services contributed 1.09 PPS. Gross private domestic investment contributed 1.66 PPs in 2010 with 1.45 PPs of change of private inventories but the contribution of gross private domestic investment was only 0.73 PPs in 2011. The contribution of GDI in 2012 increased to 1.52 PPs with fixed investment increasing its contribution to 1.38 PPs and residential investment contributing 0.33 PPs for the first time since 2009. GDI contributed 1.52 PPs in 2012 with 1.05 PPs from fixed investment and 0.33 PPs from inventory change. GDI contribute 0.70 PPs in 2013 and 0.87 PPs in 2014. Net exports of goods and services deducted marginally in 2011 with 0.02 PPs and added 0.08 PPs in 2012. Net trade contributed 0.20 PPs in 2013 and deducted 0.18 PPs in 2014. The contribution of exports fell from 1.33 PPs in 2010 and 0.87 PPs in 2011 to only 0.46 PPs in 2012, 0.38 PPs in 2013 and 0.46 PPs in 2014. Government deducted 0.65 PPs in 2011, 0.38 PPs in 2012 and 0.58 PPs in 2013. Government deducted 0.11 PPs in 2014. Demand weakened in 2013 with higher contribution of personal consumption expenditures of 1.16 PPs and of gross domestic investment of 0.70 PPs. PCE contributed 1.84 PPs in 2014 and GDI 0.87 PPs. Net trade contributed only 0.20 PPs in 2013 and deducted 0.18 PPs in 2014. The expansion since IIIQ2009 has been characterized by weak contributions of aggregate demand, which is the sum of personal consumption expenditures plus gross private domestic investment. The US did not recover strongly from the global recessions as typical in past cyclical expansions. Recoveries tend to be more sluggish as expansions mature. At the margin in IVQ2011, the acceleration of expansion was driven by inventory accumulation instead of aggregate demand of consumption and investment. Growth of PCE was partly the result of burning savings because of financial repression, which may not be sustainable in the future while creating multiple distortions of resource allocation and growth restraint.

Table I-12, US, Contributions to Growth of Gross Domestic Product in Percentage Points

 

2009

2010

2011

2012

2013

2014

GDP Growth ∆%

-2.8

2.5

1.6

2.2

1.5

2.4

Personal Consumption Expenditures (PCE)

-1.08

1.32

1.55

1.01

1.16

1.84

  Goods

-0.68

0.77

0.71

0.63

0.71

0.75

     Durable

-0.41

0.43

0.43

0.53

0.42

0.43

     Nondurable

-0.27

0.34

0.28

0.10

0.29

0.32

  Services

-0.40

0.55

0.84

0.38

0.45

1.09

Gross Private Domestic Investment (GPDI)

-3.52

1.66

0.73

1.52

0.70

0.87

Fixed Investment

-2.77

0.21

0.86

1.38

0.64

0.82

    Nonresidential

-2.04

0.28

0.85

1.05

0.38

0.77

      Structures

-0.70

-0.49

0.06

0.32

0.04

0.23

     Equipment, software

-1.29

0.70

0.66

0.58

0.19

0.34

      Intellectual Property

-0.05

0.07

0.13

0.15

0.15

0.20

    Residential

-0.73

-0.07

0.01

0.33

0.27

0.05

Change Private Inventories

-0.76

1.45

-0.14

0.14

0.06

0.05

Net Exports of Goods and Services

1.19

-0.46

-0.02

0.08

0.20

-0.18

   Exports

-1.07

1.33

0.87

0.46

0.38

0.46

      Goods

-1.03

1.08

0.57

0.34

0.26

0.41

      Services

-0.04

0.25

0.29

0.12

0.11

0.05

   Imports

2.26

-1.79

-0.89

-0.38

-0.18

-0.63

      Goods

2.15

-1.69

-0.78

-0.30

-0.14

-0.59

      Services

0.10

-0.10

-0.11

-0.09

-0.04

-0.05

Government Consumption Expenditures and Gross Investment

0.64

0.02

-0.65

-0.38

-0.58

-0.11

  Federal

0.44

0.37

-0.24

-0.15

-0.46

-0.18

    National Defense

0.27

0.18

-0.13

-0.18

-0.34

-0.18

    Nondefense

0.17

0.19

-0.11

0.03

-0.12

0.00

  State and Local

0.20

-0.35

-0.41

-0.22

-0.12

0.07

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Manufacturing jobs not seasonally adjusted increased 42,000 from Nov 2014 to
Nov 2015 or at the average monthly rate of 3500. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. Industrial production decreased 0.6 percent in Nov 2015 and decreased 0.4 percent in Oct 2015 after decreasing 0.1 percent in Sep 2015, with all data seasonally adjusted. The Board of Governors of the Federal Reserve System conducted the annual revision of industrial production released on Jul 21, 2015 (http://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm):

“The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization. Total IP is now reported to have increased slightly less than 2 1/2 percent per year, on average, from 2011 through 2013 before advancing about 4 1/2 percent in 2014 and falling back somewhat in the first half of 2015. Relative to earlier reports, the current rates of change are lower---especially for 2012 and 2013. For the most recent recession, total IP still shows a peak-to-trough decline of about 17 percent, and the dates for the peak and trough are unaltered. However, the lower rates of change for recent years indicate that the recovery in the industrial sector since the trough has been slower than reported earlier. Total IP is now estimated to have returned to its pre-recession peak in May 2014, seven months later than previously estimated.”

Manufacturing declined 22.2 from the peak in Jun 2007 to the trough in Apr 2009 and increased 19.2 percent from the trough in Apr 2009 to Dec 2014. Manufacturing grew 21.8 percent from the trough in Apr 2009 to Nov 2015. Manufacturing in Nov 2015 is lower by 5.2 percent relative to the peak in Jun 2007. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IIIQ2015 would have accumulated to 25.7 percent. GDP in IIIQ2015 would be $18,844.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,426.9 billion than actual $16,417.8 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.7 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/12/liftoff-of-fed-funds-rate-followed-by.html and earlier http://cmpassocregulationblog.blogspot.com/2015/11/live-possibility-of-interest-rates.html). US GDP in IIIQ2015 is 12.9 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,417.8 billion in IIIQ2015 or 9.5 percent at the average annual equivalent rate of 1.2 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.2 percent per year from Nov 1919 to Nov 2015. Growth at 3.2 percent per year would raise the NSA index of manufacturing output from 107.6075 in Dec 2007 to 138.0830 in Nov 2015. The actual index NSA in Nov 2015 is 106.0586, which is 23.2 percent below trend. Manufacturing output grew at average 2.2 percent between Dec 1986 and Dec 2014. Using trend growth of 2.2 percent per year, the index would increase to 127.8387 in Nov 2015. The output of manufacturing at 106.0586 in Nov 2015 is 17.0 percent below trend under this alternative calculation.

Table I-13 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 87.3 percent in IIIQ2015. Most of US national income is in the form of services. In Nov 2015, there were 144.128 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 121.663 million NSA in Nov 2015 accounted for 84.4 percent of total nonfarm jobs of 144.128 million, of which 12.332 million, or 10.1 percent of total private jobs and 8.6 percent of total nonfarm jobs, were in manufacturing. Private service-providing jobs were 101.933 million NSA in Nov 2015, or 70.7 percent of total nonfarm jobs and 83.8 percent of total private-sector jobs. Manufacturing has share of 11.2 percent in US national income in IIIQ2015 and durable goods 6.4 percent, as shown in Table I-13. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.

Table I-13, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

 

SAAR
IIQ2015

% Total

SAAR IIIQ2015

% Total

National Income WCCA

15,758.9

100.0

15,883.7

100.0

Domestic Industries

15,528.3

98.5

15,680.1

98.7

Private Industries

13,732.1

87.1

13,870.9

87.3

    Agriculture

156.5

1.0

167.5

1.1

    Mining

251.8

1.6

249.7

1.6

    Utilities

193.8

1.2

180.6

1.1

    Construction

713.4

4.5

729.4

4.6

    Manufacturing

1767.2

11.2

1776.6

11.2

       Durable Goods

1030.6

6.5

1021.7

6.4

       Nondurable Goods

736.7

4.7

754.9

4.8

    Wholesale Trade

947.1

6.0

956.4

6.0

     Retail Trade

1072.6

6.8

1090.8

6.9

     Transportation & WH

498.7

3.2

514.0

3.2

     Information

591.0

3.8

592.2

3.7

     Finance, Insurance, RE

2763.6

17.5

2777.0

17.5

     Professional & Business Services

2130.4

13.5

2151.7

13.5

     Education, Health Care

1549.7

9.8

1572.8

9.9

     Arts, Entertainment

651.1

4.1

660.1

4.2

     Other Services

445.2

2.8

452.1

2.8

Government

1796.2

11.4

1809.2

11.4

Rest of the World

230.6

1.5

203.6

1.3

Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

IA1. Contracting Real Private Fixed Investment. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions. Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 25 quarters from IIIQ2009 to IIIQ2015. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the third estimate of GDP for IIIQ2015 (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp3q15_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[$14,745.9/$14,355.6 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/11/dollar-revaluation-constraining.html and earlier http://cmpassocregulationblog.blogspot.com/2015/11/interest-rate-increase-considered.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988, 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/11/dollar-revaluation-constraining.html and earlier http://cmpassocregulationblog.blogspot.com/2015/11/interest-rate-increase-considered.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IIIQ2015 would have accumulated to 25.7 percent. GDP in IIIQ2015 would be $18,844.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,430.7 billion than actual $16,414.0 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.7 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/12/liftoff-of-fed-funds-rate-followed-by.html and earlier http://cmpassocregulationblog.blogspot.com/2015/11/live-possibility-of-interest-rates.html). US GDP in IIIQ2015 is 12.9 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,414.0 billion in IIIQ2015 or 9.5 percent at the average annual equivalent rate of 1.2 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.2 percent per year from Nov 1919 to Nov 2015. Growth at 3.2 percent per year would raise the NSA index of manufacturing output from 107.6075 in Dec 2007 to 138.0830 in Nov 2015. The actual index NSA in Nov 2015 is 106.0586, which is 23.2 percent below trend. Manufacturing output grew at average 2.2 percent between Dec 1986 and Dec 2014. Using trend growth of 2.2 percent per year, the index would increase to 127.8387 in Nov 2015. The output of manufacturing at 106.0586 in Nov 2015 is 17.0 percent below trend under this alternative calculation. Table IA1-1 provides quarterly seasonally adjusted annual rates (SAAR) of growth of private fixed investment for the recessions of the 1980s and the current economic cycle. In the cyclical expansion beginning in IQ1983 (http://www.nber.org/cycles.html), real private fixed investment in the United States grew at the average annual rate of 14.7 percent in the first eight quarters from IQ1983 to IVQ1984. Growth rates fell to an average of 2.2 percent in the following eight quarters from IQ1985 to IVQ1986 and to an average of 1.9 percent in the 12 quarters of 1985, 1986 and 1987. The average rate of growth in the four quarters of 1988 was 3.7 percent. There were only four quarters of contraction of private fixed investment from IQ1983 to IVQ1987. There is quite different behavior of private fixed investment in the twenty-four quarters of cyclical expansion from IIIQ2009 to IIQ2015. The average annual growth rate in the first eight quarters of expansion from IIIQ2009 to IIQ2011 was 3.2 percent, which is significantly lower than 14.7 percent in the first eight quarters of expansion from IQ1983 to IVQ1984. There is only strong growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 12.5 percent. Growth has fallen from the SAAR of 17.3 percent in IIIQ2011 to 0.1 percent in IIIQ2012, recovering to 6.9 percent in IVQ2012 and falling to 4.9 percent in IQ2013. The SAAR of fixed investment rose to 3.8 percent in IIIQ2013 and to 5.1 percent in IVQ2013. The SAAR of fixed investment increased to 6.0 percent in IQ2014. Fixed investment grew at the SAAR of 5.6 percent in IIQ2014 and at 7.9 percent in IIIQ2014. Fixed investment grew at 2.5 percent in IVQ2014, 3.3 percent in IQ2015 and 5.2 percent in IIQ2015. Fixed investment grew at 3.7 percent in IIIQ2015. Sudeep Reddy and Scott Thurm, writing on “Investment falls off a cliff,” on Nov 18, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324595904578123593211825394.html?mod=WSJPRO_hpp_LEFTTopStories) analyze the decline of private investment in the US and inform that a review by the Wall Street Journal of filing and conference calls finds that 40 of the largest publicly traded corporations in the US have announced intentions to reduce capital expenditures in 2012.

Table IA1-1, US, Quarterly Growth Rates of Real Private Fixed Investment, % Annual Equivalent SA

Q

1981

1982

1983

1984

2008

2009

2010

I

3.8

-12.2

9.4

13.1

-7.1

-27.4

0.8

II

3.2

-12.1

16.0

16.6

-5.5

-14.2

13.6

III

0.1

-9.3

24.4

8.2

-12.1

-0.5

-0.4

IV

-1.5

0.2

24.3

7.3

-23.9

-2.8

8.5
       

1985

    

2011

I

      

3.7

    

-0.9

II

      

5.2

    

8.2

III

      

-1.6

    

17.3

IV

      

7.8

    

9.9
       

1986

    

2012

I

      

1.1

    

14.7

II

      

0.1

    

6.9

III

      

-1.8

    

0.1

IV

      

3.1

    

6.9
       

1987

    

2013

I

      

-6.7

    

4.9

II

      

6.3

    

2.6

III

      

7.1

    

3.8

IV

      

-0.2

    

5.1
       

1988

  

2014

 

I

      

0.2

    

6.0

II

      

8.1

    

5.6

III

      

1.9

    

7.9

IV

      

4.8

    

2.5
       

1989

  

2015

  

IQ

      

3.6

    

3.3

IIQ

      

0.5

    

5.2

IIIQ

      

7.2

    

3.7

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-1 of the US Bureau of Economic Analysis (BEA) provides seasonally adjusted annual rates of growth of real private fixed investment from 1981 to 1989. Growth rates recovered sharply during the first eight quarters, which was essential in returning the economy to trend growth and eliminating unemployment and most underemployment accumulated during the contractions.

clip_image017

Chart IA1-1, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 1981-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Weak behavior of real private fixed investment from 2007 to 2015 is in Chart IA1-2. Growth rates of real private fixed investment were much lower during the initial phase of the current economic cycle and have entered sharp trend of decline.

clip_image016[1]

Chart IA1-2, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 2007-2015

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table IA1-2 provides real private fixed investment at seasonally adjusted annual rates from IVQ2007 to IIIQ2015 or for the complete economic cycle. The first column provides the quarter, the second column percentage change relative to IVQ2007, the third column the quarter percentage change in the quarter relative to the prior quarter and the final column percentage change in a quarter relative to the same quarter a year earlier. In IQ1980, real gross private domestic investment in the US was $951.6 billion of chained 2009 dollars, growing to $1,290.7 billion in IQ1989 or 35.6 percent. Real gross private domestic investment in the US increased 9.8 percent from $2605.2 billion in IVQ2007 to $2,859.7 billion in IIIQ2015. As shown in Table IAI-2, real private fixed investment increased 6.7 percent from $2,586.3 billion of chained 2009 dollars in IVQ2007 to $2,760.7 billion in IIIQ2015. Private fixed investment fell relative to IVQ2007 in all quarters preceding IIQ2014. Growth of real private investment in Table IA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012. The investment decision of United States corporations is fractured in the current economic cycle in preference of cash.

Table IA1-2, US, Real Private Fixed Investment and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions of Chained 2009 Dollars and ∆%

 

Real PFI, Billions Chained 2009 Dollars

∆% Relative to IVQ2007

∆% Relative to Prior Quarter

∆%
over
Year Earlier

IVQ2007

2586.3

NA

-0.9

-1.4

IQ2008

2539.1

-1.8

-1.8

-3.0

IIQ2008

2503.4

-3.2

-1.4

-4.6

IIIQ2008

2424.1

-6.3

-3.2

-7.1

IV2008

2263.8

-12.5

-6.6

-12.5

IQ2009

2089.3

-19.2

-7.7

-17.7

IIQ2009

2011.0

-22.2

-3.7

-19.7

IIIQ2009

2008.4

-22.3

-0.1

-17.1

IVQ2009

1994.1

-22.9

-0.7

-11.9

IQ2010

1997.9

-22.8

0.2

-4.4

IIQ2010

2062.8

-20.2

3.2

2.6

IIIQ2010

2060.8

-20.3

-0.1

2.6

IVQ2010

2103.1

-18.7

2.1

5.5

IQ2011

2098.4

-18.9

-0.2

5.0

IIQ2011

2140.2

-17.2

2.0

3.8

IIIQ2011

2227.5

-13.9

4.1

8.1

IVQ2011

2280.6

-11.8

2.4

8.4

IQ2012

2360.4

-8.7

3.5

12.5

IIQ2012

2399.8

-7.2

1.7

12.1

IIIQ2012

2400.4

-7.2

0.0

7.8

IVQ2012

2441.0

-5.6

1.7

7.0

IQ2013

2470.6

-4.5

1.2

4.7

IIQ2013

2486.3

-3.9

0.6

3.6

IIIQ2013

2509.5

-3.0

0.9

4.5

IVQ2013

2541.0

-1.8

1.3

4.1

IQ2014

2578.3

-0.3

1.5

4.4

IIQ2014

2613.4

1.0

1.4

5.1

IIIQ2014

2663.5

3.0

1.9

6.1

IVQ2014

2679.7

3.6

0.6

5.5

IQ2015

2701.4

4.5

0.8

4.8

IIQ2015

2735.5

5.8

1.3

4.7

IIIQ2015

2760.7

6.7

0.9

3.6

PFI: Private Fixed Investment

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-3 provides real private fixed investment in billions of chained 2009 dollars from IQ2007 to IIIQ2015. Real private fixed investment has not recovered, stabilizing at a level in IQ2015 that is barely higher relative to that in IVQ2007.

clip_image018

Chart IA1-3, US, Real Private Fixed Investment, Billions of Chained 2009 Dollars, IQ2007 to IIIQ2015

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-4 provides real gross private domestic investment in chained dollars of 2009 from 1980 to 1989. Real gross private domestic investment climbed 35.6 percent to $1,290.7 billion of 2009 dollars in IQ1989 above the level of $951.6 billion in IQ1980.

clip_image019

Chart IA1-4, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-5 provides real gross private domestic investment in the United States in billions of chained dollars of 2009 from 2006 to 2015. Real gross private domestic investment reached a level of $2,859.7 billion in IIIQ2015, which was only 9.8 percent higher than the level of $2605.2 billion in IVQ2007 (http://www.bea.gov/iTable/index_nipa.cfm).

clip_image020

Chart IA1-5, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 2007-2015

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table IA1-3 shows that the share of gross private domestic investment in GDP has fallen from 19.8 percent in IIIQ2000 and 19.3 percent in IIIQ2006 to 16.8 percent in IIIQ2015. There are declines in percentage shares in GDP of all components with sharp reduction of residential investment from 4.7 percent in IIIQ2000 and 5.9 percent in IIIQ2006 to 3.4 percent in IIIQ2015. The share of fixed investment in GDP fell from 19.3 percent in IIIQ2000 and 18.7 percent in IIIQ2006 to 16.3 percent in IIIQ2015.

Table IA1-3, Percentage Shares of Gross Private Domestic Investment and Components in Gross Domestic Product, % of GDP, IQ2013

 

IIIQ2015

IIIQ2006

IIIQ2000

Gross Private Domestic Investment

16.8

19.3

19.8

  Fixed Investment

16.3

18.7

19.3

     Nonresidential

12.8

12.9

14.6

          Structures

2.7

3.1

3.2

          Equipment

          and Software

6.0

6.2

7.5

          Intellectual
           Property

4.1

3.7

4.0

     Residential

3.4

5.9

4.7

   Change in Private Inventories

0.5

0.6

0.6

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Broader perspective is provided in Chart IA1-6 with the percentage share of gross private domestic investment in GDP in annual data from 1929 to 2014. There was sharp drop during the current economic cycle with almost no recovery in contrast with sharp recovery after the recessions of the 1980s.

clip_image021

Chart IA1-6, US, Percentage Share of Gross Private Domestic Investment in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-7 provides percentage shares of private fixed investment in GDP with annual data from 1929 to 2014. The sharp contraction after the recessions of the 1980s was followed by sustained recovery while the sharp drop in the current economic cycle has not been recovered.

clip_image022

Chart IA1-7, US, Percentage Share of Private Fixed Investment in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-8 provides percentage shares in GDP of nonresidential investment from 1929 to 2014. There is again recovery from sharp contraction in the 1980s but inadequate recovery in the current economic cycle.

clip_image023

Chart IA1-8, US, Percentage Share of Nonresidential Investment in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-9 provides percentage shares of business equipment and software in GDP with annual data from 1929 to 2014. There is again inadequate recovery in the current economic cycle.

clip_image024

Chart IA1-9, US, Percentage Share of Business Equipment and Software in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-10 provides percentage shares of residential investment in GDP with annual data from 1929 to 2014. The salient characteristic of Chart IA1-10 is the vertical increase of the share of residential investment in GDP up to 2006 and subsequent collapse.

clip_image025

Chart IA1-10, US, Percentage Share of Residential Investment in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Finer detail is provided by the quarterly share of residential investment in GDP from 1979 to 2015 in Chart IA1-11. There was protracted growth of that share, accelerating sharply into 2006 followed with nearly vertical drop. The explanation of the sharp contraction of United States housing can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”

Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:

“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”

There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ingersoll 1987, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.

The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.

Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).

clip_image026

Chart IA1-11, US, Percentage Share of Residential Investment in Gross Domestic Product, Quarterly, 1979-2015

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-12 provides the share of intellectual property products investment in GDP with annual data from 1929 to 2014. This is an important addition in the revision and enhancement of GDP provided by the Bureau of Economic Analysis. The share rose sharply over time but stabilized at a lower level in the past decade.

clip_image027

Chart IA1-12, US, Percentage Share of Intellectual Property Products Investment in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-13 provides the percentage share of intellectual property investment in GDP on a quarterly basis from 1979 to 2015. The share stabilized in the 2000s.

clip_image028

Chart IA1-13, US, Percentage Share of Intellectual Property Investment in Gross Domestic Product, Quarterly, 1979-2015

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table IA1-4 provides the seasonally adjusted annual rate of real GDP percentage change and contributions in percentage points in annual equivalent rate of gross domestic investment (GDI), real private fixed investment (PFI), nonresidential investment (NRES), business equipment and software (BES), residential investment (RES), intellectual property products (IPP) and change in inventories (∆INV) for the cyclical expansions from IQ1983 to IVQ1985 and from IIIQ2009 to IIIQ2015. GDI contributed 1.39 percentage points to GDP in IQ2015 with 0.52 percentage points by PFI, 0.87 percentage points by inventory accumulation and 0.29 percentage points by intellectual property products. GDI contributed 0.85 percentage points to GDP growth in IIQ2015: 0.83 percentage points in PFI, 0.53 percentage points in NRES and 0.30 percentage points in RES. Inventory investment added 0.02 percentage points and IPP added 0.33 percentage points. GDI deducted 0.11 percentage points from GDP growth in IIIQ2015 with deduction of 0.71 percentage points by inventory divestment while BSE deducted 0.21 percentage points. PFI added 0.60 percentage points, nonresidential investment added 0.33 percentage points and residential investment added 0.27 percentage points. IPP deducted 0.03 percentage points.

Table IA1-4, US, Contributions to the Rate of Growth of Real GDP in Percentage Points

 

GDP

GDI

PFI

NRES

BES

IPP

RES

∆INV

2015

                

I

0.6

1.39

0.52

0.20

-0.22

0.29

0.32

0.87

II

3.9

0.85

0.83

0.53

0.18

0.33

0.30

0.02

III

2.0

-0.11

0.60

0.33

-0.21

-0.03

0.27

-0.71

2014

                

I

-0.9

-0.38

0.91

1.00

0.50

0.30

-0.09

-1.29

II

4.6

1.99

0.87

0.56

0.00

0.19

0.31

1.12

III

4.3

1.22

1.23

1.12

-0.05

0.25

0.11

-0.01

IV

2.1

0.36

0.39

0.09

0.12

0.27

0.31

-0.03

2013

                

I

1.9

1.05

0.77

0.51

-0.16

0.30

0.26

0.28

II

1.1

0.78

0.40

0.14

0.30

-0.13

0.27

0.38

III

3.0

2.07

0.59

0.44

0.46

0.20

0.15

1.48

IV

3.8

0.71

0.79

1.05

0.11

0.13

-0.26

-0.08

2012

                

I

2.7

1.47

2.00

1.37

0.48

0.07

0.63

-0.53

II

1.9

1.53

0.98

0.88

0.27

0.14

0.10

0.56

III

0.5

-0.18

0.00

-0.27

-0.12

0.05

0.27

-0.18

IV

0.1

-0.51

1.03

0.46

-0.21

0.26

0.57

-1.54

2011

                

I

-1.5

-1.07

-0.11

-0.09

-0.73

0.05

-0.02

-0.96

II

2.9

2.14

1.10

0.97

0.63

0.12

0.13

1.04

III

0.8

0.15

2.25

2.06

0.56

0.19

0.19

-2.10

IV

4.6

4.16

1.36

1.08

0.34

0.26

0.28

2.80

2010

                

I

1.7

1.77

0.11

0.46

1.25

-0.07

-0.35

1.66

II

3.9

2.86

1.76

1.21

1.02

-0.08

0.56

1.09

III

2.7

1.86

-0.04

0.90

0.83

0.22

-0.94

1.90

IV

2.5

-0.51

1.13

0.94

0.57

0.19

0.19

-1.63

2009

                

I

-5.4

-7.02

-4.75

-3.58

-2.25

-0.23

-1.17

-2.26

II

-0.5

-3.25

-2.13

-1.46

-0.60

0.16

-0.66

-1.12

III

1.3

-0.40

-0.02

-0.54

0.25

0.04

0.52

-0.38

IV

3.9

4.05

-0.36

-0.37

0.36

0.25

0.01

4.40

1982

                

I

-6.5

-7.59

-2.26

-1.45

-0.83

0.14

-0.81

-5.33

II

2.2

-0.06

-2.32

-1.89

-1.20

0.08

-0.44

2.26

III

-1.4

-0.62

-1.73

-1.72

-0.55

0.06

-0.02

1.11

IV

0.4

-5.37

-0.03

-1.05

-0.57

0.00

1.01

-5.33

1983

                

I

5.3

2.36

1.44

-0.92

-0.27

0.16

2.36

0.92

II

9.4

5.96

2.53

0.67

1.24

0.29

1.86

3.43

III

8.1

4.40

3.82

2.13

1.43

0.31

1.70

0.57

IV

8.5

6.94

3.93

3.14

2.32

0.35

0.79

3.01

1984

                

I

8.2

7.23

2.29

1.71

0.46

0.30

0.58

4.94

II

7.2

2.57

2.86

2.52

1.36

0.29

0.34

-0.29

III

4.0

1.69

1.48

1.70

0.88

0.25

-0.22

0.21

IV

3.2

-1.08

1.36

1.34

0.86

0.29

0.02

-2.44

1985

                

I

4.0

-2.14

0.72

0.67

-0.23

0.14

0.05

-2.86

II

3.7

1.34

0.99

0.83

0.64

0.20

0.16

0.35

III

6.4

-0.43

-0.28

-0.62

-0.38

0.13

0.34

-0.15

IV

3.0

2.80

1.40

1.00

0.53

0.26

0.40

1.40

1986

                

I

3.8

0.04

0.21

-0.55

-0.28

0.17

0.76

-0.17

II

1.9

-1.30

0.00

-1.12

0.34

0.15

1.12

-1.30

III

4.1

-1.97

-0.34

-0.63

-0.17

0.10

0.28

-1.62

IV

2.1

0.24

0.53

0.48

0.30

0.10

0.05

-0.29

1987

                

I

2.8

1.98

-1.30

-1.26

-0.97

0.07

-0.04

3.28

II

4.6

0.08

1.07

1.00

0.76

0.08

0.07

-0.99

III

3.7

0.03

1.22

1.39

0.70

0.11

-0.17

-1.19

IV

6.8

4.94

-0.01

-0.05

-0.48

0.16

0.04

4.95

1988

                

I

2.3

-3.62

0.06

0.41

0.82

0.15

-0.36

-3.68

II

5.4

1.72

1.39

1.14

0.67

0.18

0.25

0.33

III

2.3

0.38

0.33

0.32

0.29

0.22

0.01

0.05

IV

5.4

1.11

0.84

0.71

0.34

0.40

0.13

0.27

GDP: Gross Domestic Product; GDI: Gross Domestic Investment; PFI: Private Fixed Investment; NRES: Nonresidential; BES: Business Equipment and Software; IPP: Intellectual Property Products; RES: Residential; ∆INV: Change in Private Inventories.

GDI = PFI + ∆INV, may not add exactly because of errors of rounding.

GDP: Seasonally adjusted annual equivalent rate of growth in a quarter; components: percentage points at annual rate.

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

IA2 Swelling Undistributed Corporate Profits. Table IA1-5 provides value added of corporate business, dividends and corporate profits in billions of current dollars at seasonally adjusted annual rates (SAAR) in IVQ2007 and IIIQ2015 together with percentage changes. The last three rows of Table IA1-5 provide gross value added of nonfinancial corporate business, consumption of fixed capital and net value added in billions of chained 2009 dollars at SAARs. Deductions from gross value added of corporate profits down the rows of Table IA1-5 end with undistributed corporate profits. Profits after taxes with inventory valuation adjustment (IVA) and capital consumption adjustment (CCA) increased by 77.8 percent in nominal terms from IVQ2007 to IIIQ2015 while net dividends increased 12.2 percent and undistributed corporate profits swelled 227.4 percent from $107.7 billion in IQ2007 to $352.6 billion in IIIQ2015 and changed signs from minus $55.9 billion in current dollars in IVQ2007. The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. Gross value added of nonfinancial corporate business adjusted for inflation increased 13.1 percent from IVQ2007 to IIIQ2015, which is much lower than nominal increase of 26.3 percent in the same period for gross value added of total corporate business.

Table IA1-5, US, Value Added of Corporate Business, Corporate Profits and Dividends, IVQ2007-IIIQ2014

 

IVQ2007

IIIQ2015

∆%

Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)

      

Gross Value Added of Corporate Business

8,165.9

10,316.1

26.3

Consumption of Fixed Capital

1,216.5

1,520.3

25.0

Net Value Added

6,949.4

8,795,7

26.6

Compensation of Employees

4,945.8

5,972.2

20.8

Taxes on Production and Imports Less Subsidies

688.5

823.0

19.5

Net Operating Surplus

1,315.1

2,000.6

52.1

Net Interest and Misc

204.2

230.5

12.9

Business Current Transfer Payment Net

68.9

102.2

48.3

Corporate Profits with IVA and CCA Adjustments

1,042.0

1,667.9

60.1

Taxes on Corporate Income

408.8

542.2

32.6

Profits after Tax with IVA and CCA Adjustment

633.2

1,125.7

77.8

Net Dividends

689.1

773.1

12.2

Undistributed Profits with IVA and CCA Adjustment

-55.9

352.6

NA ∆% 227.4 relative to 107.7 in IQ2007

Billions of Chained USD 2009 SAAR

      

Gross Value Added of Nonfinancial Corporate Business

7,519.3

8,501.9

13.1

Consumption of Fixed Capital

1,066.0

1,260.8

18.3

Net Value Added

6,453.4

7241.1

12.2

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm

Table IA1-6 provides comparable United States value added of corporate business, corporate profits and dividends from IQ1980 to IQ1989. There is significant difference both in nominal and inflation-adjusted data. Between IQ1980 and IQ1989, profits after tax with IVA and CCA increased 101.1 percent with dividends growing 208.3 percent and undistributed profits increasing 27.2 percent. There was much higher inflation in the 1980s than in the current cycle. For example, the consumer price index increased 52.7 percent from Mar 1980 to Mar 1989 but only 13.3 percent between Dec 2007 and Sep 2015 (http://www.bls.gov/cpi/data.htm). The comparison is still valid in terms of inflation-adjusted data: gross value added of nonfinancial corporate business adjusted for inflation increased 40.7 percent between IQ1980 and IQ1989 but only 13.1 percent between IVQ2007 and IIIQ2015 while net value added adjusted for inflation increased 40.0 percent between IQ1980 and IQ1989 but only 12.2 percent between IVQ2007 and IIIQ2015.

Table IA1-6, US, Value Added of Corporate Business, Corporate Profits and Dividends, IQ1980-IQ1988

 

IQ1980

IQ1989

∆%

Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)

      

Gross Value Added of Corporate Business

1,654.1

3,282.1

98.4

Consumption of Fixed Capital

200.5

416.9

107.9

Net Value Added

1,453.6

2,865.2

97.1

Compensation of Employees

1,072.9

2,083.2

94.2

Taxes on Production and Imports Less Subsidies

121.5

261.8

115.5

Net Operating Surplus

259.2

520.2

100.7

Net Interest and Misc.

50.4

128.2

154.4

Business Current Transfer Payment Net

11.5

32.2

180.0

Corporate Profits with IVA and CCA Adjustments

197.2

359.9

82.5

Taxes on Corporate Income

97.0

158.4

63.3

Profits after Tax with IVA and CCA Adjustment

100.2

201.5

101.1

Net Dividends

40.9

126.1

208.3

Undistributed Profits with IVA and CCA Adjustment

59.3

75.4

27.2

Billions of Chained USD 2009 SAAR

      

Gross Value Added of Nonfinancial Corporate Business

2,952.3

4,154.3

40.7

Consumption of Fixed Capital

315.6

464.2

47.1

Net Value Added

2,636.7

3,690.1

40.0

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm

Chart IA1-14 of the US Bureau of Economic Analysis provides quarterly corporate profits after tax and undistributed profits with IVA and CCA from 1979 to 2015. There is tightness between the series of quarterly corporate profits and undistributed profits in the 1980s with significant gap developing from 1988 and to the present with the closest approximation peaking in IVQ2005 and surrounding quarters. These gaps widened during all recessions including in 1991 and 2001 and recovered in expansions with exceptionally weak performance in the current expansion.

clip_image029

Chart IA1-14, US, Corporate Profits after Tax and Undistributed Profits with Inventory Valuation Adjustment and Capital Consumption Adjustment, Quarterly, 1979-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table IA1-7 provides price, costs and profit per unit of gross value added of nonfinancial domestic corporate income for IVQ2007 and IIIQ2015 in the upper block and for IQ1980 and IQ1989 in the lower block. Compensation of employees or labor costs per unit of gross value added of nonfinancial domestic corporate income hardly changed from 0.577 in IVQ2007 to 0.618 in IIIQ2015 in a fractured labor market but increased from 0.340 in IQ1980 to 0.458 in IQ1989 in a more vibrant labor market. Unit nonlabor costs increased mildly from 0.270 per unit of gross value added in IVQ2007 to 0.285 in IIIQ2015 but increased from 0.124 in IQ1980 to 0.190 in IQ1989 in an economy closer to full employment of resources. Profits after tax with IVA and CCA per unit of gross value added of nonfinancial domestic corporate income increased from 0.076 in IVQ2007 to 0.108 in IIIQ2015 and from 0.029 in IQ1980 to 0.042 in IQ1989.

Table IA1-7, US, Price, Costs and Profit per Unit of Gross Value Added of Nonfinancial Domestic Corporate Income

 

IVQ2007

IIIQ2015

Price per Unit of Real Gross Value Added of Nonfinancial Corporate Business

0.961

1.053

Compensation of Employees (Unit Labor Cost)

0.577

0.618

Unit Nonlabor Cost

0.270

0.285

Consumption of Fixed Capital

0.140

0.157

Taxes on Production and Imports less Subsidies plus Business Current Transfer Payments (net)

0.093

0.098

Net Interest and Misc. Payments

0.037

0.030

Corporate Profits with IVA and CCA Adjustment (Unit Profits from Current Production)

0.114

0.149

Taxes on Corporate Income

0.038

0.042

Profits after Tax with IVA and CCA Adjustment

0.076

0.108
 

IQ1980

IQ1989

Price per Unit of Real Gross Value Added of Nonfinancial Corporate Business

0.518

0.717

Compensation of Employees (Unit Labor Cost)

0.340

0.458

Unit Nonlabor Cost

0.124

0.190

Consumption of Fixed Capital

0.064

0.089

Taxes on Production and Imports less Subsidies plus Business Current Transfer Payments (net)

0.042

0.064

Net Interest and Misc. Payments

0.018

0.037

Corporate Profits with IVA and CCA Adjustment (Unit Profits from Current Production)

0.055

0.069

Taxes on Corporate Income

0.026

0.027

Profits after Tax with IVA and CCA Adjustment

0.029

0.042

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm

Chart IA1-15 provides quarterly profits after tax with IVA and CCA per unit of gross value added of nonfinancial domestic corporate income from 1980 to 2015. In an environment of idle labor and other productive resources nonfinancial corporate income increased after tax profits with IVA and CCA per unit of gross value added at a faster pace in the weak economy from IVQ2007 to IIIQ2015 than in the vibrant expansion following the cyclical contractions of the 1980s. Part of the profits was distributed as dividends and significant part was retained as undistributed profits in the current economic cycle with frustrated investment decision.

clip_image030

Chart IA1-15, US, Profits after Tax with Inventory Valuation Adjustment and Capital Consumption Adjustment per Unit of Gross Value Added of Nonfinancial Domestic Corporate Income, 1980-2015

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table IA1-8 provides percentage changes of corporate profits in 2013 and 2014 and seasonally adjusted annual rates of change of corporate profits from IVQ2014 to IIIQ2015. Corporate profits with IVA and CCA fell at 1.2 percent in IVQ2014 and fell at 1.2 percent after taxes. Corporate profits with IVA and CCA fell at 5.8 percent in IQ2015 and fell at 7.9 percent after taxes. Corporate profits with IVA and CCA increased at 3.5 percent in IIQ2015 and at 2.6 percent after taxes. Corporate profits with IVA and CCA decreased at 1.6 percent in IIIQ2015 and decreased after taxes at 1.7 percent in IIIQ2015. Corporate profits with IVA and CCA decreased 5.1 percent in IIIQ2015 relative to IIIQ2014 and profits after tax with IVA and CCA decreased 8.2 percent in IIIQ2015 relative to IIIQ2014. Net dividends increased at 2.2 percent in IVQ2014. Net dividends increased at 0.7 percent in IQ2015. Net dividends increased at 0.1 percent in IIQ2015 and increased at 3.0 percent in IIIQ2015. Net dividends increased 6.1 percent in IIIQ2015 relative to a year earlier. Undistributed profits fell at 4.8 percent in IVQ2014. Undistributed profits fell at 17.9 percent in IQ2015. Undistributed profits increased at 6.2 percent in IIQ2015. Undistributed profits fell at 8.0 percent in IIIQ2015. Undistributed profits decreased at 23.7 percent in IIIQ2015 relative to IIIQ2014.

Table IA1-8, Quarterly Seasonally Adjusted Annual Equivalent Percentage Rates of Change of Corporate Profits, ∆%

 

2013

2014

IVQ 2014

IQ
2015

IIQ 2015

IIIQ

2015

IIIQ15/ IIIQ14

Corporate Profits with IVA and CCA

2.0

1.7

-1.2

-5.8

3.5

-1.6

-5.1

Corporate Income Taxes

4.8

9.6

-1.2

1.1

6.0

-1.2

4.6

After Tax Profits with IVA and CCA

1.2

-0.6

-1.2

-7.9

2.6

-1.7

-8.2

Net Dividends

7.5

-6.9

2.2

0.7

0.1

3.0

6.1

Und Profits with IVA and CCA

-6.8

8.5

-4.8

-17.9

6.2

-8.0

-23.7

Source: US Bureau of Economic Analysis

http://bea.gov/iTable/index_nipa.cfm

Table IA1-9 provides change from prior quarter of the level of seasonally adjusted annual rates of US corporate profits. There are three aspects. First, there is decrease in corporate profits. Corporate profits with IVA and CCA decreased at 25.5 billion in IVQ2014. Corporate profits with IVA and CCA decreased at $123.0 billion in IQ2015 and increased at $70.5 billion in IIQ2015. Corporate profits with IVA and CCA decreased at $33.1 billion in IIIQ2015. Profits after tax with IVA and CCA fell at $19.5 billion in IVQ2014 and decreased at $128.5 billion in IQ2015. Profits after tax with IVA and CCA increased at $39.2 billion in IIQ2015. Profits after tax with IVA and CCA decreased at $26.2 billion in IIIQ2015. Net dividends increased at $18.6 billion in IVQ2014. Net dividends increased at $6.3 billion in IQ2015. Net dividends increased at $1.1 billion in IIQ2015 and increased at $26.1 billion in IIIQ2015. Undistributed profits with IVA and CCA decreased at $38.1 billion in IVQ2014. Undistributed corporate profits fell at $134.7 billion in IQ2015 and increased at $38.0 billion in IIQ2015. Undistributed profits with IVA and CCA decreased at $52.2 billion in IIIQ2015. Undistributed corporate profits swelled 227.4 percent from $107.7 billion in IQ2007 to $352.6 billion in IIIQ2015 and changed signs from minus $55.9 billion in current dollars in IVQ2007. Uncertainty originating in fiscal, regulatory and monetary policy causes wide swings in expectations and decisions by the private sector with adverse effects on investment, real economic activity and employment. Second, sharp and continuing strengthening of the dollar is affecting balance sheets of US corporations with foreign operations (http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010318) and the overall US economy. The bottom part of Table IA1-9 provides the breakdown of corporate profits with IVA and CCA in domestic industries and the rest of the world. Corporate profits with IVA and CCA fell at $33.1 billion in IIIQ2015 with decrease of domestic industries at $10.0 billion, mostly because of decrease of nonfinancial business at $11.8 billion, and decrease of profits from operations in the rest of the world at $23.1 billion. Receipts from the rest of the world fell at $3.5 billion. Total corporate profits with IVA and CCA were $2049.9 billion in IIIQ2015 of which $1667.9 billion from domestic industries, or 81.4 percent of the total, and $382.0 billion, or 18.6 percent, from the rest of the world. Nonfinancial corporate profits of $1271.0 billion account for 62.0 percent of the total. Third, there is reduction in the use of corporate cash for investment. Vipal Monga, David Benoit and Theo Francis, writing on “Companies send more cash back to shareholders,” published on May 26, 2015 in the Wall Street Journal (http://www.wsj.com/articles/companies-send-more-cash-back-to-shareholders-1432693805?tesla=y), use data of a study by Capital IQ conducted for the Wall Street Journal. This study shows that companies in the S&P 500 reduced investment in plant and equipment to median 29 percent of operating cash flow in 2013 from 33 percent in 2003 while increasing dividends and buybacks to median 36 percent in 2013 from 18 percent in 2003.

Table IA1-9, Change from Prior Quarter of Level of Seasonally Adjusted Annual Equivalent Rates of Corporate Profits, Billions of Dollars

 

2013

2014

IVQ

2014

IQ
2015

IIQ

2015

IIIQ      

2015

Corporate Profits with IVA and CCA

39.2

35.5

-25.5

-123.0

70.5

-33.1

Corporate Income Taxes

21.3

45.0

-6.1

5.5

31.2

-6.8

After Tax Profits with IVA and CCA

18.0

-9.4

-19.5

-128.5

39.2

-26.2

Net Dividends

64.6

-64.0

18.6

6.3

1.1

26.1

Und Profits with IVA and CCA

-46.7

54.5

-38.1

-134.7

38.0

-52.2

Corporate Profits with IVA and CCA

39.2

35.5

-25.5

-123.0

70.5

-33.1

Domestic Industries

34.8

32.1

-21.1

-93.9

59.0

-10.0

Financial

-52.4

-2.2

-22.6

-23.4

34.7

1.8

Nonfinancial

87.1

34.3

1.5

-70.5

24.3

-11.8

Rest of the World

4.5

3.4

-4.4

-29.1

11.5

-23.1

Receipts from Rest of the World

18.4

21.6

-13.6

-40.0

24.9

-3.5

Payments to the Rest of the World

14.0

18.2

-9.1

-11.0

13.4

19.5

Source: Bureau of Economic Analysis

http://bea.gov/iTable/index_nipa.cfm

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015

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