Saturday, January 4, 2020

Fluctuating Valuations of Risk Financial Assets, Mediocre Cyclical United States Economic Growth with GDP Three Trillion Dollars Below Trend in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Cyclically Stagnating Real Fixed Investment, Swelling Undistributed Corporate Profits, United States Terms of International Trade, United States Housing, Sales of New Houses, United States House Prices, World Cyclical Slow Growth, Government Intervention in Globalization, and Global Recession Risk: Part I


Fluctuating Valuations of Risk Financial Assets, Mediocre Cyclical United States Economic Growth with GDP Three Trillion Dollars Below Trend in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Cyclically Stagnating Real Fixed Investment, Swelling Undistributed Corporate Profits, United States Terms of International Trade, United States Housing, Sales of New Houses, United States House Prices, World Cyclical Slow Growth, Government Intervention in Globalization, and Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020

I Mediocre Cyclical United States Economic Growth with GDP Three Trillion Dollars Below Trend in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide

IA Mediocre Cyclical United States Economic Growth

IA1 Stagnating Real Private Fixed Investment

IA2 Swelling Undistributed Corporate Profits

IID United States Terms of International Trade

IIA United States Housing Collapse

IIA1 Sales of New Houses

IIA2 United States House Prices

III World Financial Turbulence

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

I Mediocre Cyclical United States Economic Growth with GDP Three 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 14.3 percent below trend. Section IA1 Stagnating Real Private Fixed Investment analyzes weakness in investment in the initial part of the cycle followed by stronger performance and recent weakness. Section IA2 Swelling Undistributed Corporate Profits provides the analysis of corporate profits.

There is socio-economic stress in the combination of adverse events and cyclical performance:

and earlier http://cmpassocregulationblog.blogspot.com/2015/07/fluctuating-risk-financial-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/fluctuating-valuations-of-financial.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/global-portfolio-reallocations-squeeze.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/impatience-with-monetary-policy-of.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/02/world-financial-turbulence-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2015/01/exchange-rate-conflicts-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html and earlier http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html and earlier http://cmpassocregulationblog.blogspot.com/2014/10/imf-view-squeeze-of-economic-activity.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html)

The Bureau of Economic Analysis revised the national accounts of the United States since 1929 (https://www.bea.gov/newsreleases/national/gdp/2018/pdf/gdp2q18_adv.pdf):

“Comprehensive Update of the National Income and Product Accounts The estimates released today also reflect the results of the 15th comprehensive update of the National Income and Product Accounts (NIPAs). The updated estimates reflect previously announced improvements, and include the introduction of new not seasonally adjusted estimates for GDP, GDI, and their major components. For more information, see the Technical Note. Revised NIPA table stubs, initial results, and background materials are available on the BEA Web site.” The Bureau of Economic Analysis provided the annual revision of the national product accounts in the release of the first estimate or advanced estimate of IIQ2019 GDP (https://www.bea.gov/system/files/2019-07/gdp2q19_adv.pdf): “The estimates released today also reflect the results of the Annual Update of the National Income and

Product Accounts (NIPAs). The update covers the first quarter of 2014 through the first quarter of 2019.”

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 2.3 percent on average in the cyclical expansion in the 41 quarters from IIIQ2009 to IIIQ2019. 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 IIIQ2019 (https://www.bea.gov/system/files/2019-12/gdp3q19_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 2.8 percent obtained by dividing GDP of $15,557.3 billion in IIQ2010 by GDP of $15,134.1 billion in IIQ2009 {[($15,557.3/$15,134.1) -1]100 = 2.8%], or accumulating the quarter on quarter growth rates (Section I and earlier https://cmpassocregulationblog.blogspot.com/2019/11/fluctuating-valuations-of-risk.html). The expansion from IQ1983 to IQ1986 was at the average annual growth rate of 5.7 percent, 5.3 percent from IQ1983 to IIIQ1986, 5.1 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, 4.7 percent from IQ1983 to IIQ1989, 4.6 percent from IQ1983 to IIIQ1989, 4.5 percent from IQ1983 to IVQ1989. 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990, 4.0 percent from IQ1983 to IVQ1990, 3.8 percent from IQ1983 to IQ1991, 3.8 percent from IQ1983 to IIQ1991, 3.8 percent from IQ1983 to IIIQ1991, 3.7 percent from IQ1983 to IVQ1991, 3.7 percent from IQ1983 to IQ1992, 3.7 percent from IQ1983 to IIQ1992, 3.7 percent from IQ1983 to IIIQ2019, 3.8 percent from IQ1983 to IVQ1992, 3.7 percent from IQ1983 to IQ1993 and at 7.9 percent from IQ1983 to IVQ1983 (Section I and earlier https://cmpassocregulationblog.blogspot.com/2019/11/fluctuating-valuations-of-risk.html). The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://apps.bea.gov/iTable/index_nipa.cfm). 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 IIIQ2019 would have accumulated to 41.5 percent. GDP in IIIQ2019 would be $22,303.2 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $3182.1 billion than actual $19,121.1 billion. There are more than three trillion dollars of GDP less than at trend, explaining the 18.5 million unemployed or underemployed equivalent to actual unemployment/underemployment of 10.8 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2019/12/increase-in-valuations-of-risk.html and earlier https://cmpassocregulationblog.blogspot.com/2019/11/increasing-valuations-of-risk-financial.html). US GDP in IIIQ2019 is 14.3 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $19,121.1 billion in IIIQ2019 or 21.3 percent at the average annual equivalent rate of 1.7 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. 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 3.0 percent per year from Nov 1919 to Nov 2019. Growth at 3.0 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 154.0282 in Nov 2019. The actual index NSA in Nov 2019 is 104.7173 which is 32.0 percent below trend. Manufacturing grew at the average annual rate of 3.3 percent between Dec 1986 and Dec 2006. Growth at 3.3 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 159.4601 in Nov 2019. The actual index NSA in Nov 2019 is 104.7173, which is 34.3 percent below trend. Manufacturing output grew at average 1.9 percent between Dec 1986 and Nov 2019. Using trend growth of 1.9 percent per year, the index would increase to 135.5290 in Nov 2019. The output of manufacturing at 104.7173 in Nov 2019 is 22.7 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 110.5147 in Jun 2007 to the low of 86.3800 in Apr 2009 or 21.8 percent. The NAICS manufacturing index increased from 86.3800 in Apr 2009 to 105.8734 in Nov 2019 or 22.6 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 106.6777 in Dec 2007 to 160.7359 in Nov 2019. The NAICS index at 105.8734 in Nov 2019 is 34.1 below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 106.6777 in Dec 2007 to 130.4112 in Nov 2019. The NAICS index at 105.8734 in Nov 2019 is 18.8 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 2.6 percent on an annual basis in 2010 to 1.6 percent in 2011, 2.2 percent in 2012, 1.8 percent in 2013, 2.5 percent in 2014 and 2.9 percent in 2015. GDP growth was 1.6 percent in 2016 and 2.4 percent in 2017. GDP growth was 2.9 percent in 2018. The following calculations show that actual growth is around 2.3 percent per year during the expansion phase. The rate of growth of 1.6 percent in the entire cycle from 2007 to 2018 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) provides valuable 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

1929-2018

3.2

1947-2018

3.2

Whole Cycles

1980-1989

3.4

2006-2018

1.6

2007-2018

1.6

Cyclical Contractions ∆%

IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982

-4.8

IVQ2007 to IIQ2009

-4.0

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

IQ1983 to IIQ1989

IQ1983 to IIIQ1989

IQ1983 to IVQ1989

IQ1983 to IQ1990

IQ1983 to IIQ1990

IQ1983 to IIIQ1990

IQ1983 to IVQ1990

5.9

5.7

5.3

5.1

5.0

5.0

4.9

5.0

4.9

4.9

4.8

4.8

4.8

4.7

4.6

4.5

4.5

4.4

4.3

4.0

IQ1983 to IQ1991

IQ1983 to IIQ1991

IQ1983 to IIIQ1991

IQ1983 to IVQ1991

IQ1983 to IQ1992

IQ1983 to IIQ1992

IQ1983 to IIIQ1992

IQ1983 to IVQ1992

IQ1983 to IQ1993

3.8

3.8

3.8

3.7

3.7

3.7

3.7

3.8

3.7

First Four Quarters IQ1983 to IVQ1983

7.9

IIIQ2009 to IIIQ2019

2.3

First Four Quarters IIIQ2009 to IIQ2010

2.8

Real Disposable Income

Real Disposable Income per Capita

Long-Term

1929-2018

3.2

2.0

1947-1999

3.7

2.3

Whole Cycles

1980-1989

3.5

2.6

2006-2018

2.2

1.4

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 2.3 percent per year. Table Summary GDP provides the data.

  1. Average Annual Growth in the Past Thirty Quarters. GDP growth in the four quarters of 2012, the four quarters of 2013, the four quarters of 2014, the four quarters of 2015, the four quarters of 2016, the four quarters of 2017, the four quarters of 2018 and the three quarters of 2019 accumulated to 19.5 percent. This growth is equivalent to 2.3 percent per year, obtained by dividing GDP in IIIQ2019 of $19,121.1 billion by GDP in IVQ2011 of $16,004.1 billion and compounding by 4/31: {[($19,121.1/$16,004.1)4/31 -1]100 = 2.3 percent}.
  2. Average Annual Growth in the Past Four Quarters. GDP growth in the four quarters from IIIQ2018 to IIIQ2019 accumulated to 2.1 percent that is equivalent to 2.1 percent in a year. This is obtained by dividing GDP in IIIQ2019 of $19,121.1 billion by GDP in IIIQ2018 of $18,732.7 billion and compounding by 4/4: {[($19,121.1/$18,732.7)4/4 -1]100 = 2.1%}. The US economy grew 2.1 percent in IIIQ2019 relative to the same quarter a year earlier in IIIQ2018. Growth was at annual equivalent 5.5 percent in IIQ2014 and 5.0 percent IIIQ2014 and only at 2.3 percent in IVQ2014. GDP grew at annual equivalent 3.2 percent in IQ2015, 3.0 percent in IIQ2015, 1.3 percent in IIIQ2015 and 0.1 percent in IVQ2015. GDP grew at annual equivalent 2.0 percent in IQ2016 and at 1.9 percent annual equivalent in IIQ2016. GDP increased at 2.2 percent annual equivalent in IIIQ2016 and at 2.0 percent in IVQ2016. GDP grew at annual equivalent 2.3 percent in IQ2017 and at annual equivalent 2.2 percent in IIQ2017. GDP grew at annual equivalent 3.2 percent in IIIQ2017. GDP grew at annual equivalent 3.5 percent in IVQ2017. GDP grew at annual equivalent 2.5 percent in IQ2018, increasing at 3.5 percent annual equivalent in IIQ2018. GDP grew at annual equivalent 2.9 percent in IIIQ2018 and at 1.1 percent in IVQ2018. GDP grew at annual equivalent 3.1 percent in IQ2019 and at annual equivalent 2.0 percent in IIQ2019. GDP grew at annual equivalent 2.1 percent in IIIQ2019. Another important revelation of the revisions and enhancements is that GDP was flat at 0.1 in IVQ2012, which is in the borderline of contraction, and negative in IQ2014. US GDP fell 0.3 percent in IQ2014. The rate of growth of GDP in the revision of IIIQ2013 is 3.2 percent in seasonally adjusted annual rate (SAAR).

Table Summary GDP, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2012 Dollars and ∆%

Real GDP, Billions Chained 2012 Dollars

∆% Relative to IVQ2007

∆% Relative to Prior Quarter

∆%
over
Year Earlier

IVQ2007

15,762.0

NA

0.6

2.0

IVQ2011

16,004.1

1.5

1.2

1.6

IQ2012

16,129.5

2.3

0.8

2.7

IIQ2012

16,198.8

2.8

0.4

2.4

IIIQ2012

16,220.7

2.9

0.1

2.5

IVQ2012

16,239.1

3.0

0.1

1.5

IQ2013

16,383.0

3.9

0.9

1.6

IIQ2013

16,403.2

4.1

0.1

1.3

IIIQ2013

16,531.7

4.9

0.8

1.9

IVQ2013

16,663.6

5.7

0.8

2.6

IQ2014

16,616.5

5.4

-0.3

1.4

IIQ2014

16,841.5

6.8

1.4

2.7

IIIQ2014

17,047.1

8.2

1.2

3.1

IVQ2014

17,143.0

8.8

0.6

2.9

IQ2015

17,277.6

9.6

0.8

4.0

IIQ2015

17,405.7

10.4

0.7

3.4

IIIQ2015

17,463.2

10.8

0.3

2.4

IVQ2015

17,468.9

10.8

0.0

1.9

IQ2016

17,556.8

11.4

0.5

1.6

IIQ2016

17,639.4

11.9

0.5

1.3

IIIQ2016

17,735.1

12.5

0.5

1.6

IVQ2016

17,824.2

13.1

0.5

2.0

IQ2017

17,925.3

13.7

0.6

2.1

IIQ2017

18,021.0

14.3

0.5

2.2

IIIQ2017

18,163.6

15.2

0.8

2.4

IVQ2017

18,322.5

16.2

0.9

2.8

IQ2018

18,438.3

17.0

0.6

2.9

IIQ2018

18,598.1

18.0

0.9

3.2

IIIQ2018

18,732.7

18.8

0.7

3.1

IVQ2018

18,783.5

19.2

0.3

2.5

IQ2019

18,927.3

20.1

0.8

2.7

IIQ2019

19,021.9

20.7

0.5

2.3

IIIQ2019

19,121.1

21.3

0.5

2.1

Cumulative ∆% IQ2012 to IIIQ2019

19.5

Annual Equivalent ∆%

2.3

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

Chart GDP of the US Bureau of Economic Analysis provides the rates of growth of GDP at SAAR (seasonally adjusted annual rate) in the 16 quarters from IVQ2015 to IIIQ2019. Growth has been fluctuating.

clip_image002

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

Source: US Bureau of Economic Analysis

https://www.bea.gov/data/gdp/gross-domestic-product

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 IIQ1954 to IIIQ1955: 4.6, 8.1, 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, 7.9 and 9.3. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IQ1976: 2.9, 7.0, 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 cycle 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

-1.9

E IIIQ1954-IIQ1955

1954

4.6

8.1

1955

11.9

6.7

R IIIQ1957-IIQ1958

1957

-4.1

1958

-10.0

E IIIQ1958-IIQ1959

1958

9.6

9.7

1959

7.9

9.3

R IVQ1969-IV1970

1969

-1.9

1970

-0.6

E IIQ1970-IQ1971

1970

0.6

3.7

-4.2

1971

11.3

R IVQ1973-IQ1975

1973

3.8

1974

-3.4

1.0

-3.7

-1.5

1975

-4.8

E IIQ1975-IQ1976

1975

2.9

7.0

5.5

1976

9.3

R IQ1980-IIIQ1980

1980

1.3

-8.0

-0.5

R IQ1981-IVQ1982

1981

8.1

-2.9

4.9

-4.3

1982

-6.1

1.8

-1.5

0.2

E IQ1983-IVQ1983

1983

5.4

9.4

8.2

8.6

R IVQ2007-IIQ2009

2008

-2.3

2.1

-2.1

-8.4

2009

-4.4

-0.6

E IIIQ2009-IIQ2010

2009

1.5

4.5

2010

1.5

3.7

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 4.8 percent is more comparable to the latest revised 4.0 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 Jul 27, 2016, subsequent revisions, the revision since 1929 (https://www.bea.gov/newsreleases/national/gdp/2018/pdf/gdp2q18_adv.pdf), revising data since 1929 (“Comprehensive Update of the National Income and Product Accounts The estimates released today also reflect the results of the 15th comprehensive update of the National Income and Product Accounts (NIPAs). The updated estimates reflect previously announced improvements, and include the introduction of new not seasonally adjusted estimates for GDP, GDI, and their major components. For more information, see the Technical Note. Revised NIPA table stubs, initial results, and background materials are available on the BEA Web site.”) and the third estimate for IIQ2019 (https://www.bea.gov/system/files/2019-09/gdp2q19_3rd.pdf) revising estimates from IQ2014 through IQ2019, which are available in the dataset of the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). There is a third estimate for IIIQ2019 (https://www.bea.gov/system/files/2019-12/gdp3q19_3rd.pdf). There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.1 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.6 percent to -8.4 percent. The striking difference is that in the first forty one quarters of expansion from IQ1983 to IQ1993, shown in Table I-2 in relief, GDP grew at the high quarterly percentage growth rates of 5.4, 9.4, 8.2, 8.6, 8.1, 7.1, 3.9, 3.3, 3.9, 3.6, 6.2, 3.0, 3.8, 1.8, 3.9, 2.2, 3.0, 4.4, 3.5, 7.0, 2.1, 5.4, 2.4, 5.4, 4.1, 3.1, 3.0, 0.8, 4.4, 1.5, 0.3, minus 3.6, minus 1.9, 3.2, 2.0, 1.4 , 4.9, 4.4, 4.0, 4.2 and 0.7. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm). Table III-1 shows weaker performance in IIQ1990 and IIIQ1990 and contractions at 3.6 percent in IVQ1990 and 1.9 percent in IQ1991. In contrast, the percentage growth rates in the first forty one quarters of expansion from IIIQ2009 to IIIQ2019 shown in relief in Table I-2 were mediocre: 1.5, 4.5, 1.5, 3.7, 3.0, 2.0, -1.0, 2.9, -0.1, 4.7, 3.2, 1.7, 0.5, 0.5, 3.6, 0.5, 3.2, 3.2, minus 1.1, 5.5, 5.0, 2.3, 3.2, 3.0, 1.3, 0.1, 2.0, 1.9, 2.2, 2.0, 2.3, 2.2, 3.2, 3.5, 2.5, 3.5, 2.9, 1.1, 3.1, 2.0 and 2.1. Economic growth and employment creation continued at slow rhythm during 2012 and in 2013-2019 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

8.1

-6.1

5.4

8.1

-2.3

-4.4

1.5

II

-2.9

1.8

9.4

7.1

2.1

-0.6

3.7

III

4.9

-1.5

8.2

3.9

-2.1

1.5

3.0

IV

-4.3

0.2

8.6

3.3

-8.4

4.5

2.0

1985

2011

I

3.9

-1.0

II

3.6

2.9

III

6.2

-0.1

IV

3.0

4.7

1986

2012

I

3.8

3.2

II

1.8

1.7

III

3.9

0.5

IV

2.2

0.5

1987

2013

I

3.0

3.6

II

4.4

0.5

III

3.5

3.2

IV

7.0

3.2

1988

2014

I

2.1

-1.1

II

5.4

5.5

III

2.4

5.0

IV

5.4

2.3

1989

2015

I

4.1

3.2

II

3.1

3.0

III

3.0

1.3

IV

0.8

0.1

1990

2016

I

4.4

2.0

II

1.5

1.9

III

0.3

2.2

IV

-3.6

2.0

1991

2017

I

-1.9

2.3

II

3.2

2.2

III

2.0

3.2

IV

1.4

3.5

1992

2018

I

4.9

2.5

II

4.4

3.5

III

4.0

2.9

IV

4.2

1.1

1993

2019

I

0.7

3.1

II

2.3

2.0

III

1.9

2.1

IV

5.6

1994

I

3.9

II

5.5

III

2.4

IV

4.7

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

Chart I-1 provides the real GDP of the US between 1929 and 1999. US GDP grew at the yearly average rate of 3.5 percent between 1929 and 1999. 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_image004

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 2018. 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 2018 is 3.2 percent. The average growth rate from IV2007 to IIQ2019 is only 1.6 percent with 2.9 percent annual equivalent from the end of the recession in IVQ2001 to the end of the expansion in IVQ2007. US economic growth has been at only 2.3 percent on average in the cyclical expansion in the 41 quarters from IIIQ2009 to IIIQ2019. 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 IIIQ2019 (https://www.bea.gov/system/files/2019-12/gdp3q19_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 2.8 percent obtained by dividing GDP of $15,557.3 billion in IIQ2010 by GDP of $15,134.1 billion in IIQ2009 {[($15,557.3/$15,134.1) -1]100 = 2.8%], or accumulating the quarter on quarter growth rates (Section I and earlier https://cmpassocregulationblog.blogspot.com/2019/11/fluctuating-valuations-of-risk.html). The expansion from IQ1983 to IQ1986 was at the average annual growth rate of 5.7 percent, 5.3 percent from IQ1983 to IIIQ1986, 5.1 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, 4.7 percent from IQ1983 to IIQ1989, 4.6 percent from IQ1983 to IIIQ1989, 4.5 percent from IQ1983 to IVQ1989. 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990, 4.0 percent from IQ1983 to IVQ1990, 3.8 percent from IQ1983 to IQ1991, 3.8 percent from IQ1983 to IIQ1991, 3.8 percent from IQ1983 to IIIQ1991, 3.7 percent from IQ1983 to IVQ1991, 3.7 percent from IQ1983 to IQ1992, 3.7 percent from IQ1983 to IIQ1992, 3.7 percent from IQ1983 to IIIQ2019, 3.8 percent from IQ1983 to IVQ1992, 3.7 percent from IQ1983 to IQ1993 and at 7.9 percent from IQ1983 to IVQ1983 (Section I and earlier https://cmpassocregulationblog.blogspot.com/2019/11/fluctuating-valuations-of-risk.html). The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://apps.bea.gov/iTable/index_nipa.cfm). 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 IIIQ2019 would have accumulated to 41.5 percent. GDP in IIIQ2019 would be $22,303.2 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $3182.1 billion than actual $19,121.1 billion. There are more than three trillion dollars of GDP less than at trend, explaining the 18.5 million unemployed or underemployed equivalent to actual unemployment/underemployment of 10.8 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2019/12/increase-in-valuations-of-risk.html and earlier https://cmpassocregulationblog.blogspot.com/2019/11/increasing-valuations-of-risk-financial.html). US GDP in IIIQ2019 is 14.3 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $19,121.1 billion in IIIQ2019 or 21.3 percent at the average annual equivalent rate of 1.7 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. 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 3.0 percent per year from Nov 1919 to Nov 2019. Growth at 3.0 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 154.0282 in Nov 2019. The actual index NSA in Nov 2019 is 104.7173 which is 32.0 percent below trend. Manufacturing grew at the average annual rate of 3.3 percent between Dec 1986 and Dec 2006. Growth at 3.3 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 159.4601 in Nov 2019. The actual index NSA in Nov 2019 is 104.7173, which is 34.3 percent below trend. Manufacturing output grew at average 1.9 percent between Dec 1986 and Nov 2019. Using trend growth of 1.9 percent per year, the index would increase to 135.5290 in Nov 2019. The output of manufacturing at 104.7173 in Nov 2019 is 22.7 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 110.5147 in Jun 2007 to the low of 86.3800 in Apr 2009 or 21.8 percent. The NAICS manufacturing index increased from 86.3800 in Apr 2009 to 105.8734 in Nov 2019 or 22.6 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 106.6777 in Dec 2007 to 160.7359 in Nov 2019. The NAICS index at 105.8734 in Nov 2019 is 34.1 below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 106.6777 in Dec 2007 to 130.4112 in Nov 2019. The NAICS index at 105.8734 in Nov 2019 is 18.8 percent below trend under this alternative calculation.

clip_image006

Chart I-1A, US, Real GDP 1929-2018

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 2019. 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 2018 is 3.2 percent. The annual equivalent growth rate from IVQ2007 to IIIQ2019 is only 1.7 percent with 2.9 percent from the end of the recession in IVQ2001 to the end of the expansion in IVQ2007.

clip_image008

Chart I-2, US, Real GDP, Quarterly, 1947-2019

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 1983-1992. 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. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

clip_image010

Chart I-3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1993

Source: US Bureau of Economic Analysis

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

In contrast, growth rates in the comparable forty quarters of expansion from 2009 to 2019 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_image012

Chart I-4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2019

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 26.3 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 4.8 percent in the two recessions (1) from IQ1980 to IIIQ1980 and (2) from III1981 to IVQ1982 and 4.0 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, 7.2 percent in 1984, 4.2 percent in 1985, 3.5 percent in 1986, 3.5 percent in 1987, 4.2 percent in 1988 and 3.7 percent in 1989. In contrast, GDP grew 2.6 percent in 2010, 1.6 percent in 2011, 2.2 percent in 2012, 1.8 percent in 2013, 2.5 percent in 2014 and 2.9 percent in 2015. GDP grew 1.6 percent in 2016 and 2.4 percent in 2017. GDP grew 2.9 percent in 2018. Actual annual equivalent GDP growth in the thirty-one quarters from IQ2012 to IIIQ2019 is 2.3 percent and 2.1 percent in the four quarters ending in IIIQ2019. GDP grew at 4.2 percent in 1985, 3.5 percent in 1986, 3.5 percent in 1987, 4.2 percent in 1988 and 3.7 percent in 1989. The forecasts of the central tendency of participants of the Federal Open Market Committee (FOMC) are in the range of 2.0 to 2.2 percent in 2020 (https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20191211.pdf) with less reliable forecast of 1.8 to 2.0 percent in 2021 (https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20191211.pdf). Growth of GDP in the expansion from IIIQ2009 to IIIQ2019 has been at average 2.3 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

-0.3

2000

4.1

1931

-6.4

1981

2.5

2001

1.0

1932

-12.9

1982

-1.8

2002

1.7

1933

-1.2

1983

4.6

2003

2.9

1934

10.8

1984

7.2

2004

3.8

1935

8.9

1985

4.2

2005

3.5

1936

12.9

1986

3.5

2006

2.9

1937

5.1

1987

3.5

2007

1.9

1938

-3.3

1988

4.2

2008

-0.1

1939

8.0

1989

3.7

2009

-2.5

1940

8.8

1990

1.9

2010

2.6

1941

17.7

1991

-0.1

2011

1.6

1942

18.9

1992

3.5

2012

2.2

1943

17.0

1993

2.8

2013

1.8

1944

8.0

1994

4.0

2014

2.5

1945

-1.0

1995

2.7

2015

2.9

1946

-11.6

1996

3.8

2016

1.6

1947

-1.1

1997

4.4

2017

2.4

1948

4.1

1998

4.5

2018

2.9

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_image014

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. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

clip_image016

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

Source: US Bureau of Economic Analysis

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

Chart I-7 provides the rates of growth during the 2000s. Growth rates in the initial thirty-two 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 10.8 percent of the effective US labor force (https://cmpassocregulationblog.blogspot.com/2019/12/increase-in-valuations-of-risk.html and earlier https://cmpassocregulationblog.blogspot.com/2019/11/increasing-valuations-of-risk-financial.html).

clip_image018

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 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 4.8 percent, which is almost equal to the decline of 4.0 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 26.3 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

-2.6

-0.65

IVQ2007 to IIQ2009

6

-4.0

-0.7

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 2.3 percent of the US economy in the forty-one quarters of the current cyclical expansion from IIIQ2009 to IIIQ2019. In sharp contrast, the average growth rate of GDP was:

  • 5.7 percent in the first thirteen quarters of expansion from IQ1983 to IQ1986
  • 5.3 percent in the first fifteen quarters of expansion from IQ1983 to IIIQ1986
  • 5.1 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
  • 4.7 percent in the first twenty-six quarters of expansion from IQ1983 to IIQ1989
  • 4.6 percent in the first twenty-seven quarters of expansion from IQ1983 to IIIQ1989
  • 4.5 percent in the first twenty-eight quarters of expansion from IQ1983 to IVQ1989
  • 4.5 percent in the first twenty-nine quarters of expansion from IQ1983 to IQ1990
  • 4.4 percent in the first thirty quarters of expansion from IQ1983 to IIQ1990
  • 4.3 percent in the first thirty-one quarters of expansion from IQ1983 to IIIQ1990
  • 4.0 percent in the first thirty-two quarters of expansion from IQ1983 to IVQ1990
  • 3.8 percent in the first thirty-three quarters of expansion from IQ1983 to IQ1991
  • 3.8 percent in the first thirty-four quarters of expansion from IQ1983 to IIQ1991
  • 3.8 percent in the first thirty-five quarters of expansion from IQ1983 to IIIQ1991
  • 3.7 percent in the thirty-six quarters of expansion from IQ1983 to IVQ1991
  • 3.7 percent in the thirty-seven quarters of expansion from IQ1983 to IQ1992
  • 3.7 percent in the thirty-eight quarters of expansion from IQ1983 to IIQ1992
  • 3.7 percent in the thirty-nine quarters of expansion from IQ1983 to IIIQ1992
  • 3.8 percent in the forty quarters of expansion from IQ1983 to IVQ1992
  • 3.7 percent in the forty-one quarters from IQ1983 to IQ1993

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 7.9 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 relative to historical experience with annual growth of 2.6 percent in 2010 decelerating to 1.6 percent annual growth in 2011, 2.2 percent in 2012, 1.8 percent in 2013, 2.5 percent in 2014, 2.9 percent in 2015, 1.6 percent in 2016, 2.4 percent in 2017 and 2.9 percent in 2018 (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, 5.1 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, 4.7 percent from IQ1983 to IIQ1989, 4.6 percent from IQ1983 to IIIQ1989. 4.5 percent from IQ1983 to IVQ1989, 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990. 4.0 percent from IQ1983 to IVQ1990. 3.8 percent from IQ1983 to IQ1991, 3.8 percent from IQ1983 to IIQ1991, 3.8 percent from IQ1983 to IIIQ1991. 3.7 percent from IQ1983 to IVQ1991, 3.7 percent from IQ1983 to IQ1992, 3.7 percent from IQ1983 to IIQ1992, 3.7 percent from IQ1983 to IIIQ1992, 3.8 percent from IQ1983 to IVQ1992, 3.7 percent from IQ1983 to IQ1993 and at 7.9 percent from IQ1983 to IVQ1983. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm). GDP grew 2.8 percent in the first four quarters of the expansion from IIIQ2009 to IIQ2010. GDP growth in the thirty-one quarters from IQ2012 to IIIQ2019 accumulated to 19.5 percent. This growth is equivalent to 2.3 percent per year, obtained by dividing GDP in IIIQ2019 of $19,121.1 billion by GDP in IVQ2011 of $16,004.1 billion and compounding by 4/31: {[($19,121.1/$16,004.1)4/31 -1]100 = 2.3 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

IQ1983 to IIQ1989

IQ1983 to IIIQ1989

IQ1983 to IVQ1989

IQ1983 to IQ1990

IQ1983 to IIQ1990

IQ1983 to IIIQ1990

IQ1983 to IVQ1990

IQ1983 to IQ1991

IQ1983 to IIQ1991

IQ1983 to IIIQ1991

IQ1983 to IVQ1991

IQ1983 to IQ1992

IQ1983 to IIQ1992

IQ1983 to IIIQ1992

IQ1983 to IVQ1992

IQ1983 to IQ1993

13

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

19.8

21.5

22.1

23.0

24.4

25.4

27.6

28.3

29.9

30.7

32.5

33.8

34.8

35.8

36.1

37.6

38.1

38.2

36.9

36.3

37.3

38.0

38.5

40.2

41.7

43.1

44.6

44.8

5.7

5.3

5.1

5.0

5.0

4.9

5.0

4.9

4.9

4.8

4.8

4.8

4.7

4.6

4.5

4.5

4.4

4.3

4.0

3.8

3.8

3.8

3.7

3.7

3.7

3.7

3.8

3.7

First Four Quarters IQ1983 to IVQ1983

4

7.9

Average First Four Quarters in Four Expansions*

7.7

IIIQ2009 to IIIQ2019

41

26.3

2.3

First Four Quarters IIIQ2009 to IIQ2010

2.8

*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 1993. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

clip_image020

Chart I-8, US, Real GDP, 1980-1993

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 2019. The economy has underperformed during the first forty quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous cyclical slow growth.

clip_image022

Chart I-9, US, Real GDP, 2007-2019

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 4.0 percent but the gain in the cyclical expansion has been only 26.3 percent (first to the last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IIIQ2019 with the second estimate and revisions is higher by only 21.3 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 IIIQ2019 would have accumulated to 41.5 percent. GDP in IIIQ2019 would be $22,303.2 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $3182.1 billion than actual $19,121.1 billion. There are more than three trillion dollars of GDP less than at trend, explaining the 18.5 million unemployed or underemployed equivalent to actual unemployment/underemployment of 10.8 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2019/12/increase-in-valuations-of-risk.html and earlier https://cmpassocregulationblog.blogspot.com/2019/11/increasing-valuations-of-risk-financial.html). US GDP in IIIQ2019 is 14.3 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $19,121.1 billion in IIIQ2019 or 21.3 percent at the average annual equivalent rate of 1.7 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. 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 3.0 percent per year from Nov 1919 to Nov 2019. Growth at 3.0 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 154.0282 in Nov 2019. The actual index NSA in Nov 2019 is 104.7173 which is 32.0 percent below trend. Manufacturing grew at the average annual rate of 3.3 percent between Dec 1986 and Dec 2006. Growth at 3.3 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 159.4601 in Nov 2019. The actual index NSA in Nov 2019 is 104.7173, which is 34.3 percent below trend. Manufacturing output grew at average 1.9 percent between Dec 1986 and Nov 2019. Using trend growth of 1.9 percent per year, the index would increase to 135.5290 in Nov 2019. The output of manufacturing at 104.7173 in Nov 2019 is 22.7 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 110.5147 in Jun 2007 to the low of 86.3800 in Apr 2009 or 21.8 percent. The NAICS manufacturing index increased from 86.3800 in Apr 2009 to 105.8734 in Nov 2019 or 22.6 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 106.6777 in Dec 2007 to 160.7359 in Nov 2019. The NAICS index at 105.8734 in Nov 2019 is 34.1 below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 106.6777 in Dec 2007 to 130.4112 in Nov 2019. The NAICS index at 105.8734 in Nov 2019 is 18.8 percent below trend under this alternative calculation.

Table I-6 shows that the contraction concentrated in two quarters: decline of 2.2 percent in IVQ2008 relative to the prior quarter and decline of 1.1 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.3 percent {[(1-0.022) x (1-0.011) -1]100 = -3.3%}, or {[(IQ2009 $15,155.9)/(IIIQ2008 $15,677.0) – 1]100 = -3.3%} 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 0.4 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 1.1 percent in IVQ2009, 0.4 percent in IQ2010, 0.9 percent in IIQ2010 and nearly equal growth at 0.7 percent in IIIQ2010 and 0.5 percent in IVQ2010 for cumulative growth in those five quarters of 3.8 percent, obtained by accumulating the quarterly rates {[(1.011 x 1.004 x 1.009 x 1.007 x 1.005) – 1]100 = 3.7%} or {[(IVQ2010 $15,750.6)/(IIIQ2009 $15,189.2) – 1]100 = 3.7%} with minor rounding difference. The economy then stalled during the first half of 2011 with decline of 0.2 percent in IQ2011 and growth of 0.7 percent in IIQ2011 for combined annual equivalent rate of 1.0 percent {(0.998 x 1.007)2}. The economy grew 0.0 percent in IIIQ2011 for annual equivalent growth of 0.0 percent in the first three quarters {[(0.998 x 1.007 x 1.00)4/3 -1]100 = 0.7%}. Growth picked up in IVQ2011 with 1.2 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table I-6 slows from over 2.6 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 1.9 percent in IQ2011, 1.7 percent in IIQ2011, 0.9 percent in IIIQ2011 and 1.6 percent in IVQ2011. As shown below, growth of 1.2 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.8 percent relative to IVQ2011 and 2.7 percent relative to IQ2011, decelerating to 0.4 percent in IIQ2012 and 2.4 percent relative to IIQ2011 and 0.1 percent in IIIQ2012 and 2.5 percent relative to IIIQ2011. Growth was 0.1 percent in IVQ2012 with 1.5 percent relative to a year earlier but mostly because of deduction of 1.70 percentage points of inventory divestment and 0.63 percentage points of reduction of one-time national defense expenditures. Growth was 0.9 percent in IQ2013 and 1.6 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 0.1 percent in IIQ2013 and 1.3 percent relative to a year earlier. In IIIQ2013, GDP grew 0.8 percent relative to the prior quarter and 1.9 percent relative to the same quarter a year earlier with inventory accumulation contributing 1.48 percentage points to growth at 3.2 percent SAAR in IIIQ2013. GDP increased 0.8 percent in IVQ2013 and 2.6 percent relative to a year earlier. GDP fell 0.3 percent in IQ2014 and grew 1.4 percent relative to a year earlier. Inventory divestment deducted 1.40 percentage points from GDP growth in IQ2014. GDP grew 1.4 percent in IIQ2014, 2.7 percent relative to a year earlier and at 5.5 SAAR with inventory change contributing 1.05 percentage points. GDP grew 1.2 percent in IIIQ2014 and 3.1 percent relative to a year earlier. GDP grew 0.6 percent in IVQ2014 and 2.9 percent relative to a year earlier. GDP increased 0.8 percent in IQ2015 and increased 4.0 percent relative to a year earlier partly because of low level during contraction of 0.3 percent in IQ2014. GDP grew 0.7 percent in IIQ2015 and 3.4 percent relative to a year earlier. GDP grew 0.3 percent in IIIQ2015 and 2.4 percent relative to a year earlier. GDP changed 0.0 percent in IVQ2015 and increased 1.9 percent relative to a year earlier. GDP grew 0.5 percent in IQ2016 and increased 1.6 percent relative to a year earlier. GDP grew 0.5 percent in IIQ2016 and increased 1.3 percent relative to a year earlier. GDP grew 0.5 percent in IIIQ2016 and increased 1.6 percent relative to a year earlier. GDP grew 0.5 percent in IVQ2016 and increased 2.0 percent relative to a year earlier. GDP grew 0.6 percent in IQ2017 and increased 2.1 percent relative to a year earlier. GDP grew 0.5 percent in IIQ2017 and 2.2

percent relative to a year earlier. GDP increased 0.8 percent in IIIQ2017 and increased 2.4 percent relative to a year earlier. GDP grew 0.9 percent in IVQ2017 and 2.8 percent relative to a year earlier. GDP increased 0.6 percent in IQ2018 and increased 2.9 percent relative to a year earlier. GDP grew 0.9 percent in IIQ2018 and increased 3.2 percent relative to a year earlier. GDP increased 0.7 percent in IIIQ2018 and increased 3.1 percent relative to a year earlier. GDP grew 0.3 percent in IVQ2018 and increased 2.5 percent relative to a year earlier. GDP grew 0.8 percent in IQ2019 and increased 2.7 percent relative to a year earlier. GDP grew 0.5 percent in IIQ2019 and increased 2.3 percent relative to a year earlier. GDP grew 0.5 percent in IIIQ2019 and increased 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 recent higher growth of investment and spikes of consumption driven by burning saving because of financial repression in the form of low interest rates and still bloated balance sheet of the Fed.

Table I-6, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2012 Dollars and ∆%

Real GDP, Billions Chained 2012 Dollars

∆% Relative to IVQ2007

∆% Relative to Prior Quarter

∆%
over
Year Earlier

IVQ2007

15,762.0

NA

0.6

2.0

IQ2008

15,671.4

-0.6

-0.6

1.1

IIQ2008

15,752.3

-0.1

0.5

1.1

IIIQ2008

15,667.0

-0.6

-0.5

0.0

IVQ2008

15,328.0

-2.8

-2.2

-2.8

IQ2009

15,155.9

-3.8

-1.1

-3.3

IIQ2009

15,134.1

-4.0

-0.1

-3.9

IIIQ2009

15,189.2

-3.6

0.4

-3.0

IV2009

15,356.1

-2.6

1.1

0.2

IQ2010

15,415.1

-2.2

0.4

1.7

IIQ2010

15,557.3

-1.3

0.9

2.8

IIIQ2010

15,672.0

-0.6

0.7

3.2

IVQ2010

15,750.6

-0.1

0.5

2.6

IQ2011

15,712.8

-0.3

-0.2

1.9

IIQ2011

15,825.1

0.4

0.7

1.7

IIIQ2011

15,820.7

0.4

0.0

0.9

IVQ2011

16,004.1

1.5

1.2

1.6

IQ2012

16,129.4

2.3

0.8

2.7

IIQ2012

16,198.8

2.8

0.4

2.4

IIIQ2012

16,220.7

2.9

0.1

2.5

IVQ2012

16,239.1

3.0

0.1

1.5

IQ2013

16,383.0

3.9

0.9

1.6

IIQ2013

16,403.2

4.1

0.1

1.3

IIIQ2013

16,531.7

4.9

0.8

1.9

IVQ2013

16,663.6

5.7

0.8

2.6

IQ2014

16,616.5

5.4

-0.3

1.4

IIQ2014

16,841.5

6.8

1.4

2.7

IIIQ2014

17,047.1

8.2

1.2

3.1

IVQ2014

17,143.0

8.8

0.6

2.9

IQ2015

17,277.6

9.6

0.8

4.0

IIQ2015

17,405.7

10.4

0.7

3.4

IIIQ2015

17,463.2

10.8

0.3

2.4

IVQ2015

17,468.9

10.8

0.0

1.9

IQ2016

17,556.9

11.4

0.5

1.6

IIQ2016

17,639.4

11.9

0.5

1.3

IIIQ2016

17,735.1

12.5

0.5

1.6

IVQ2016

17,824.2

13.1

0.5

2.0

IQ2017

17,925.3

13.7

0.6

2.1

IIQ2017

18,021.0

14.3

0.5

2.2

IIIQ2017

18,163.6

15.2

0.8

2.4

IVQ2017

18,322.5

16.2

0.9

2.8

IQ2018

18,438.3

17.0

0.6

2.9

IIQ2018

18,598.1

18.0

0.9

3.2

IIIQ2018

18,732.7

18.8

0.7

3.1

IVQ2018

18,783.5

19.2

0.3

2.5

IQ2019

18,927.3

20.1

0.8

2.7

IIQ2019

19,021.9

20.7

0.5

2.3

IIIQ2019

19,121.1

21.3

0.5

2.1

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 1993. 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. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

clip_image024

Chart I-10, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1993

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_image026

Chart I-11, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2019

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. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IIQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

clip_image028

Chart I-12, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1993

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 2019. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.

clip_image030

Chart I-13, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2019

Source: US Bureau of Economic Analysis

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

The revised estimates and earlier estimates from IQ2008 to IQ2016 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 revision of Jul 20, 2015 reduced significantly the rate of growth in 2013. The revision of Jul 27, 2016 increased the growth rate in 2013 and 2014. 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 29, 2016

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

2.8

1.9

2.7

1.1

1.8

II

0.8

1.1

1.8

2.5

III

3.1

3.0

4.5

4.1

IV

4.0

3.8

3.5

2.6

2014

I

-1.2

-0.9

-2.1

-2.9

II

4.0

4.6

III

5.0

4.3

IV

2.3

2.1

2015

I

2.0

0.6

II

2.6

III

2.0

IV

0.9

2016

I

0.8

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 IVQ1992 than from IIIQ2009 to IIIQ2019, 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 2019. 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 3.2 percent consisted of positive contribution of 1.10 percentage points of personal consumption expenditures (PCE) plus positive contribution of 2.60 percentage points of gross private domestic investment (GDI) of which 1.48 percentage points of inventory investment (∆PI), deduction of net exports (trade or exports less imports) of 0.14 percentage points and deduction of 0.40 percentage points of government consumption expenditures and gross investment (GOV) partly because of one-time deduction of national defense expenditures of 0.38 percentage points. Growth at 3.2 percent in IVQ2013 had strongest contributions of 2.31 percentage points of PCE and 1.23 percentage points of trade. Growth of GDP at minus 1.1 percent in IQ2014 is mostly contribution of 1.03 percentage points by PCE with deduction of 0.74 percentage points by GDI, inventory divestment of 1.40 percentage points and trade deducting 1.11 percentage points. Growth at 5.5 percent in IIQ2014 consists of contributions of 2.97 percentage points by PCE and 2.92 percentage points by GDI with 1.05 percentage points by inventory change. Trade deducted 0.46 percentage points and government added 0.10 percentage points. Growth at 5.0 percent in IIIQ2014 consists of contribution of 2.92 percentage points by PCE, 1.47 percentage points by GDI, 0.10 percentage points by trade and 0.49 percentage points by government of which 0.22 percentage points by national defense expenditures. Growth at 2.3 percent in IVQ2014 consists of contribution of 3.26 percentage points by PCE, contribution of 0.09 percentage points by GDI and deduction of 0.69 percentage points by inventory investment. Net trade deducted 1.05 percentage points while government deducted 0.04 percentage mostly because of deduction of 0.47 percentage points by national defense expenditure declining at 10.6 percent in IVQ2014. Growth of GDP at 3.2 percent in IQ2015 consisted mostly of contributions of 2.26 percentage points by personal consumption expenditures and 2.18 percentage points by inventory accumulation while trade deducted 1.67 percentage points and government contributed 0.37 percentage points. Growth at 3.0 percent in IIQ2015 consisted mostly of contributions of 2.15 percentage points by personal consumption expenditures, 0.08 percentage points by gross domestic investment, contribution of 0.06 percentage points by net trade and contribution of 0.71 percentage points by government consumption and expenditures. Growth at 1.3 percent in IIIQ2015 consisted mostly of contribution of personal consumption expenditures (PCE) of 2.05 percentage points with government adding 0.36 percentage points. Gross domestic investment (GDI) deducted 0.08 percentage points with deduction of inventory divestment of 0.61 percentage points while net trade deducted 1.00 percentage points. Growth at 0.1 percent in IVQ2015 consisted mostly of contribution of 1.20 percentage points by personal consumption expenditures (PCE). GDI deducted 1.07 percentage points while trade deducted 0.20 percentage points and inventory divestment deducted 0.68 percentage points. Growth at 2.0 percent in IQ2016 consisted mostly of contribution of 2.11 percentage points by personal consumption expenditures (PCE). There were deductions of 0.26 percentage points by gross domestic investment (GDI) and 0.68 percentage points by inventory change. Net trade subtracted 0.50 percentage points and government added 0.67 percentage points. Growth at 1.9 percent in IIQ2016 consisted mostly of contribution of 1.95 percentage points by PCE with GDI deducting 0.28 percentage points. Inventory divestment deducted 0.72 percentage points. Growth at 2.2 percent in IIIQ2016 consisted mostly of contribution of 1.74 percentage points by PCE with GDI contributing 0.09 percentage points. Inventory investment deducted 0.53 percentage points and trade added 0.05 percentage points. Growth at 2.0 percent in IVQ2016 had positive contributions of 1.70 percentage points of PCE, 1.50 of GDI and 0.19 of GOV. Inventory investment added 1.18 percentage points and net trade deducted 1.36 percentage points. Growth at 2.3 percent in IQ2017 originated in contributions of 1.63 percentage points by PCE and 0.57 percentage points by GDI with contribution of 0.13 percentage points by net trade. GOV deducted 0.04 percentage points and inventory divestment subtracted 0.70 percentage points. Growth of GDP at 2.2 percent in IIQ217 originated in contributions of 1.63 percentage points by PCE, 0.59 percentage points by GDI, deduction of 0.31 percentage points by net trade and contribution of 0.11 percentage points by inventory investment. Government added 0.24 percentage points. Growth at 3.2 percent in IIIQ2017 consisted of positive contributions of 1.61 percentage points by PCE, 1.25 percentage points by GDI, 1.00 percentage points by inventory investment and 0.35 percentage points by net trade. GOV deducted 0.02 percentage points. Growth at 3.5 percent in IVQ2017 originated in positive contributions of 3.12 percentage points by PCE, 0.80 percentage points by GDI and 0.42 percentage points by GOV. Inventory divestment deducted 0.64 percentage points and net trade deducted 0.80 percentage points. Growth at 2.5 percent in IQ2018 originated in positive contributions of 1.15 percentage points by PCE, 1.07 percentage points by GDI and 0.33 percentage points by GOV. Inventory investment added 0.13 percentage points and net trade added 0.00 percentage points. Growth at 3.5 percent in IIQ2018 originated in positive contributions of 2.70 percentage points by PCE and 0.44 percentage points by GOV. Inventory divestment subtracted 1.20 percentage points and GDI deducted 0.30 percentage points. Net trade contributed 0.67 percentage points. Growth at 2.9 percent in IIIQ2018 consisted of positive contributions of 2.34 percentage points of PCE, 2.14 percentage points of inventory change and 0.36 percentage points of GOV. GDI contributed 2.27 percentage points and net trade deducted 2.05 percentage points. Growth at 1.1 percent in IVQ2018 consisted of positive contributions of 0.97 percentage points of PCE, 0.07 percentage points of inventory change and deduction of 0.07 percentage points of GOV. GDI contributed 0.53 percentage points and net trade deducted 0.35 percentage points. Growth at 3.1 percent in IQ2019 consisted of positive contributions of 0.78 percentage points of PCE, 0.53 percentage points of inventory change and contribution of 0.50 percentage points of GOV. GDI contributed 1.09 percentage points and net trade contributed 0.73 percentage points. Growth at 2.0 percent in IIQ2019 consisted of contribution of 3.03 percentage points by PCE and 0.82 percentage points by government. GDI deducted 1.16 percentage points, inventory divestment deducted 0.91 percentage points and net trade deducted 0.68 percentage points. Growth at 2.1 percent in IIIQ2019 consisted of contribution of 2.12 percentage points by PCE and 0.30 percentage points by government. GDI deducted 0.17 percentage points, inventory divestment deducted 0.03 percentage points and net trade deducted 0.14 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

2019

I

3.1

0.78

1.09

0.53

0.73

0.50

II

2.0

3.03

-1.16

-0.91

-0.68

0.82

III

2.1

2.12

-0.17

-0.03

-0.14

0.30

2018

I

2.5

1.15

1.07

0.13

0.00

0.33

II

3.5

2.70

-0.30

-1.20

0.67

0.44

III

2.9

2.34

2.27

2.14

-2.05

0.36

IV

1.1

0.97

0.53

0.07

-0.35

-0.07

2017

I

2.3

1.63

0.57

-0.70

0.13

-0.04

II

2.2

1.63

0.59

0.11

-0.31

0.24

III

3.2

1.61

1.25

1.00

0.35

-0.02

IV

3.5

3.12

0.80

-0.64

-0.80

0.42

2016

I

2.0

2.11

-0.26

-0.68

-0.50

0.67

II

1.9

1.95

-0.28

-0.72

0.35

-0.12

III

2.2

1.74

0.09

-0.53

0.05

0.31

IV

2.0

1.70

1.50

1.18

-1.36

0.19

2015

I

3.2

2.26

2.22

2.18

-1.67

0.37

II

3.0

2.15

0.08

-0.42

0.06

0.71

III

1.3

2.05

-0.08

-0.61

-1.00

0.36

IV

0.1

1.20

-1.07

-0.68

-0.20

0.19

2014

I

-1.1

1.03

-0.74

-1.40

-1.11

-0.31

II

5.5

2.97

2.92

1.05

-0.46

0.10

III

5.0

2.92

1.47

0.17

0.10

0.49

IV

2.3

3.26

0.09

-0.69

-1.05

-0.04

2013

I

3.6

1.44

2.43

1.33

0.40

-0.68

II

0.5

0.20

0.75

0.23

-0.33

-0.13

III

3.2

1.10

2.60

1.48

-0.14

-0.40

IV

3.2

2.31

0.27

-0.62

1.23

-0.58

2012

I

3.2

2.19

1.32

-0.59

0.00

-0.34

II

1.7

0.41

1.47

0.21

0.27

-0.41

III

0.5

0.45

0.29

0.20

-0.08

-0.12

IV

0.5

1.22

-0.58

-1.70

0.57

-0.76

2011

I

-1.0

1.17

-1.10

-1.02

-0.02

-1.01

II

2.9

0.62

2.36

1.03

0.45

-0.55

III

-0.1

1.07

0.19

-2.23

-0.21

-1.16

IV

4.7

0.52

4.60

3.06

-0.36

-0.04

2010

I

1.5

1.32

1.28

1.30

-0.72

-0.33

II

3.7

2.16

2.95

0.92

-1.67

0.30

III

3.0

1.90

2.60

2.28

-0.94

-0.57

IV

2.0

1.80

-0.17

-1.25

0.91

-0.52

2009

I

-4.4

-0.52

-7.21

-2.14

2.40

0.92

II

-0.6

-1.03

-3.15

-1.04

2.39

1.22

III

1.5

1.92

-0.08

-0.33

-0.61

0.23

IV

4.5

-0.39

4.76

4.44

-0.07

0.17

1982

I

-6.1

1.80

-7.33

-5.33

-0.49

-0.05

II

1.8

0.75

-0.05

2.27

0.81

0.34

III

-1.5

1.64

-0.62

1.11

-3.22

0.68

IV

0.2

4.34

-5.38

-5.34

-0.10

1.30

1983

I

5.4

2.52

2.34

0.91

-0.30

0.81

II

9.4

5.21

5.95

3.42

-2.47

0.73

III

8.2

4.60

4.40

0.57

-2.26

1.49

IV

8.6

4.10

6.95

3.01

-1.14

-1.30

1984

I

8.1

2.21

7.23

4.94

-2.31

0.92

II

7.1

3.57

2.57

-0.29

-0.87

1.82

III

3.9

1.88

1.70

0.21

-0.36

0.69

IV

3.3

3.22

-1.07

-2.43

-0.56

1.74

1985

I

3.9

4.22

-2.14

-2.86

0.94

0.92

II

3.6

2.29

1.34

0.35

-1.91

1.85

III

6.2

4.76

-0.43

-0.15

-0.01

1.93

IV

3.0

0.52

2.81

1.40

-0.67

0.35

1986

I

3.8

2.16

0.04

-0.17

0.93

0.66

II

1.8

2.70

-1.30

-1.30

-1.33

1.75

III

3.9

4.43

-1.97

-1.63

-0.45

1.87

IV

2.2

1.55

0.25

-0.29

0.71

-0.33

1987

I

3.0

0.26

1.99

3.29

0.23

0.54

II

4.4

3.47

0.08

-1.00

0.14

0.70

III

3.5

2.91

0.03

-1.20

0.45

0.13

IV

7.0

0.57

4.96

4.97

0.18

1.33

1988

I

2.1

4.45

-3.64

-3.69

1.94

-0.67

II

5.4

1.90

1.73

0.33

1.44

0.29

III

2.4

2.25

0.38

0.05

-0.31

0.03

IV

5.4

2.91

1.12

0.28

-0.21

1.62

1989

I

4.1

1.19

2.43

1.80

0.86

-0.34

II

3.1

1.19

-0.71

-0.80

1.35

1.26

III

3.0

2.46

-0.64

-1.84

0.44

0.75

IV

0.8

1.11

-0.54

0.37

-0.20

0.42

1990

I

4.4

2.17

0.70

-0.10

0.25

1.33

II

1.5

0.77

0.03

1.38

0.52

0.13

III

0.3

1.00

-1.29

-0.74

0.44

0.13

IV

-3.6

-1.96

-3.66

-1.97

1.47

0.55

1991

I

-1.9

-1.00

-2.04

-0.26

0.69

0.49

II

3.2

2.11

0.05

-0.12

0.65

0.35

III

2.0

1.27

1.21

1.16

-0.21

-0.23

IV

1.4

-0.12

2.15

1.91

-0.02

-0.61

1992

I

4.9

4.83

-1.16

-1.81

0.44

0.77

II

4.4

1.78

3.40

1.44

-0.63

-0.14

III

4.0

2.77

0.50

-0.19

0.19

0.55

IV

4.2

3.08

1.92

0.14

-0.77

0.01

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 1-2) explains growth of GDP in IIIQ2019 as follows (https://www.bea.gov/system/files/2019-12/gdp3q19_3rd.pdf):

“Real gross domestic product (GDP) increased at an annual rate of 2.1 percent in the third quarter of 2019 (table 1), according to the "third" estimate released by the Bureau of Economic Analysis. In thesecond quarter, real GDP increased 2.0 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 also 2.1 percent. With the third estimate for the third quarter, upward revisions to personal consumption expenditures (PCE) and nonresidential fixed investment were offset by a downward revision to private inventory investment (see "Updates to GDP" on page 2).

The increase in real GDP in the third quarter reflected positive contributions from PCE, federal

government spending, residential investment, exports, and state and local government spending that were partly offset by negative contributions from nonresidential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased (table 2).

The acceleration in real GDP in the third quarter reflected a smaller decrease in private inventory investment and upturns in exports and residential fixed investment that were partly offset by decelerations in PCE, federal government spending, and state and local government spending, and a larger decrease in nonresidential fixed investment.”

There are positive contributions to growth in IIIQ2019 shown in Table I-9:

· Personal consumption expenditures (PCE) growing at 3.2 percent

· Durable goods growing at 8.1 percent

· Growth of residential fixed investment (RFI) at 4.6 percent

· Growth of national defense expenditures at 2.2 percent

· Growth of government expenditures (GOV) at 1.7 percent

· Growth of federal government expenditures (Federal GOV) at 3.3 percent

· Growth of state and local government expenditures at 0.7 percent

· Growth of exports at 1.0 percent

There were negative contributions in IIIQ2019:

· Nonresidential fixed investment contracting at 2.3 percent

· Imports, which are deduction from growth, growing at 1.8 percent

· Inventory divestment subtracting 0.03 percentage points

The BEA finding accelerating factors:

  • Growth of exports at 1.0 percent after contracting at 5.7 percent in IIQ2019
  • Growth of residential fixed investment (RFI) at 4.6 percent after contracting at 3.0 percent in IIQ2019
  • Inventory divestment subtracting 0.03 percentage points after subtracting 0.91 percentage points in IIQ2019

The BEA finds offsetting decelerating factors:

· Nonresidential investment contracting at 2.3 percent after contracting at 1.0 percent in IIQ2019

· Personal consumption expenditure PCE growing at 3.2 percent after growing at 4.6 percent in IIQ2019

· Durable goods growing at 8.1 percent after growing at 13.0 percent in IIQ2019

· Imports, which are a deduction from growth, growing at 1.8 percent after changing at 0.0 percent in IQ2019

· Government expenditures growing at 1.7 percent after growing at 4.8 percent in IIQ2019

· Federal government expenditures growing at 3.3 percent after growing at 8.3 percent in IIQ2019

· National defense expenditures growing at 2.2 percent after growing at 3.3 percent in IIQ2019

· State and local government expenditures growing at 0.7 percent after growing at 2.7 percent in IIQ2019

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 0.2 percent in IIIQ2013 compared with a year earlier. Contraction of real disposable income of 2.5 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 3.1 percent in IQ2014 relative to a year earlier and 3.6 percent in IIQ2014 relative to a year earlier. Real disposable personal income increased 4.3 percent in IIIQ2014 relative to a year earlier and 5.2 percent in IVQ2014 compared with a year earlier. Real disposable personal income grew 4.9 percent in IQ2015 relative to a year earlier partly because of contraction of energy prices and increased at 4.4 percent in IIQ2015. Real disposable personal income grew at 4.0 percent in IIIQ2015 relative to a year earlier and at 3.0 percent in IVQ2015 relative to a year earlier. Real disposable income grew at 2.5 percent in IQ2016 relative to a year earlier and at 1.6 percent in IIQ2016 relative to a year earlier. Real disposable income grew at 1.3 percent in IIIQ2016 relative to a year earlier and at 1.6 percent in IVQ2016 compared with a year earlier. Real disposable income grew at 2.2 percent in IQ2017 relative to a year earlier and grew at 2.9 percent in IIQ2017 relative to a year earlier. Real disposable income grew at 3.1 percent in IIIQ2017 relative to a year earlier and grew 3.4 percent in IVQ2017 relative to a year earlier. Real disposable income grew at 3.9 percent in IQ2018 relative to a year earlier and grew at 3.9 percent in IIQ2018 relative to a year earlier. Real disposable personal income grew at 4.1 percent in IIIQ2018 relative to a year earlier and at 3.9 percent in IVQ2018 relative to a year earlier. Real disposable income grew at 3.3 percent in IQ2019 relative to a year earlier and grew at 3.0 percent in IIQ2019 relative to a year earlier. Real disposable income grew at 2.9 percent in IIIQ2019 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 10.2 percent in IVQ2012 to 6.6 percent in IIIQ2013 and 6.3 percent in IVQ2013. The savings rate eased to 7.3 percent in IQ2014, increasing to 7.4 percent in IIQ2014 and stabilizing to 7.4 percent in IIIQ2014. The savings rate moved to 7.4 percent in IVQ2014, increasing to 7.7 percent in IQ2015. The savings rate moved to 7.6 percent in IIQ2015, 7.7 percent in IIIQ2015 and 7.4 percent in IVQ2015. The savings ratio moved to 7.5 percent in IQ2016 and 6.6 percent in IIQ2016. The savings ratio eased at 6.3 percent in IIIQ2016 and at 6.4 percent in IVQ2016. The savings ratio reached 7.0 percent in IQ2017 and 6.7 percent in IIQ2017. The savings ratio eased to 6.7 percent in IIIQ2017 and 6.3 percent in IVQ2017. The savings ratio increased to 7.2 percent in IQ2018 and 7.6 percent in IIQ2018. The savings ratio eased to 7.5 percent in IIIQ2018 and increased to 7.8 percent in IVQ2018. The savings ratio increased to 8.5 percent in IQ2019, easing to 7.8 percent in IIQ2019. The savings ratio stabilized to 7.8 percent in IIIQ2019. 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, %

III Q2018

IV

Q2018

I

Q2019

II Q2019

III

Q2019

GDP

2.9

1.1

3.1

2.0

2.1

PCE

3.5

1.4

1.1

4.6

3.2

Durable Goods

3.6

1.3

0.3

13.0

8.1

NRFI

2.1

4.8

4.4

-1.0

-2.3

RFI

-4.0

-4.7

-1.0

-3.0

4.6

Net Exports GS % Points

-2.05

-0.35

0.73

-0.68

-0.14

Exports

-6.2

1.5

4.1

-5.7

1.0

Imports

8.6

3.5

-1.5

0.0

1.8

GOV

2.1

-0.4

2.9

4.8

1.7

Federal GOV

2.9

1.1

2.2

8.3

3.3

National Defense

3.0

5.2

7.7

3.3

2.2

GDP Growth % Points

0.11

0.20

0.29

0.13

0.09

State/Local GOV

1.6

-1.2

3.3

2.7

0.7

∆ PI % Points

2.14

0.07

0.53

-0.91

-0.03

Final Sales of Domestic Product

0.8

1.0

2.6

3.0

2.1

Gross Domestic Purchases

4.9

1.4

2.3

2.6

2.2

Prices Gross
Domestic Purchases

1.9

1.5

0.8

2.2

1.4

Prices of GDP

2.0

1.6

1.1

2.4

1.8

Prices of GDP Excluding Food and Energy

2.1

2.0

1.4

2.3

1.9

Prices of PCE

1.6

1.3

0.4

2.4

1.5

Prices of PCE Excluding Food and Energy

1.6

1.7

1.1

1.9

2.1

Prices of Market Based PCE

1.3

1.1

0.8

2.1

1.1

Prices of Market Based PCE Excluding Food and Energy

1.2

1.6

1.7

1.4

1.8

Real Disposable Personal Income*

4.1

3.9

3.3

3.0

2.9

Personal Saving As % Disposable Income

7.5

7.8

8.5

7.8

7.8

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 68.1 percent of GDP and is under pressure with stagnant real disposable income per person, elevated 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, %

IIIQ2019

GDP

100.0

PCE

68.1

   Goods

21.2

            Durable

7.2

            Nondurable

14.0

   Services

47.0

Gross Private Domestic Investment

17.4

    Fixed Investment

17.1

        NRFI

13.4

            Structures

2.9

            Equipment & Software

5.7

            Intellectual Property

4.7

        RFI

3.7

     Change in Private
      Inventories

0.3

Net Exports of Goods and Services

-3.0

       Exports

11.6

                    Goods

7.6

                    Services

4.0

       Imports

14.6

                     Goods

11.8

                     Services

2.8

Government

17.5

        Federal

6.6

           National Defense

3.9

           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, 1982-1991 and 2009, 2010, 2011, 2012, 2013, 2014 2015, 2016, 2017 and 2018. 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 7.2 percent in 1984 and 4.2 percent in 1985. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm). In contrast, GDP grew 2.6 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, 1.8 percent in 2013 after 18 consecutive quarters of expansion, 2.5 percent in 2014 after 22 consecutive quarters of expansion and 2.9 percent in 2015 after twenty-six consecutive quarters of expansion. GDP grew at 1.6 percent in 2016 after thirty consecutive quarters of expansion. GDP grew at 2.4 percent in 2017 after 34 quarters of expansion. GDP grew at 2.9 percent in 2018 after 38 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, 2014, 2015, 2016, 2017 and 2018.

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

0.76

1959

6.9

3.51

2.83

0.83

0.00

0.60

1975

-0.2

1.36

-2.91

-1.24

0.86

0.49

1976

5.4

3.41

2.91

1.37

-1.05

0.12

1982

-1.8

0.88

-2.46

-1.31

-0.59

0.37

1983

4.6

3.51

1.60

0.28

-1.32

0.79

1984

7.2

3.30

4.73

1.90

-1.54

0.74

1985

4.2

3.20

-0.01

-1.03

-0.39

1.37

1986

3.5

2.58

0.03

-0.31

-0.29

1.14

1987

3.5

2.15

0.53

0.41

0.17

0.62

1988

4.2

2.65

0.45

-0.13

0.81

0.26

1989

3.7

1.86

0.72

0.17

0.51

0.58

1990

1.9

1.28

-0.45

-0.21

0.40

0.65

1991

-0.1

0.12

-1.09

-0.26

0.62

0.25

1992

3.5

2.36

1.11

0.28

-0.04

0.10

2009

-2.5

-0.85

-3.52

-0.83

1.13

0.70

2010

2.6

1.20

1.86

1.42

-0.49

0.00

2011

1.6

1.29

0.94

-0.05

-0.01

-0.66

2012

2.2

1.03

1.64

0.17

0.00

-0.42

2013

1.8

0.99

1.11

0.23

0.22

-0.47

2014

2.5

1.99

0.95

-0.12

-0.25

-0.17

2015

2.9

2.48

0.85

0.28

-0.77

0.35

2016

1.6

1.85

-0.23

-0.55

-0.30

0.32

2017

2.4

1.78

0.75

0.04

-0.28

0.12

2018

2.9

2.05

0.87

0.09

-0.29

0.30

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 2018 using annual-level data. PCEs contributed 1.20 PPs to GDP growth in 2010 of which 0.66 percentage points (PP) in goods and 0.57 PP in services. Gross private domestic investment (GPDI) deducted 3.52 PPs of GDP growth in 2009 of which -2.70 PPs by fixed investment and -0.83 PPs of inventory change (∆PI) and added 1.86 PPs of GDI in 2010 of which 0.44 PPs of fixed investment and 1.42 PPs of inventory accumulation (∆PI). Trade, or exports of goods and services net of imports, contributed 1.13 PPs in 2009 of which exports deducted 1.01 PPs and imports added 2.14 PPs. In 2010, trade deducted 0.49 PPs with exports contributing 1.35 PPs and imports deducting 1.84 PPs likely benefitting from dollar revaluation. In 2009, government added 0.70 PP of which 0.47 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 0.23 PPs. Table I-12 provides the estimates for 2011, 2012, 2013, 2014, 2015, 2016 and 2017. PCE contributed 1.29 PPs in 2011 after 1.20 PPs in 2010. The contribution of PCE fell to 1.03 points in 2012 and to 0.99 PPs in 2013, increasing to 1.99 PPs in 2014. PCE contributed 2.48 percentage points in 2015 and added 1.85 PPs in 2016. PCE contributed 1.78 percentage points in 2017. PCE contributed 2.05 PPs in 2018. The breakdown into goods and services is similar but with contributions in 2012 of 0.48 PPs of goods and 0.55 PPs of services. In 2013, goods contributed 0.70 PPs and services 0.29 PPs. Goods contributed 0.90 PPs in 2014 and services contributed 1.10 PPs. Goods contributed 1.01 percentage points in 2015 and services 1.46 percentage points. Goods contributed 0.77 PPs in 2016 and services contributed 1.08 PPs. Goods contributed 0.83 PPs in 2017 and services contributed 0.94 PPs. Goods contributed 0.86 PPs in 2018 and services contributed 1.18 PPs. Gross private domestic investment contributed 1.86 PPs in 2010 with 1.42 PPs of change of private inventories but the contribution of gross private domestic investment was only 0.94 PPs in 2011. The contribution of GDI in 2012 increased to 1.64 PPs with fixed investment increasing its contribution to 1.47 PPs and residential investment contributing 0.31 PPs for the first time since 2009. GDI contributed 1.64 PPs in 2012 with 1.47 PPs from fixed investment and 0.17 PPs from inventory change. GDI contributed 1.11 PPs in 2013, 0.95 PPs in 2014 and 0.85 PPs in 2015. GDI deducted 0.23 PPs in 2016 with contribution of 0.32 PPs of fixed investment and deduction of 0.55 PPs by inventory change. GDI contributed 0.75 PPs in 2017 with contribution of 0.70 PPs by fixed investment and 0.57 PPs by nonresidential fixed investment. GDI contributed 0.87 percentage points in 2018 with contribution of 0.78 percentage points by fixed investment and 0.84 percentage points by nonresidential fixed investment. Net exports of goods and services deducted marginally in 2011 with 0.01 PPs and added 0.00 PPs in 2012. Net trade contributed 0.22 PPs in 2013 and deducted 0.25 PPs in 2014. Net trade deducted 0.77 percentage points in 2015 and deducted 0.30 PPs in 2016. Net trade deducted 0.28 percentage points in 2017 and deducted 0.29 percentage points in 2018. The contribution of exports fell from 1.35 PPs in 2010 and 0.90 PPs in 2011 to only 0.46 PPs in 2012, 0.48 PPs in 2013 and 0.57 PPs in 2014. Exports contributed only 0.06 percentage points in 2015 and deducted 0.00 percentage points in 2016. Exports contributed 0.41 PPs in 2017 and contributed 0.37 percentage points in 2018. Government deducted 0.66 PPs in 2011, 0.42 PPs in 2012 and 0.47 PPs in 2013. Government deducted 0.17 PPs in 2014 and contributed 0.35 PPs in 2015, contributing 0.32 PPs in 2016. Government contributed 0.12 PPs in 2017 and contributed 0.30 PP in 2018. Demand weakened in 2013 with lower contribution of personal consumption expenditures of 0.99 PPs and of gross domestic investment of 1.11 PPs. PCE contributed 1.99 PPs in 2014 and GDI 0.95 PPs. PCE contributed 2.48 PPs in 2015 and GDI contributed 0.85 PPs. PCE contributed 1.85 PPs in 2016 and GDI deducted 0.23 PPs. PCE contributed 1.78 PPs in 2017 and GDI added 0.75 PPs. PCE contributed 2.05 PP in 2018 and GDI added 0.87 PPs. Net trade contributed only 0.22 PPs in 2013 and deducted 0.25 PPs in 2014, deducting 0.77 PPs in 2015. Net trade deducted 0.30 PPs in 2016 and deducted 0.28 PPs in 2017. Net trade deducted 0.29 PPs in 2018. 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

2015

GDP Growth ∆%

-2.5

2.6

1.6

2.2

1.8

2.5

2.9

Personal Consumption Expenditures (PCE)

-0.85

1.20

1.29

1.03

0.99

1.99

2.48

  Goods

-0.70

0.62

0.49

0.48

0.70

0.90

1.01

     Durable

-0.45

0.39

0.35

0.41

0.42

0.50

0.52

     Nondurable

-0.25

0.24

0.14

0.07

0.28

0.40

0.49

  Services

-0.15

0.57

0.80

0.55

0.29

1.10

1.46

Gross Private Domestic Investment (GPDI)

-3.52

1.86

0.94

1.64

1.11

0.95

0.85

Fixed Investment

-2.70

0.44

0.99

1.47

0.87

1.07

0.58

    Nonresidential

-1.95

0.52

1.00

1.16

0.54

0.95

0.25

      Structures

-0.72

-0.50

0.07

0.34

0.04

0.33

-0.10

     Equipment, software

-1.22

0.92

0.69

0.62

0.28

0.42

0.20

      Intellectual Property

-0.02

0.11

0.24

0.20

0.22

0.20

0.15

    Residential

-0.74

-0.08

0.00

0.31

0.34

0.12

0.33

Change Private Inventories

-0.83

1.42

-0.05

0.17

0.23

-0.12

0.28

Net Exports of Goods and Services

1.13

-0.49

-0.01

0.00

0.22

-0.25

-0.77

   Exports

-1.01

1.35

0.90

0.46

0.48

0.57

0.06

      Goods

-1.00

1.12

0.61

0.36

0.30

0.42

-0.03

      Services

-0.01

0.23

0.28

0.10

0.18

0.14

0.09

   Imports

2.14

-1.84

-0.91

-0.46

-0.26

-0.81

-0.83

      Goods

2.08

-1.74

-0.82

-0.38

-0.25

-0.75

-0.73

      Services

0.06

-0.10

-0.09

-0.09

-0.01

-0.06

-0.10

Government Consumption Expenditures and Gross Investment

0.70

0.00

-0.66

-0.42

-0.47

-0.17

0.35

  Federal

0.47

0.35

-0.23

-0.16

-0.44

-0.19

-0.01

    National Defense

0.29

0.16

-0.12

-0.18

-0.34

-0.19

-0.09

    Nondefense

0.18

0.19

-0.11

0.03

-0.10

0.00

0.08

  State and Local

0.23

-0.35

-0.44

-0.26

-0.03

0.02

0.35

2013

2014

2015

2016

2017

2018

GDP Growth ∆%

1.8

2.5

2.9

1.6

2.4

2.9

Personal Consumption Expenditures (PCE)

0.99

1.99

2.48

1.85

1.78

2.05

  Goods

0.70

0.90

1.01

0.77

0.83

0.86

     Durable

0.42

0.50

0.52

0.43

0.49

0.44

     Nondurable

0.28

0.40

0.49

0.34

0.35

0.42

  Services

0.29

1.10

1.46

1.08

0.94

1.18

Gross Private Domestic Investment (GPDI)

1.11

0.95

0.85

-0.23

0.75

0.87

Fixed Investment

0.87

1.07

0.58

0.32

0.70

0.78

    Nonresidential

0.54

0.95

0.25

0.09

0.57

0.84

      Structures

0.04

0.33

-0.10

-0.16

0.14

0.12

     Equipment, software

0.28

0.42

0.20

-0.08

0.27

0.39

      Intellectual Property

0.22

0.20

0.15

0.33

0.16

0.32

    Residential

0.34

0.12

0.33

0.23

0.13

-0.06

Change Private Inventories

0.23

-0.12

0.28

-0.55

0.04

0.09

Net Exports of Goods and Services

0.22

-0.25

-0.77

-0.30

-0.28

-0.29

   Exports

0.48

0.57

0.06

0.00

0.41

0.37

      Goods

0.30

0.42

-0.03

0.04

0.30

0.34

      Services

0.18

0.14

0.09

-0.05

0.11

0.03

   Imports

-0.26

-0.81

-0.83

-0.30

-0.69

-0.66

      Goods

-0.25

-0.75

-0.73

-0.18

-0.57

-0.61

      Services

-0.01

-0.06

-0.10

-0.12

-0.12

-0.05

Government Consumption Expenditures and Gross Investment

-0.47

-0.17

0.35

0.32

0.12

0.30

  Federal

-0.44

-0.19

-0.01

0.03

0.05

0.19

    National Defense

-0.34

-0.19

-0.09

-0.02

0.03

0.13

    Nondefense

-0.10

0.00

0.08

0.05

0.02

0.07

  State and Local

-0.03

0.02

0.35

0.29

0.07

0.11

Source: US Bureau of Economic Analysis

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

Industrial production increased 1.1 percent in Nov 2019 and decreased 0.9 percent in Oct 2019 after decreasing 0.4 percent in Sep 2019, with all data seasonally adjusted, as shown in Table I-1. The Board of Governors of the Federal Reserve System conducted the annual revision of industrial production released on Mar 27, 2019 (https://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.[1] On net, the revisions to the growth rates for total IP for recent years were small and positive, with the estimates for 2016 and 2017 a bit higher and the estimates for 2015 and 2018 slightly lower.[2] Total IP is still reported to have increased from the end of the recession in mid-2009 through late 2014 before declining in 2015 and rebounding in mid-2016. Subsequently, the index advanced around 7 1/2 percent over 2017 and 2018.

Capacity for total industry expanded modestly in each year from 2015 to 2017 before advancing 1 1/2 percent in 2018; it is expected to advance about 2 percent in 2019. Revisions for recent years were very small and showed slightly less expansion in most years relative to earlier reports.

In the fourth quarter of 2018, capacity utilization for total industry stood at 79.4 percent, about 3/4 percentage point above its previous estimate and about 1/2 percentage point below its long-run (1972–2018) average. The utilization rate in 2017 is also higher than its previous estimate.”

The report of the Board of Governors of the Federal Reserve System states (https://www.federalreserve.gov/releases/g17/Current/default.htm):

“Industrial production and manufacturing production both rebounded 1.1 percent in November after declining in October. These sharp November increases were largely due to a bounceback in the output of motor vehicles and parts following the end of a strike at a major manufacturer. Excluding motor vehicles and parts, the indexes for total industrial production and for manufacturing moved up 0.5 percent and 0.3 percent, respectively. Mining production edged down 0.2 percent, while the output of utilities increased 2.9 percent.

At 109.7 percent of its 2012 average, total industrial production was 0.8 percent lower in November than it was a year earlier. Capacity utilization for the industrial sector increased 0.7 percentage point in November to 77.3 percent, a rate that is 2.5 percentage points below its long-run (1972–2018) average.” United States industry apparently decelerated to a lower growth rate followed by possible acceleration and weakening growth in past months. There could be renewed growth with oscillations.

Manufacturing decreased 22.3 percent from the peak in Jun 2007 to the trough in Apr 2009 and increasing 19.7 percent from the trough in Apr 2009 to Dec 2018. Manufacturing grew 19.9 percent from the trough in Apr 2009 to Nov 2019. Manufacturing in Nov 2019 is lower by 6.8 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 IIIQ2019 would have accumulated to 41.5 percent. GDP in IIIQ2019 would be $22,303.2 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $3182.1 billion than actual $19,121.1 billion. There are more than three trillion dollars of GDP less than at trend, explaining the 18.5 million unemployed or underemployed equivalent to actual unemployment/underemployment of 10.8 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2019/12/increase-in-valuations-of-risk.html and earlier https://cmpassocregulationblog.blogspot.com/2019/11/increasing-valuations-of-risk-financial.html). US GDP in IIIQ2019 is 14.3 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $19,121.1 billion in IIIQ2019 or 21.3 percent at the average annual equivalent rate of 1.7 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. 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 3.0 percent per year from Nov 1919 to Nov 2019. Growth at 3.0 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 154.0282 in Nov 2019. The actual index NSA in Nov 2019 is 104.7173 which is 32.0 percent below trend. Manufacturing grew at the average annual rate of 3.3 percent between Dec 1986 and Dec 2006. Growth at 3.3 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 159.4601 in Nov 2019. The actual index NSA in Nov 2019 is 104.7173, which is 34.3 percent below trend. Manufacturing output grew at average 1.9 percent between Dec 1986 and Nov 2019. Using trend growth of 1.9 percent per year, the index would increase to 135.5290 in Nov 2019. The output of manufacturing at 104.7173 in Nov 2019 is 22.7 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 110.5147 in Jun 2007 to the low of 86.3800 in Apr 2009 or 21.8 percent. The NAICS manufacturing index increased from 86.3800 in Apr 2009 to 105.8734 in Nov 2019 or 22.6 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 106.6777 in Dec 2007 to 160.7359 in Nov 2019. The NAICS index at 105.8734 in Nov 2019 is 34.1 below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 106.6777 in Dec 2007 to 130.4112 in Nov 2019. The NAICS index at 105.8734 in Nov 2019 is 18.8 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 86.9 percent in IIQ2019. Most of US national income is in the form of services. In Nov 2019, there were 153.624 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 130.500 million NSA in Nov 2019 accounted for 84.9 percent of total nonfarm jobs of 153.624 million, of which 12.862 million, or 9.9 percent of total private jobs and 8.4 percent of total nonfarm jobs, were in manufacturing. Private service-providing jobs were 109.289 million NSA in Nov 2019, or 71.1 percent of total nonfarm jobs and 83.7 percent of total private-sector jobs. Manufacturing has share of 9.4 percent in US national income in IIIQ2019 and durable goods 5.6 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 IIQ2019

% Total

SAAR IIIQ2019

% Total

National Income WCCA

17,747.7

100.0

17,917.5

100.0

Domestic Industries

17,446.7

98.3

17,608.6

98.3

Private Industries

15,415.7

86.9

15,553.0

86.8

Agriculture

121.6

0.7

128.3

0.7

Mining

198.4

1.1

197.4

1.1

Utilities

165.6

0.9

166.4

0.9

Construction

932.4

5.3

943.8

5.3

Manufacturing

1656.1

9.3

1677.2

9.4

Durable Goods

995.8

5.6

994.9

5.6

Nondurable Goods

660.3

3.7

682.2

3.8

Wholesale Trade

1008.2

5.7

1022.2

5.7

Retail Trade

1183.0

6.7

1199.4

6.7

Transportation & WH

575.6

3.2

581.6

3.2

Information

627.4

3.5

626.3

3.5

Finance, Insurance, RE

3135.8

17.7

3128.5

17.5

Professional & Business Services

2665.2

15.0

2700.1

15.1

Education, Health Care

1837.1

10.4

1862.5

10.4

Arts, Entertainment

785.7

4.4

790.8

10.4

Other Services

523.6

3.0

528.7

3.0

Government

2031.0

11.4

2055.6

11.5

Rest of the World

301.0

1.7

308.9

1.7

Notes: SSAR: Seasonally-Adjusted Annual Rate; Percentages Calculates from Unrounded Data; 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 Stagnating Real Private Fixed Investment. 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. The National Bureau of Economic Research dates another cycle from Jul 1990 (IIIQ1981) to Mar 1991 (IQ1991) (http://www.nber.org/cycles.html), showing in Table III-1 with contractions of fixed investment in the final three quarters of 1990 and the first quarter of 1991. There is quite different behavior of private fixed investment in the thirty-six quarters of cyclical expansion from IIIQ2009 to IIQ2018. The average annual growth rate in the first eight quarters of expansion from IIIQ2009 to IIQ2011 was 4.6 percent, which is significantly lower than 14.7 percent in the first eight quarters of expansion from IQ1983 to IVQ1984. There is only robust growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 12.8 percent. Growth has fallen from the SAAR of 17.9 percent in IIIQ2011 to 0.6 percent in IIIQ2012, recovering to 7.4 percent in IVQ2012 and increasing to 7.0 percent in IQ2013. The SAAR of fixed investment fell to 7.1 percent in IIIQ2013 and to 5.5 percent in IVQ2013. The SAAR of fixed investment decreased to 4.1 percent in IQ2014. Fixed investment grew at the SAAR of 11.6 percent in IIQ2014 and at 7.9 percent in IIIQ2014. Fixed investment grew at 4.7 percent in IVQ2014, 0.3 percent in IQ2015 and 3.0 percent in IIQ2015. Fixed investment grew at 3.2 percent in IIIQ2015 and fell at 2.2 percent in IVQ2015. Fixed investment increased at 2.6 percent in IQ2016 and increased at 2.7 percent in IIQ2016. Fixed investment increased at 3.8 percent in IIIQ2016 and increased at 2.0 percent in IVQ2016. Fixed investment increased at 7.7 percent in IQ2017 and increased at 2.8 percent in IIQ2017. Fixed investment grew at 1.4 percent in IIIQ2017. Fixed investment grew at 8.7 percent in IVQ2017 and increased at 5.5 percent in IQ2018. Fixed investment grew at 5.2 percent in IIQ2018. Fixed investment increased at 0.7 percent in IIIQ2018 and increased at 2.7 percent in IVQ2018. Fixed investment increased at 3.2 percent in IQ2019 and decreased at 1.4 percent in IIQ2019. Fixed investment decreased at 0.8 percent in IIIQ2019. 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

-10.6

9.3

13.2

-6.1

-28.2

-0.2

II

3.2

-12.0

15.9

16.6

-3.2

-13.7

15.4

III

0.2

-9.2

24.4

8.2

-9.7

1.5

2.2

IV

-1.3

0.2

24.3

7.4

-23.9

2.0

7.8

1985

2011

I

3.7

-0.7

II

5.2

9.7

III

-1.6

17.9

IV

7.8

10.6

1986

2012

I

1.1

13.1

II

0.1

8.3

III

-1.8

0.6

IV

3.1

7.4

1987

2013

I

-6.7

7.0

II

6.3

3.3

III

7.1

7.1

IV

-0.2

5.5

1988

2014

I

0.2

4.1

II

8.1

11.6

III

1.9

7.9

IV

4.8

4.7

1989

2015

IQ

3.6

0.3

IIQ

0.5

3.0

IIIQ

7.2

3.2

IVQ

-5.1

-2.2

1990

2016

IQ

4.8

2.6

IIQ

-7.7

2.7

IIIQ

-3.2

3.8

IVQ

-9.9

2.0

1991

2017

I

-10.6

7.7

II

1.2

2.8

III

0.5

1.4

IV

1.7

8.7

1992

2018

I

4.5

5.5

II

13.8

5.2

III

4.7

0.7

IV

12.2

2.7

1993

2019

I

3.0

3.2

II

7.4

-1.4

III

6.4

-0.8

IV

17.1

1994

I

4.8

II

8.3

III

3.3

IV

10.0

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 1980 to 1993. 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. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

clip_image032

Chart IA1-1, US, Real Private Fixed Investment, Seasonally Adjusted Annual Rates Percent Change from Prior Quarter, 1980-1993

Source: US Bureau of Economic Analysis

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

Weak behavior of real private fixed investment from 2007 to 2019 is in Chart IA1-2. Growth rates of real private fixed investment were much lower during the initial phase of the current economic cycle, entered sharp trend of decline and recovered recently, with another decline followed by increase and renewed decline.

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Chart IA1-2, US, Real Private Fixed Investment, Seasonally Adjusted Annual Rates Percent Change from Prior Quarter, 2007-2019

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 IIIQ2019 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 $933.1 billion of chained 2012 dollars, growing to $1,305.0 billion in IQ1993 or 39.9 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm). Real gross private domestic investment in the US increased 28.8 percent from $2653.1 billion in IVQ2007 to $3,416.2 billion in IIIQ2019. Real private fixed investment increased 26.6 percent from $2,630.0 billion of chained 2012 dollars in IVQ2007 to $3,330.5 billion in IIIQ2019. Private fixed investment fell relative to IVQ2007 in all quarters preceding IVQ2012 and increased 0.9 percent in IIIQ2016, increasing 0.7 percent in IIQ2016 and increasing 0.6 percent in IQ2016. Private fixed investment increased 0.5 percent in IVQ2016. Private fixed investment increased 1.9 percent in IQ2017 and increased 0.7 percent in IIQ2017. Private fixed investment increased 0.4 percent in IIIQ2017 and increased 2.1 percent in IVQ2017. Private fixed investment increased 1.3 percent in IQ2018, increasing 1.3 percent in IIQ2018. Private fixed investment increased 0.2 percent in IIIQ2018, increasing 0.7 percent in IVQ2018. Private fixed investment increased 0.8 percent in IQ2019, decreasing 0.4 percent in IIQ2019. Private fixed investment decreased 0.2 percent in IIIQ2019. Growth of real private investment in Table IA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012. There is recent robust growth. 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 2012 Dollars and ∆%

Real PFI, Billions Chained 2012

Dollars

∆% Relative to IVQ2007

∆% Relative to Prior Quarter

∆%
over
Year Earlier

IVQ2007

2630.0

NA

-1.0

-1.1

IQ2008

2589.1

-1.6

-1.6

-2.6

IIQ2008

2567.9

-2.4

-0.8

-3.8

IIIQ2008

2503.0

-4.8

-2.5

-5.7

IV2008

2337.8

-11.1

-6.6

-11.1

IQ2009

2151.9

-18.2

-8.0

-16.9

IIQ2009

2073.9

-21.1

-3.6

-19.2

IIIQ2009

2081.6

-20.9

0.4

-16.8

IVQ2009

2092.0

-20.5

0.5

-10.5

IQ2010

2091.0

-20.5

0.0

-2.8

IIQ2010

2167.1

-17.6

3.6

4.5

IIIQ2010

2178.7

-17.2

0.5

4.7

IVQ2010

2220.0

-15.6

1.9

6.1

IQ2011

2216.2

-15.7

-0.2

6.0

IIQ2011

2268.0

-13.8

2.3

4.7

IIIQ2011

2363.3

-10.1

4.2

8.5

IVQ2011

2423.7

-7.8

2.6

9.2

IQ2012

2499.4

-5.0

3.1

12.8

IIQ2012

2549.8

-3.0

2.0

12.4

IIIQ2012

2553.6

-2.9

0.1

8.1

IVQ2012

2599.4

-1.2

1.8

7.2

IQ2013

2643.9

0.5

1.7

5.8

IIQ2013

2665.3

1.3

0.8

4.5

IIIQ2013

2711.3

3.1

1.7

6.2

IVQ2013

2748.0

4.5

1.4

5.7

IQ2014

2775.6

5.5

1.0

5.0

IIQ2014

2852.8

8.5

2.8

7.0

IIIQ2014

2907.3

10.5

1.9

7.2

IVQ2014

2941.2

11.8

1.2

7.0

IQ2015

2943.1

11.9

0.1

6.0

IIQ2015

2964.7

12.7

0.7

3.9

IIIQ2015

2988.2

13.6

0.8

2.8

IVQ2015

2971.9

13.0

-0.5

1.0

IQ2016

2991.0

13.7

0.6

1.6

IIQ2016

3010.9

14.5

0.7

1.6

IIIQ2016

3038.9

15.5

0.9

1.7

IVQ2016

3053.7

16.1

0.5

2.8

IQ2017

3111.1

18.3

1.9

4.0

IIQ2017

3133.0

19.1

0.7

4.1

IIIQ2017

3144.1

19.5

0.4

3.5

IVQ2017

3210.7

22.1

2.1

5.1

IQ2018

3254.0

23.7

1.3

4.6

IIQ2018

3295.4

25.3

1.3

5.2

IIIQ2018

3301.3

25.5

0.2

5.0

IVQ2018

3323.0

26.3

0.7

3.5

IQ2019

3349.4

27.4

0.8

2.9

IIQ2019

3337.4

26.9

-0.4

1.3

IIIQ2019

3330.5

26.6

-0.2

0.9

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 chained dollars of 2009 from 2007 to 2019. Real private fixed investment increased 26.6 percent from $2,630.0 billion of chained 2012 dollars in IVQ2007 to $3,330.5 billion in IIIQ2019.

clip_image036

Chart IA1-3, US, Real Private Fixed Investment, Billions of Chained 2009 Dollars, 2007 to 2019

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 2012 from 1980 to 1993. Real gross private domestic investment climbed 39.9 percent to $1,305.0 billion of 2012 dollars in IQ1993 above the level of $933.1 billion in IQ1980. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991.

clip_image038

Chart IA1-4, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 1980-1993

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 2012 from 2007 to 2019. Real gross private domestic investment reached a level of $3416.2 billion in IIIQ2019, which was 28.8 percent higher than the level of $2,653.1 billion in IVQ2007 (http://www.bea.gov/iTable/index_nipa.cfm).

clip_image040

Chart IA1-5, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 2007-2019

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 decreased from 20.0 percent in IIIQ2000 and 19.5 percent in IIIQ2006 to 17.4 percent in IIIQ2019. 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 3.7 percent in IIIQ2019. The share of fixed investment in GDP fell from 19.4 percent in IIIQ2000 and 19.0 percent in IIIQ2006 to 17.1 percent in IIIQ2019.

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

IIIQ2019

IIIQ2006

IIIQ2000

Gross Private Domestic Investment

17.4

19.5

20.0

  Fixed Investment

17.1

19.0

19.4

     Nonresidential

13.4

13.1

14.7

          Structures

2.9

3.1

3.2

          Equipment

          and Software

5.7

6.3

7.5

          Intellectual
           Property

4.7

3.7

4.0

     Residential

3.7

5.9

4.7

   Change in Private Inventories

0.3

0.6

0.6

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

Broader perspective is in Chart IA1-6 with the percentage share of gross private domestic investment in GDP in annual data from 1929 to 2018. 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_image042

Chart IA1-6, US, Percentage Share of Gross Private Domestic Investment in Gross Domestic Product, Annual, 1929-2018

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 2018. 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_image044

Chart IA1-7, US, Percentage Share of Private Fixed Investment in Gross Domestic Product, Annual, 1929-2018

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 2018. There is again recovery from sharp contraction in the 1980s but inadequate recovery in the current economic cycle.

clip_image046

Chart IA1-8, US, Percentage Share of Nonresidential Investment in Gross Domestic Product, Annual, 1929-2018

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 2018. There is again inadequate recovery in the current economic cycle.

clip_image048

Chart IA1-9, US, Percentage Share of Business Equipment and Software in Gross Domestic Product, Annual, 1929-2018

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 2018. 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_image050

Chart IA1-10, US, Percentage Share of Residential Investment in Gross Domestic Product, Annual, 1929-2018

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 2019 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_image052

Chart IA1-11, US, Percentage Share of Residential Investment in Gross Domestic Product, Quarterly, 1979-2019

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 2018. 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_image054

Chart IA1-12, US, Percentage Share of Intellectual Property Products Investment in Gross Domestic Product, Annual, 1929-2018

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 2019. The share stabilized in the 2000s.

clip_image056

Chart IA1-13, US, Percentage Share of Intellectual Property Investment in Gross Domestic Product, Quarterly, 1979-2019

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 (EQP), residential investment (RES), intellectual property products (IPP) and change in inventories (∆INV) for the cyclical expansions from IQ1983 to IVQ1992 and from IIIQ2009 to IIQ2019. GDI contributed 2.22 percentage points to GDP in IQ2015 with 0.04 percentage points by PFI, 2.18 percentage points by inventory accumulation and deduction of 0.12 percentage points by intellectual property products. GDI contributed 0.08 percentage points to GDP growth in IIQ2015: 0.49 percentage points in PFI, 0.16 percentage points in NRES and 0.34 percentage points in RES. Inventory investment deducted 0.42 percentage points and IPP added 0.02 percentage points. GDI deducted 0.08 percentage points from GDP growth in IIIQ2015 with deduction of 0.61 percentage points by inventory divestment while EQP added 0.47 percentage points. PFI added 0.53 percentage points, nonresidential investment added 0.15 percentage points and residential investment added 0.37 percentage points. IPP added 0.18 percentage points. GDI deducted 1.07 percentage points in IVQ2015 with percentage point deductions of 0.61 by NRES, 0.38 by PFI, 0.61 by EQP and 0.68 by inventory divestment. Percentage point contributions were 0.39 by IPP and 0.23 by RES. GDI deducted 0.26 percentage points from GDP growth in IQ2016 with percentage point contribution of 0.43 by fixed investment, deduction of 0.08 by nonresidential investment and deduction of 0.68 by inventory change. Residential investment added 0.50 percentage points and intellectual property products contributed 0.52 percentage points. GDI deducted 0.28 percentage points from GDP growth in IIQ2016 with deductions of 0.07 by RES and 0.72 percentage points by inventory change. IPP added 0.39 percentage points, NRES contributed 0.52 and PFI added 0.44. GDI contributed 0.09 percentage points to GDP growth in IIIQ2016 with contributions by NRES, EQP, IPP and deduction by inventory divestment. PFI added 0.62 percentage points and RES deducted 0.10 percentage points. GDI contributed 1.50 percentage points to GDP growth in IVQ2016 with contributions by NRES, RES and inventory investment. PFI added 0.33 percentage points, RES added 0.24 percentage points and inventory investment added 1.18 percentage points. GDI contributed 0.57 percentage points to GDP growth in IQ2017 with contributions by all segments except for deduction of 0.70 percentage points by inventory divestment. PFI contributed 1.27 percentage points. NRES contributed 0.84 percentage points and RES added 0.43 percentage points. EQP contributed 0.36 percentage points and IPP added 0.27 percentage points. GDI added 0.59 percentage points to GDP growth in IIQ2017 with contributions of 0.48 PPs by PFI, 0.57 PPs by NRES, 0.50 PPs by EQP and 0.01 PPs by IPP. RES deducted 0.09 PPs and inventory change added 0.11 PPs. GDI added 1.25 percentage points to GDP growth in IIIQ2017 with contributions of 0.25 PPs by PFI, 0.32 PPs by NRES and 0.21 PPs by IPP. EQP contributed 0.36 PPs, RES deducted 0.08 PPs and inventory change added 1.00 PPs. GDI added 0.80 percentage points to GDP growth in IVQ2017 with contributions of 1.45 PPs by PFI, 1.08 PPs by NRES and 0.20 PPs by IPP. EQP contributed 0.72 PPs, RES added 0.37 PPs and inventory change deducted 0.64 PPs. GDI added 1.07 percentage points to GDP growth in IQ2018 with contributions of 0.94 PPs by PFI, 1.15 PPs by NRES and 0.41 PPs by IPP. EQP contributed 0.39 PPs, RES deducted 0.21 PPs and inventory change contributed 0.13 PPs. GDI deducted 0.30 PPs from GDP growth in IIQ2018 with contributions of 0.89 by PFI, 1.04 by NRES, 0.20 by EQP and 0.51 by IPP. RES deducted 0.15 and inventory divestment deducted 1.20. GDI added 2.27 PPs to GDP growth in IIIQ2018 with contributions of 0.29 by NRSE, 0.17 by EQP, 0.18 by IPP and 2.14 by inventory change. RES deducted 0.16 and PFI added 0.13. GDI added 0.53 PPs to GDP growth in IVQ2018 with contributions of 0.64 by NRSE, 0.42 by EQP, 0.51 by IPP and 0.07 by inventory change. RES deducted 0.18 and PFI added 0.46. GDI added 1.09 PPs to GDP growth in IQ2019 with contributions of 0.60 by NRSE, 0.48 by IPP and 0.53 by inventory change. RES deducted 0.04 and EQP deducted 0.00. PFI added 0.56. GDI deducted 1.16 PPs from GDP in IIQ2019. PFI deducted 0.25, NRES deducted 0.14, RES deducted 0.11 and inventory divestment deducted 0.91. EQP added 0.05 and IPP added 0.17. GDI deducted 0.17 PPs from GDP in IIIQ2019. PFI deducted 0.14, NRES deducted 0.31, EQP deducted 0.22 and inventory divestment deducted 0.03. RES added 0.17 and IPP added 0.22.

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

GDP

GDI

PFI

NRES

EQP

IPP

RES

∆INV

2019

I

3.1

1.09

0.56

0.60

0.00

0.48

-0.04

0.53

II

2.0

-1.16

-0.25

-0.14

0.05

0.17

-0.11

-0.91

III

2.1

-0.17

-0.14

-0.31

-0.22

0.22

0.17

-0.03

2018

I

2.5

1.07

0.94

1.15

0.39

0.41

-0.21

0.13

II

3.5

-0.30

0.89

1.04

0.20

0.51

-0.15

-1.20

III

2.9

2.27

0.13

0.29

0.17

0.18

-0.16

2.14

IV

1.1

0.53

0.46

0.64

0.42

0.51

-0.18

0.07

2017

I

2.3

0.57

1.27

0.84

0.36

0.27

0.43

-0.70

II

2.2

0.59

0.48

0.57

0.50

0.01

-0.09

0.11

III

3.2

1.25

0.25

0.32

0.36

0.21

-0.08

1.00

IV

3.5

0.80

1.45

1.08

0.72

0.20

0.37

-0.64

2016

I

2.0

-0.26

0.43

-0.08

-0.24

0.52

0.50

-0.68

II

1.9

-0.28

0.44

0.52

-0.14

0.39

-0.07

-0.72

III

2.2

0.09

0.62

0.72

0.02

0.20

-0.10

-0.53

IV

2.0

1.50

0.33

0.09

0.02

0.00

0.24

1.18

2015

I

3.2

2.22

0.04

-0.22

0.21

-0.12

0.26

2.18

II

3.0

0.08

0.49

0.16

0.09

0.02

0.34

-0.42

III

1.3

-0.08

0.53

0.15

0.47

0.18

0.37

-0.61

IV

0.1

-1.07

-0.38

-0.61

-0.31

0.39

0.23

-0.68

2014

I

-1.1

-0.74

0.66

0.75

0.21

0.10

-0.09

-1.40

II

5.5

2.92

1.86

1.47

0.62

0.38

0.40

1.05

III

5.0

1.47

1.30

1.11

0.76

0.30

0.19

0.17

IV

2.3

0.09

0.78

0.33

-0.23

0.34

0.46

-0.69

2013

I

3.6

2.43

1.10

0.69

0.44

0.50

0.41

1.33

II

0.5

0.75

0.52

0.14

-0.05

-0.14

0.37

0.23

III

3.2

2.60

1.12

0.90

0.00

0.31

0.22

1.48

IV

3.2

0.27

0.89

1.08

0.92

0.05

-0.20

-0.62

2012

I

3.2

1.32

1.90

1.30

0.73

0.04

0.60

-0.59

II

1.7

1.47

1.25

1.16

0.68

0.21

0.09

0.21

III

0.5

0.29

0.09

-0.18

-0.07

0.03

0.27

0.20

IV

0.5

-0.58

1.13

0.57

0.48

0.32

0.56

-1.70

2011

I

-1.0

-1.10

-0.09

-0.05

0.53

0.16

-0.03

-1.02

II

2.9

2.36

1.34

1.23

0.31

0.26

0.11

1.03

III

-0.1

0.19

2.42

2.25

1.32

0.32

0.17

-2.23

IV

4.7

4.60

1.55

1.29

0.54

0.37

0.25

3.06

2010

I

1.5

1.28

-0.02

0.32

1.32

-0.27

-0.34

1.30

II

3.7

2.95

2.03

1.49

1.28

-0.08

0.53

0.92

III

3.0

2.60

0.32

1.26

1.11

0.30

-0.94

2.28

IV

2.0

-0.17

1.08

0.92

0.44

0.29

0.16

-1.25

2009

I

-4.4

-7.21

-5.07

-3.89

-2.35

-0.41

-1.18

-2.14

II

-0.6

-3.15

-2.11

-1.44

-0.74

0.39

-0.68

-1.04

III

1.5

-0.08

0.25

-0.24

0.46

0.16

0.49

-0.33

IV

4.5

4.76

0.32

0.33

0.86

0.48

-0.02

4.44

1982

I

-6.1

-7.33

-2.00

-1.19

-0.57

0.14

-0.81

-5.33

II

1.8

-0.05

-2.32

-1.88

-1.20

0.08

-0.44

2.27

III

-1.5

-0.62

-1.73

-1.71

-0.55

0.06

-0.02

1.11

IV

0.2

-5.38

-0.04

-1.05

-0.57

0.00

1.01

-5.34

1983

I

5.4

2.34

1.44

-0.93

-0.27

0.16

2.36

0.91

II

9.4

5.95

2.53

0.67

1.24

0.29

1.86

3.42

III

8.2

4.40

3.83

2.13

1.43

0.31

1.70

0.57

IV

8.6

6.95

3.93

3.14

2.32

0.35

0.79

3.01

1984

I

8.1

7.23

2.29

1.71

0.46

0.30

0.58

4.94

II

7.1

2.57

2.87

2.53

1.36

0.29

0.34

-0.29

III

3.9

1.70

1.48

1.70

0.89

0.25

-0.22

0.21

IV

3.3

-1.07

1.36

1.34

0.86

0.29

0.02

-2.43

1985

I

3.9

-2.14

0.72

0.67

-0.23

0.14

0.05

-2.86

II

3.6

1.34

0.99

0.83

0.65

0.20

0.16

0.35

III

6.2

-0.43

-0.28

-0.62

-0.38

0.13

0.34

-0.15

IV

3.0

2.81

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

1.8

-1.30

0.00

-1.12

0.34

0.15

1.12

-1.30

III

3.9

-1.97

-0.34

-0.63

-0.17

0.10

0.28

-1.62

IV

2.2

0.25

0.54

0.48

0.30

0.10

0.05

-0.29

1987

I

3.0

1.99

-1.30

-1.26

-0.97

0.07

-0.04

3.29

II

4.4

0.08

1.07

1.00

0.76

0.08

0.07

-1.00

III

3.5

0.03

1.23

1.40

0.70

0.11

-0.17

-1.20

IV

7.0

4.96

-0.01

-0.05

-0.48

0.16

0.04

4.97

1988

I

2.1

-3.64

0.06

0.41

0.82

0.15

-0.36

-3.69

II

5.4

1.73

1.39

1.15

0.67

0.18

0.25

0.33

III

2.4

0.38

0.33

0.32

0.29

0.22

0.01

0.05

IV

5.4

1.12

0.84

0.71

0.35

0.40

0.13

0.28

1989

I

4.1

2.43

0.62

0.81

0.32

0.27

-0.19

1.80

II

3.1

-0.71

0.09

0.68

0.57

0.27

-0.59

-0.80

III

3.0

-0.64

1.20

1.28

0.52

0.29

-0.08

-1.84

IV

0.8

-0.54

-0.91

-0.53

-0.74

0.30

-0.38

0.37

1990

I

4.4

0.70

0.80

0.64

0.11

0.23

0.16

-0.10

II

1.5

0.03

-1.35

-0.67

-0.79

0.19

-0.69

1.38

III

0.3

-1.29

-0.56

0.33

0.34

0.05

-0.89

-0.74

IV

-3.6

-3.66

-1.69

-0.79

-0.38

0.20

-0.90

-1.97

1991

I

-1.9

-2.04

-1.78

-1.00

-0.90

0.18

-0.78

-0.26

II

3.2

0.05

0.17

-0.26

-0.17

0.26

0.43

-0.12

III

2.0

1.21

0.05

-0.43

0.33

0.04

0.48

1.16

IV

1.4

2.15

0.24

-0.05

-0.13

0.31

0.29

1.91

1992

I

4.9

-1.16

0.64

-0.20

-0.21

0.15

0.84

-1.81

II

4.4

3.40

1.96

1.44

1.29

0.14

0.53

1.44

III

4.0

0.50

0.70

0.69

0.52

0.07

0.01

-0.19

IV

4.2

1.92

1.78

1.18

0.85

0.19

0.60

0.14

GDP: Gross Domestic Product; GDI: Gross Domestic Investment; PFI: Private Fixed Investment; NRES: Nonresidential; EQP: 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 IIIQ2019 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 2012 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 85.5 percent in nominal terms from IVQ2007 to IIIQ2019 while net dividends increased to $790.4 billion in IIIQ2019 and undistributed corporate profits swelled 287.3 percent from $138.0 billion in IQ2007 to $534.5 billion in IIIQ2019 and changed signs from minus $4.3 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 20.2 percent from IVQ2007 to IIIQ2019, which is much lower than nominal increase of 47.6 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-IIIQ2019

IVQ2007

IIIQ2019

∆%

Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)

Gross Value Added of Corporate Business

8,177.6

12,070.2

47.6

Consumption of Fixed Capital

1,209.3

1,914.5

58.3

Net Value Added

6,968.3

10,155.7

45.7

Compensation of Employees

4,948.5

7,103.8

43.6

Taxes on Production and Imports Less Subsidies

686.7

992.0

44.5

Net Operating Surplus

1,333.1

2,059.9

54.5

Net Interest and Misc

190.1

372.3

95.8

Business Current Transfer Payment Net

70.0

153.3

119.0

Corporate Profits with IVA and CCA Adjustments

1,073.1

1,534.2

43.0

Taxes on Corporate Income

359.0

209.3

-41.7

Profits after Tax with IVA and CCA Adjustment

714.1

1,324.9

85.5

Net Dividends

718.4

790.4

10.0

Undistributed Profits with IVA and CCA Adjustment

-4.3

534.5

NA ∆% 287.3 relative to 138.0 in IQ2007

Billions of Chained USD 2012 SAAR

Gross Value Added of Nonfinancial Corporate Business

7,881.7

9,477.7

20.2

Consumption of Fixed Capital

1,107.7

1,595.7

44.1

Net Value Added

6,774.0

7,882.0

16.4

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 IQ1993. There is significant difference both in nominal and inflation-adjusted data. Between IQ1980 and IQ1993, profits after tax with IVA and CCA increased 131.8 percent with dividends growing 272.4 percent and undistributed profits increasing 6.6 percent. There was much higher inflation in the 1980s than in the current cycle. For example, the consumer price index increased 79.3 percent from Mar 1980 to Mar 1993 but only 22.2 percent between Dec 2007 and Sep 2019 (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 46.9 percent between IQ1980 and IQ1993 but only 20.2 percent between IVQ2007 and IIIQ2019 while net value added adjusted for inflation increased 44.6 percent between IQ1980 and IQ1993 but only 16.4 percent between IVQ2007 and IIIQ2019. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

Table IA1-6, US, Value Added of Corporate Business, Corporate Profits and Dividends, IQ1980-IVQ1992

IQ1980

IQ1993

∆%

Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)

Gross Value Added of Corporate Business

1,653.6

3,799.1

129.7

Consumption of Fixed Capital

200.5

507.5

153.1

Net Value Added

1,453.1

3,291.6

126.5

Compensation of Employees

1,072.9

2,459.9

129.3

Taxes on Production and Imports Less Subsidies

121.5

334.5

175.3

Net Operating Surplus

258.7

497.3

92.2

Net Interest and Misc.

50.0

62.8

25.6

Business Current Transfer Payment Net

11.5

33.6

192.2

Corporate Profits with IVA and CCA Adjustments

197.2

400.8

103.2

Taxes on Corporate Income

85.4

141.7

65.9

Profits after Tax with IVA and CCA Adjustment

111.8

259.1

131.8

Net Dividends

52.6

195.9

272.4

Undistributed Profits with IVA and CCA Adjustment

59.3

63.2

6.6

Billions of Chained USD 2012 SAAR

Gross Value Added of Nonfinancial Corporate Business

3,140.9

4,615.0

46.9

Consumption of Fixed Capital

319.3

534.2

67.3

Net Value Added

2,821.6

4,080.8

44.6

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 2019. 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_image058

Chart IA1-14, US, Corporate Profits after Tax and Undistributed Profits with Inventory Valuation Adjustment and Capital Consumption Adjustment, Quarterly, 1979-2019

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 IIIQ2019 in the upper block and for IQ1980 and IQ1993 in the lower block. Compensation of employees or labor costs per unit of gross value added of nonfinancial domestic corporate income hardly changed from 0.551 in IVQ2007 to 0.665 in IIIQ2019 in a fractured labor market but increased from 0.320 in IQ1980 to 0.481 in IQ1993 in a more vibrant labor market. Unit nonlabor costs increased mildly from 0.259 per unit of gross value added in IVQ2007 to 0.321 in IIIQ2019 but increased from 0.116 in IQ1980 to 0.197 in IQ1993 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 0.079 in IVQ2007 to 0.105 in IIIQ2019 and from 0.027 in IQ1980 to 0.044 in IQ1993.

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

IVQ2007

IIIQ2019

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

0.921

1.105

Compensation of Employees (Unit Labor Cost)

0.551

0.665

Unit Nonlabor Cost

0.259

0.321

Consumption of Fixed Capital

0.135

0.177

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

0.088

0.108

Net Interest and Misc. Payments

0.036

0.036

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

0.112

0.120

Taxes on Corporate Income

0.032

0.016

Profits after Tax with IVA and CCA Adjustment

0.079

0.105

IQ1980

IQ1993

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

0.487

0.744

Compensation of Employees (Unit Labor Cost)

0.320

0.481

Unit Nonlabor Cost

0.116

0.197

Consumption of Fixed Capital

0.060

0.097

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

0.039

0.074

Net Interest and Misc. Payments

0.017

0.026

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

0.052

0.066

Taxes on Corporate Income

0.024

0.021

Profits after Tax with IVA and CCA Adjustment

0.027

0.044

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 2019. 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 at a slower pace in the weak economy from IVQ2007 to IIQ2019 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 economy cycle with frustrated investment decision.

clip_image060

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, 1980-2019

Source: US Bureau of Economic Analysis

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

Corporate profits with IVA and CCA decreased at 0.9 percent in IVQ2018 and decreased at 0.4 percent after taxes, as shown in Table IA1-8. Corporate profits with IVA and CCA decreased at 3.8 percent in IQ2019 and decreased at 4.1 percent after taxes. Corporate profits with IVA and CCA increased at 3.8 percent in IIQ2019 and increased at 3.7 percent after taxes. Corporate profits with IVA and CCA decreased at 0.2 percent in IIIQ2019 and increased at 0.6 percent after taxes. Corporate profits with IVA and CCA decreased at 1.2 percent in IIIQ2019 relative to IIIQ2018 and profits after tax with IVA and CCA decreased 0.3 percent in IIIQ2019 relative to IIIQ2018. Net dividends increased at 2.5 percent in IVQ2018. Net dividends decreased at 2.8 percent in IQ2019. Net dividends increased at 1.7 percent in IIQ2019. Net dividends decreased at 0.5 percent in IIIQ2019. Net dividends increased 0.7 percent in IIIQ2019 relative to a year earlier. Undistributed profits decreased at 7.3 percent in IVQ2018. Undistributed profits decreased at 7.5 percent in IQ2019. Undistributed profits increased at 9.4 percent in IIQ2019. Undistributed profits increased at 3.6 percent in IIIQ2019. Undistributed profits decreased at 2.8 percent in IIIQ2019 relative to IIIQ2018.

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

2017

2018

IV Q2018

I

Q2019

II

Q2019

III Q219

IIIQ19/ IIIQ18

Corporate Profits with IVA and CCA

-0.3

3.4

-0.9

-3.8

3.8

-0.2

-1.2

Corporate Income Taxes

-15.4

-31.2

-5.1

-1.4

4.5

-7.0

-9.1

After Tax Profits with IVA and CCA

3.2

10.0

-0.4

-4.1

3.7

0.6

-0.3

Net Dividends

5.4

5.9

2.5

-2.8

1.7

-0.5

0.7

Und Profits with IVA and CCA

-2.4

21.3

-7.3

-7.5

9.4

3.6

-2.8

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 fluctuation in corporate profits. Corporate profits decreased at $18.6 billion in IVQ2018. Corporate profits decreased at $78.7 billion in IQ2019. Corporate profits increased at $75.8 billion in IIQ2019. Corporate profits decreased at $4.7 billion in IIIQ2019. Profits after tax with IVA and CCA decreased at $6.8 billion in IVQ2018. Profits after tax with IVA and CCA decreased at $75.7 billion in IQ2019. Profits after tax with IVA and CCA increased at $66.1 billion in IIQ2019. Profits after tax with IVA and CCA increased at $11.2 billion in IIIQ2019. Net dividends increased at $32.8 billion in IVQ2018. Net dividends decreased at $37.9 billion in IQ2019. Net dividends increased at $22.3 billion in IIQ2019. Net dividends decreased at $7.3 billion in IIIQ2019. Undistributed corporate profits decreased at $39.6 billion in IVQ2018. Undistributed corporate profits decreased at $37.8 billion in IQ2019. Undistributed corporate profits increased at $43.9 billion in IIQ2019. Undistributed corporate profits increased at $18.4 billion in IIIQ2019. Undistributed corporate profits swelled 287.3 percent from $138.0 billion in IQ2007 to $534.5 billion in IIIQ2019 and changed signs from minus $4.3 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. Second, sharp and continuing strengthening of the dollar, with recent depreciation at the margin, is affecting balance sheets of US corporations with foreign operations (https://www.fasb.org/summary/stsum52.shtml) 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 decreased at $18.6 billion in IVQ2018. Profits from domestic industries increased at $0.7 billion and profits from nonfinancial business increased at $7.4 billion. Profits from the rest of the world decreased at $19.3 billion. Corporate profits with IVA and CCA decreased at $78.7 billion in IQ2019. Profits from domestic industries decreased at $86.0 billion and profits from nonfinancial business decreased at $108.2 billion. Profits from the rest of the world increased at $7.3 billion. Corporate profits with IVA and CCA increased at $75.8 billion in IIQ2019. Profits from domestic industries increased at $37.2 billion and profits from nonfinancial business increased at $34.7 billion. Profits from the rest of the world increased at $38.7 billion. Corporate profits with IVA and CCA increased at $4.7 billion in IIIQ2019. Profits from domestic industries decreased at $10.3 billion and profits from nonfinancial business decreased at $5.5 billion. Profits from the rest of the world increased at $5.5 billion. Total corporate profits with IVA and CCA were $2078.0 billion in IIIQ2019 of which $1534.2 billion from domestic industries, or 73.8 percent of the total, and $543.7 billion, or 26.2 percent, from the rest of the world. Nonfinancial corporate profits of $1129.3 billion account for 54.3 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

2017

2018

IV

Q2018

I

Q2019

II

Q2019

III Q2019

Corporate Profits with IVA and CCA

-5.5

68.7

-18.6

-78.7

75.8

-4.7

Corporate Income Taxes

-58.2

-99.6

-11.8

-3.1

9.8

-15.9

After Tax Profits with IVA and CCA

52.6

168.4

-6.8

-75.7

66.1

11.2

Net Dividends

63.7

73.0

32.8

-37.9

22.3

-7.3

Und Profits with IVA and CCA

-11.1

95.4

-39.6

-37.8

43.9

18.4

Corporate Profits with IVA and CCA

-5.5

68.7

-18.6

-78.7

75.8

-4.7

Domestic Industries

-47.7

21.1

0.7

-86.0

37.2

-10.3

Financial

-35.7

11.1

-6.7

22.2

2.5

-4.7

Nonfinancial

-12.1

10.0

7.4

-108.2

34.7

-5.5

Rest of the World

42.2

47.6

-19.3

7.3

38.7

5.5

Receipts from Rest of the World

63.5

99.9

-5.0

13.7

25.3

-10.0

Payments to the Rest of the World

21.3

52.4

14.3

6.4

-13.4

-15.5

Source: Bureau of Economic Analysis

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

IID. United States International Terms of Trade. Delfim Netto (1959) partly reprinted in Pelaez (1973) conducted two classical nonparametric tests (Mann 1945, Wallis and Moore 1941; see Kendall and Stuart 1968) with coffee-price data in the period of free markets from 1857 to 1906 with the following conclusions (Pelaez, 1976a, 280):

“First, the null hypothesis of no trend was accepted with high confidence; secondly, the null hypothesis of no oscillation was rejected also with high confidence. Consequently, in the nineteenth century international prices of coffee fluctuated but without long-run trend. This statistical fact refutes the extreme argument of structural weakness of the coffee trade.”

In his classic work on the theory of international trade, Jacob Viner (1937, 563) analyzed the “index of total gains from trade,” or “amount of gain per unit of trade,” denoted as T:

T= (∆Pe/∆Pi)∆Q

Where ∆Pe is the change in export prices, ∆Pi is the change in import prices and ∆Q is the change in export volume. Dorrance (1948, 52) restates “Viner’s index of total gain from trade” as:

“What should be done is to calculate an index of the value (quantity multiplied by price) of exports and the price of imports for any country whose foreign accounts are to be analysed. Then the export value index should be divided by the import price index. The result would be an index which would reflect, for the country concerned, changes in the volume of imports obtainable from its export income (i.e. changes in its "real" export income, measured in import terms). The present writer would suggest that this index be referred to as the ‘income terms of trade’ index to differentiate it from the other indexes at present used by economists.”

What really matters for an export activity especially during modernization is the purchasing value of goods that it exports in terms of prices of imports. For a primary producing country, the purchasing power of exports in acquiring new technology from the country providing imports is the critical measurement. The barter terms of trade of Brazil improved from 1857 to 1906 because international coffee prices oscillated without trend (Delfim Netto 1959) while import prices from the United Kingdom declined at the rate of 0.5 percent per year (Imlah 1958). The accurate measurement of the opportunity afforded by the coffee exporting economy was incomparably greater when considering the purchasing power in British prices of the value of coffee exports, or Dorrance’s (1948) income terms of trade.

The conventional theory that the terms of trade of Brazil deteriorated over the long term is without reality (Pelaez 1976a, 280-281):

“Moreover, physical exports of coffee by Brazil increased at the high average rate of 3.5 per cent per year. Brazil's exchange receipts from coffee-exporting in sterling increased at the average rate of 3.5 per cent per year and receipts in domestic currency at 4.5 per cent per year. Great Britain supplied nearly all the imports of the coffee economy. In the period of the free coffee market, British export prices declined at the rate of 0.5 per cent per year. Thus, the income terms of trade of the coffee economy improved at the relatively satisfactory average rate of 4.0 per cent per year. This is only a lower bound of the rate of improvement of the terms of trade. While the quality of coffee remained relatively constant, the quality of manufactured products improved significantly during the fifty-year period considered. The trade data and the non-parametric tests refute conclusively the long-run hypothesis. The valid historical fact is that the tropical export economy of Brazil experienced an opportunity of absorbing rapidly increasing quantities of manufactures from the "workshop" countries. Therefore, the coffee trade constituted a golden opportunity for modernization in nineteenth-century Brazil.”

Imlah (1958) provides decline of British export prices at 0.5 percent in the nineteenth century and there were no lost decades, depressions or unconventional monetary policies in the highly dynamic economy of England that drove the world’s growth impulse. Inflation in the United Kingdom between 1857 and 1906 is measured by the composite price index of O’Donoghue and Goulding (2004) at minus 7.0 percent or average rate of decline of 0.2 percent per year.

Simon Kuznets (1971) analyzes modern economic growth in his Lecture in Memory of Alfred Nobel:

“The major breakthroughs in the advance of human knowledge, those that constituted dominant sources of sustained growth over long periods and spread to a substantial part of the world, may be termed epochal innovations. And the changing course of economic history can perhaps be subdivided into economic epochs, each identified by the epochal innovation with the distinctive characteristics of growth that it generated. Without considering the feasibility of identifying and dating such economic epochs, we may proceed on the working assumption that modern economic growth represents such a distinct epoch - growth dating back to the late eighteenth century and limited (except in significant partial effects) to economically developed countries. These countries, so classified because they have managed to take adequate advantage of the potential of modern technology, include most of Europe, the overseas offshoots of Western Europe, and Japan—barely one quarter of world population.”

Cameron (1961) analyzes the mechanism by which the Industrial Revolution in Great Britain spread throughout Europe and Cameron (1967) analyzes the financing by banks of the Industrial Revolution in Great Britain. O’Donoghue and Goulding (2004) provide consumer price inflation in England since 1750 and MacFarlane and Mortimer-Lee (1994) analyze inflation in England over 300 years. Lucas (2004) estimates world population and production since the year 1000 with sustained growth of per capita incomes beginning to accelerate for the first time in English-speaking countries and in particular in the Industrial Revolution in Great Britain. The conventional theory is unequal distribution of the gains from trade and technical progress between the industrialized countries and developing economies (Singer 1950, 478):

“Dismissing, then, changes in productivity as a governing factor in changing terms of trade, the following explanation presents itself: the fruits of technical progress may be distributed either to producers (in the form of rising incomes) or to consumers (in the form of lower prices). In the case of manufactured commodities produced in more developed countries, the former method, i.e., distribution to producers through higher incomes, was much more important relatively to the second method, while the second method prevailed more in the case of food and raw material production in the underdeveloped countries. Generalizing, we may say -that technical progress in manufacturing industries showed in a rise in incomes while technical progress in the production of food and raw materials in underdeveloped countries showed in a fall in prices”

Temin (1997, 79) uses a Ricardian trade model to discriminate between two views on the Industrial Revolution with an older view arguing broad-based increases in productivity and a new view concentration of productivity gains in cotton manufactures and iron:

“Productivity advances in British manufacturing should have lowered their prices relative to imports. They did. Albert Imlah [1958] correctly recognized this ‘severe deterioration’ in the net barter terms of trade as a signal of British success, not distress. It is no surprise that the price of cotton manufactures fell rapidly in response to productivity growth. But even the price of woolen manufactures, which were declining as a share of British exports, fell almost as rapidly as the price of exports as a whole. It follows, therefore, that the traditional ‘old-hat’ view of the Industrial Revolution is more accurate than the new, restricted image. Other British manufactures were not inefficient and stagnant, or at least, they were not all so backward. The spirit that motivated cotton manufactures extended also to activities as varied as hardware and haberdashery, arms, and apparel.”

Phyllis Deane (1968, 96) estimates growth of United Kingdom gross national product (GNP) at around 2 percent per year for several decades in the nineteenth century. The facts that the terms of trade of Great Britain deteriorated during the period of epochal innovation and high rates of economic growth while the income terms of trade of the coffee economy of nineteenth-century Brazil improved at the average yearly rate of 4.0 percent from 1857 to 1906 disprove the hypothesis of weakness of trade as an explanation of relatively lower income and wealth. As Temin (1997) concludes, Britain did pass on lower prices and higher quality the benefits of technical innovation. Explanation of late modernization must focus on laborious historical research on institutions and economic regimes together with economic theory, data gathering and measurement instead of grand generalizations of weakness of trade and alleged neocolonial dependence (Stein and Stein 1970, 134-5):

“Great Britain, technologically and industrially advanced, became as important to the Latin American economy as to the cotton-exporting southern United States. [After Independence in the nineteenth century] Latin America fell back upon traditional export activities, utilizing the cheapest available factor of production, the land, and the dependent labor force.”

Summerhill (2015) contributes momentous solid facts and analysis with an ideal method combining economic theory, econometrics, international comparisons, data reconstruction and exhaustive archival research. Summerhill (2015) finds that Brazil committed to service of sovereign foreign and internal debt. Contrary to conventional wisdom, Brazil generated primary fiscal surpluses during most of the Empire until 1889 (Summerhill 2015, 37-8, Figure 2.1). Econometric tests by Summerhill (2015, 19-44) show that Brazil’s sovereign debt was sustainable. Sovereign credibility in the North-Weingast (1989) sense spread to financial development that provided the capital for modernization in England and parts of Europe (see Cameron 1961, 1967). Summerhill (2015, 3, 194-6, Figure 7.1) finds that “Brazil’s annual cost of capital in London fell from a peak of 13.9 percent in 1829 to only 5.12 percent in 1889. Average rates on secured loans in the private sector in Rio, however, remained well above 12 percent through 1850.” Financial development would have financed diversification of economic activities, increasing productivity and wages and ensuring economic growth. Brazil restricted creation of limited liability enterprises (Summerhill 2015, 151-82) that prevented raising capital with issue of stocks and corporate bonds. Cameron (1961) analyzed how the industrial revolution in England spread to France and then to the rest of Europe. The Société Générale de Crédit Mobilier of Émile and Isaac Péreire provided the “mobilization of credit” for the new economic activities (Cameron 1961). Summerhill (2015, 151-9) provides facts and analysis demonstrating that regulation prevented the creation of a similar vehicle for financing modernization by Irineu Evangelista de Souza, the legendary Visconde de Mauá. Regulation also prevented the use of negotiable bearing notes of the Caisse Générale of Jacques Lafitte (Cameron 1961, 118-9). The government also restricted establishment and independent operation of banks (Summerhill 2015, 183-214). Summerhill (2015, 198-9) measures concentration in banking that provided economic rents or a social loss. The facts and analysis of Summerhill (2015) provide convincing evidence in support of the economic theory of regulation, which postulates that regulated entities capture the process of regulation to promote their self-interest. There appears to be a case that excessively centralized government can result in regulation favoring private instead of public interests with adverse effects on economic activity. The contribution of Summerhill (2015) explains why Brazil did not benefit from trade as an engine of growth—as did regions of recent settlement in the vision of nineteenth-century trade and development of Ragnar Nurkse (1959)—partly because of restrictions on financing and incorporation. Professor Rondo E. Cameron, in his memorable A Concise Economic History of the World (Cameron 1989, 307-8), finds that “from a broad spectrum of possible forms of interaction between the financial sector and other sectors of the economy that requires its services, one can isolate three type-cases: (1) that in which the financial sector plays a positive, growth-inducing role; (2) that in which the financial sector is essentially neutral or merely permissive; and (3) that in which inadequate finance restricts or hinders industrial and commercial development.” Summerhill (2015) proves exhaustively that Brazil failed to modernize earlier because of the restrictions of an inadequate institutional financial arrangement plagued by regulatory capture for self-interest.

There is analysis of the origins of current tensions in the world economy (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), Regulation of Banks and Finance (2009b), International Financial Architecture (2005), The Global Recession Risk (2007), Globalization and the State Vol. I (2008a), Globalization and the State Vol. II (2008b), Government Intervention in Globalization (2008c)).

The US Bureau of Economic Analysis (BEA) measures the terms of trade index of the United States quarterly since 1947 and annually since 1929. Chart IID-1 provides the terms of trade of the US quarterly since 1947 with significant long-term deterioration from 150.474 in IQ1947 to 110.356 in IIIQ2019. Significant part of the deterioration occurred from the 1960s to the 1980s followed by some recovery and then stability.

clip_image062

Chart IID-1, United States Terms of Trade Quarterly Index 1947-2019

Source: Bureau of Economic Analysis

https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=3&isuri=1&1921=survey&1903=46#reqid=19&step=3&isuri=1&1921=survey&1903=46

Chart IID-1A provides the annual US terms of trade from 1929 to 2018. The index fell from 142.590 in 1929 to 108.690 in 2018. There is decline from 1971 to a much lower plateau.

clip_image064

Chart IID-1A, United States Terms of Trade Annual Index 1929-2018, Annual

Source: Bureau of Economic Analysis

https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=3&isuri=1&1921=survey&1903=46#reqid=19&step=3&isuri=1&1921=survey&1903=46

Chart IID-1B provides the US terms of trade index, index of terms of trade of nonpetroleum goods and index of terms of trade of goods. The terms of trade of nonpetroleum goods dropped sharply from the mid-1980s to 1995, recovering significantly until 2014, dropping and then recovering again into 2018. There is relative stability in the terms of trade of nonpetroleum goods from 1967 to 2018 but sharp deterioration in the overall index and the index of goods.

clip_image066

Chart IID-1B, United States Terms of Trade Annual Indexes 1967-2018, Annual

Source: Bureau of Economic Analysis

https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=3&isuri=1&1921=survey&1903=46#reqid=19&step=3&isuri=1&1921=survey&1903=46

The US Bureau of Labor Statistics (BLS) provides measurements of US international terms of trade. The measurement by the BLS is as follows (https://www.bls.gov/mxp/terms-of-trade.htm):

“BLS terms of trade indexes measure the change in the U.S. terms of trade with a specific country, region, or grouping over time. BLS terms of trade indexes cover the goods sector only.

To calculate the U.S. terms of trade index, take the U.S. all-export price index for a country, region, or grouping, divide by the corresponding all-import price index and then multiply the quotient by 100. Both locality indexes are based in U.S. dollars and are rounded to the tenth decimal place for calculation. The locality indexes are normalized to 100.0 at the same starting point.
TTt=(LODt/LOOt)*100,
where
TTt=Terms of Trade Index at time t
LODt=Locality of Destination Price Index at time t
LOOt=Locality of Origin Price Index at time t
The terms of trade index measures whether the U.S. terms of trade are improving or deteriorating over time compared to the country whose price indexes are the basis of the comparison. When the index rises, the terms of trade are said to improve; when the index falls, the terms of trade are said to deteriorate. The level of the index at any point in time provides a long-term comparison; when the index is above 100, the terms of trade have improved compared to the base period, and when the index is below 100, the terms of trade have deteriorated compared to the base period.”

Chart IID-3 provides the BLS terms of trade of the US with Canada. The index increases from 100.0 in Dec 2017 to 117.8 in Dec 2018 and decreases to 99.4 in Nov 2019.

clip_image067

Chart IID-3, US Terms of Trade, Monthly, All Goods, Canada, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Chart IID-4 provides the BLS terms of trade of the US with the European Union. There is improvement from 100.0 in Dec 2017 to 102.8 in Nov 2019.

clip_image068

Chart IID-4, US Terms of Trade, Monthly, All Goods, European Union, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Chart IID-4 provides the BLS terms of trade of the US with Mexico. There is improvement from 100.0 in Dec 2017 to 102.9 in Nov 2019.

clip_image069

Chart IID-5, US Terms of Trade, Monthly, All Goods, Mexico, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Chart IID-4 provides the BLS terms of trade of the US with China. There is deterioration from 100.0 in Dec 2017 to 98.0 in Sep 2018, improvement to 100.6 in Apr 2019 with deterioration to 99.2 in Nov 2019.

clip_image070

Chart IID-6, US Terms of Trade, Monthly, All Goods, China, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Chart IID-4 provides the BLS terms of trade of the US with Japan. There is deterioration from 100.0 in Dec 2017 to 97.8 in Jan 2019 and improvement to 99.3 in Nov 2019.

clip_image071

Chart IID-7, US Terms of Trade, Monthly, All Goods, Japan, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Manufacturing is underperforming in the lost cycle of the global recession. Manufacturing (NAICS) in Nov 2019 is lower by 4.2 percent relative to the peak in Jun 2007, as shown in Chart V-3A. Manufacturing (SIC) in Nov 2019 at 104.7173 is lower by 6.8 percent relative to the peak at 112.3113 in Jun 2007. 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 3.0 percent per year from Nov 1919 to Nov 2019. Growth at 3.0 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 154.0282 in Nov 2019. The actual index NSA in Nov 2019 is 104.7173 which is 32.0 percent below trend. Manufacturing grew at the average annual rate of 3.3 percent between Dec 1986 and Dec 2006. Growth at 3.3 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 159.4601 in Nov 2019. The actual index NSA in Nov 2019 is 104.7173, which is 34.3 percent below trend. Manufacturing output grew at average 1.9 percent between Dec 1986 and Nov 2019. Using trend growth of 1.9 percent per year, the index would increase to 135.5290 in Nov 2019. The output of manufacturing at 104.7173 in Nov 2019 is 22.7 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 110.5147 in Jun 2007 to the low of 86.3800 in Apr 2009 or 21.8 percent. The NAICS manufacturing index increased from 86.3800 in Apr 2009 to 105.8734 in Nov 2019 or 22.6 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 106.6777 in Dec 2007 to 160.7359 in Nov 2019. The NAICS index at 105.8734 in Nov 2019 is 34.1 below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 106.6777 in Dec 2007 to 130.4112 in Nov 2019. The NAICS index at 105.8734 in Nov 2019 is 18.8 percent below trend under this alternative calculation.

clip_image072

Chart V-3A, United States Manufacturing NSA, Nov 2007 to Nov 2019

Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/g17/Current/default.htm

Chart V-3B provides the civilian noninstitutional population of the United States, or those available for work. The civilian noninstitutional population increased from 231.713 million in Jun 2007 to 260.020 million in Nov 2019 or 28.307 million.

clip_image073

Chart V-3B, United States, Civilian Noninstitutional Population, Million, NSA, Jan 2007 to Nov 2019

Source: US Bureau of Labor Statistics

https://www.bls.gov/

Chart V-3C provides nonfarm payroll manufacturing jobs in the United States from Jan 2007 to Nov 2019. Nonfarm payroll jobs fell from 13.987 million in Jun 2007 to 12.862 million in Nov 2019, or 1.125 million.

clip_image074

Chart V-3C, United States, Payroll Manufacturing Jobs, NSA, Jan 2007 to Nov 2019, Thousands

Source: US Bureau of Labor Statistics

https://www.bls.gov/

Chart V-3D provides the index of US manufacturing (NAICS) from Jan 1972 to Nov 2019. The index continued increasing during the decline of manufacturing jobs after the early 1980s. There are likely effects of changes in the composition of manufacturing with also changes in productivity and trade.

clip_image075

Chart V-3D, United States Manufacturing (NAICS) NSA, Jan 1972 to Nov 2019

Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/g17/Current/default.htm

Chart V-3E provides the US noninstitutional civilian population, or those in condition of working, from Jan 1948, when first available, to Nov 2019. The noninstitutional civilian population increased from 170.042 million in Jun 1981 to 260.020 million in Nov 2019, or 89.978 million.

clip_image076

Chart V-3E, United States, Civilian Noninstitutional Population, Million, NSA, Jan 1948 to Nov 2019

Source: US Bureau of Labor Statistics

https://www.bls.gov/

Chart V-3F provides manufacturing jobs in the United States from Jan 1939 to Nov 2019. Nonfarm payroll manufacturing jobs decreased from a peak of 18.890 million in Jun 1981 to 12.862 million in Nov 2019.

clip_image077

Chart V-3C, United States, Payroll Manufacturing Jobs, NSA, Jan 1939 to Nov 2019, Thousands

Source: US Bureau of Labor Statistics

https://www.bls.gov/

There is global stress in manufacturing. Table V-3B provides month and 12-month percentage changes of new orders in manufacturing and output of manufacturing in Germany.

Table V-3B, Germany, Manufacturing Orders and Manufacturing Output, ∆% Month and 12 Months

MFG New Orders

Month ∆%

MFG New Orders

12 Months ∆%

MFG Output

Month ∆%

MFG Output

12 Month ∆%

Oct 2019

-1.3

-5.4

-1.6

-6.1

Sep

1.9

-2.2

0.3

-1.7

Aug

-2.3

-9.3

-1.1

-7.6

Jul

-1.3

-2.2

1.1

-1.2

Jun

3.9

-10.8

-1.3

-14.6

May

-3.1

-3.8

-0.6

1.0

Apr

1.4

-5.2

-0.3

-4.3

Mar

-0.3

-7.0

-2.4

-3.9

Feb

-3.1

-7.1

1.4

-0.2

Jan

-1.9

-3.6

-0.4

-3.8

Dec 2018

1.3

-8.2

0.7

-6.7

Dec 2017

4.0

3.9

0.2

3.7

Dec 2016

6.4

11.2

-0.2

2.0

Source: Federal Statistical Agency of Germany, https://www.destatis.de/EN/Home/_node.html

Table I-13A provides national income without capital consumption by industry with estimates based on the Standard Industrial Classification (SIC). The share of agriculture declines from 8.7 percent in 1948 to 1.7 percent in 1987 while the share of manufacturing declines from 30.2 percent in 1948 to 19.4 percent in 1987. Colin Clark (1957) pioneered the analysis of these trends over long periods.

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

1948

% Total

1987

% Total

National Income WCCA

249.1

100.0

4,029.9

100.0

Domestic Industries

247.7

99.4

4,012.4

99.6

Private Industries

225.3

90.4

3,478.8

86.3

Agriculture

21.7

8.7

66.5

1.7

Mining

5.8

2.3

42.5

1.1

Construction

11.1

4.5

201.0

5.0

Manufacturing

75.2

30.2

780.2

19.4

Durable Goods

37.5

15.1

458.4

11.4

Nondurable Goods

37.7

15.1

321.8

8.0

Transportation PUT

21.3

8.5

317.7

7.9

Transportation

13.8

5.5

127.2

3.2

Communications

3.8

1.5

96.7

2.4

Electric, Gas, SAN

3.7

1.5

93.8

2.3

Wholesale Trade

17.1

6.9

283.1

7.0

Retail Trade

28.8

11.6

400.4

9.9

Finance, INS, RE

22.9

9.2

651.7

16.2

Services

21.4

8.6

735.7

18.3

Government

22.4

9.0

533.6

13.2

Rest of World

1.5

0.6

17.5

0.4

2003.9

11.6

2016.3

11.5

252.6

1.5

257.9

1.5

Notes: Using 1972 Standard Industrial Classification (SIC). Percentages Calculates from Unrounded Data; WCCA: Without Capital Consumption Adjustment by Industry; RE: Real Estate; PUT: Public Utilities; SAN: Sanitation

Source: US Bureau of Economic Analysis

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

Table I-13B provides national income without capital consumption estimated based on the 2012 North American Industry Classification (NAICS). The share of manufacturing fell from 14.9 percent in 1998 to 9.5 percent in 2018.

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

1998

% Total

2018

% Total

National Income WCCA

7,744.4

100.0

17,136.5

100.0

Domestic Industries

7,727.0

99.8

16,868.6

98.4

Private Industries

6,793.3

87.7

14,889.6

86.9

Agriculture

72.7

0.9

119.7

0.7

Mining

74.2

1.0

202.7

1.2

Utilities

134.4

1.7

157.7

0.9

Construction

379.2

4.9

902.5

5.3

Manufacturing

1156.4

14.9

1635.3

9.5

Durable Goods

714.9

9.2

964.9

5.6

Nondurable Goods

441.5

5.7

670.4

3.9

Wholesale Trade

512.8

6.6

958.2

5.6

Retail Trade

610.0

7.9

1124.1

6.6

Transportation & WH

246.1

3.2

554.4

3.2

Information

294.3

3.8

629.7

3.7

Finance, Insurance, RE

1280.9

16.5

3058.8

17.8

Professional & Business Services

889.8

11.5

2522.6

14.7

Education, Health Care

607.1

7.8

1764.8

10.3

Arts, Entertainment

290.5

3.8

756.6

4.4

Other Services

244.9

3.3

502.5

2.9

Government

933.7

12.1

1979.0

11.5

Rest of the World

17.4

0.2

267.9

1.6

Notes: Estimates based on 2012 North American Industry Classification System (NAICS). Percentages Calculates from Unrounded Data; 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

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.

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