The United States GDP data release this morning was dismal.
The overall conclusions from this report are that:
• Economic growth was weaker than we thought during 2007 to 2010
• Inflation was higher than we thought during 2007 to 2010
• Consumption spending was weaker than we thought during 2007 to 2010
• Output per Worker was weaker than we thought during 2007 to 2010
I feel like the CERF forecasting, analysis, and blogging for the last year and a half or so has been vindicated. Ever since late 2008 our forecasts have been under consensus and we have written repeatedly about fundamental weaknesses in the United States economy. Our clients have pretty much stuck by our side despite our dour message.
I plan to publish a more granular analysis of today’s report early next week. For today, I provide quotes that I have written in the last couple of years or so, although the blogging and other essays by other CERFers have also contributed meaningfully to the message.
“I had hypothesized in 2009 that households would rebuild their balance sheets to pare down debt. However, this has not happened.” May 11, 2011
“The United States economy continues to surprise me. Fourth quarter real consumption growth of over four percent, the fastest growth rate in five years, seems anomalous in the face of many fundamentals. I remind myself and the reader that one quarter’s worth of data does not make a trend.” March 21, 2011
I blogged on February 3, 2011 that: “Consumption is too high and Investment is too low”, a title which is self explanatory.
“I note that virtually any measure of household debt is still extraordinarily high and these need to fall. For the long-term health of the American household sector and the economy, I am concerned about the fall in the savings rate. I hope that the increased consumption and falling savings rate do not forebode an extended period of weakness in the United States economy.” January 28, 2011
I blogged on December 15, 2010 that: “Spending is Still too High”, again a title that is self explanatory.
“I continue to be surprised by the strength of government expenditures. The preliminary estimates show federal spending growing with such strength to offset state and local weakness. I continue to expect that state and local expenditure weakness will be a greater drag on growth during the next few quarters than the previous couple of quarters.” October 28, 2010
“It confirms my suspicions that the economy does not yet have its own legs. Without government stimulus, this economy might not grow at all. This does not mean that we should re-instate the stimulus programs, as they have their own problems. Continued debt-funded consumption is simply unsustainable, and it does nothing for long-term growth.” August 27, 2010
“Total household consuming, which is imports plus consumption grew very rapidly (6 percent) in quarter 2. It is hard to imagine that households can continue to spend this rapidly given their debt levels and the unemployment rate.” July 30, 2010
“We here at CERF had been worried that, during the fourth quarter of 2009 and the first quarter of 2010, much of the observed growth transitory. We believed at that time that the household sector should have been rebuilding their balance sheets, reducing debt, and restraining consumption. It appeared as if government programs were inducing households away from balance sheet rebuilding with incentives to spend, to the long-term detriment to the economy. These programs included Cash-for-Clunkers, Home-buyer incentives, and attempts to save flagging mortgage payments.” July 14, 2010
“Our forecast is weaker than consensus because we believe that fundamental weaknesses still remain. The fundamental domestic weaknesses include: residential real estate, commercial real estate, banking, and household balance sheets.” June 4, 2010
“We released our new United States and California forecasts today. As we note in our publication, we are pessimistic relative to consensus, particularly for 2010 quarters 2, 3, and 4. It appears that we see the negatives continuing longer than our forecasting colleagues at UCLA and across the nation. These negatives include financial, real estate, and construction sectors.” March 24, 2010
Today’s report also shows that State and Local government expenditures have been rather weak for three quarters in a row. Back in late 2009 and 2010 I worried that ongoing state government budgetary problems would feed into the overall economy and prolong the weakness. Here, I was referring to jobs:
“We suspect the job-cuts that the State will have to perform to manage its current and future deficits will get substantially worse than they have been to date and that this will imply worse public sector job losses during the next year. Even if the private sector improves during the next few months, the worsening public sector job market could offset many of those gains. December 28, 2009
These quotes often refer to weak fundamentals. What are they? Here is a not too long version written March 21, 2011:
“The United States economic fundamentals include: a high revolving-credit debt level as a share of income, a high mortgage-debt level as a share of income, a high residential default rate and foreclosure rate, a high banking charge-off rate, a high long-term unemployment rate, a high home ownership rate, a low construction activity rate, a low small-business profit rate, a significant structural imbalance in the labor market (too many construction workers), and a low job creation rate. Some of these combine to the reality of a weak labor market, and some of these combine to the realization of a weak real estate market.” March 21, 2011