Larry Summers, Director of the White House National Economic Council, has called for a new ‘mini-stimulus’ of $200 billion to attempt to pull the US economy out what he terms its ‘very deep valley’. Summers’ was clearly a response to ‘disappointing’ trends revealed in the the latest US economic data. Similar concerns lay behind the call of US Treasury Secretary Geithner, in the run up to the G20 summit, for Europe and Japan to do more to boost demand.
Certainly recent US data confirms the limited character of US economic recovery from the Great Recession. As widely reported, the overwhelming majority of new US jobs created in May were temporary ones for conducting the census — private sector job creation fell to its lowest level since January. US housing sales in key regions have fallen by 25-30% following the expiry of the government tax credit scheme. House prices, on the S&P Case-Schiller index, have been declining since last September. The revised 1st quarter 2010 US GDP figures lowered the estimate of economic growth in that quarter from an annualised 3.2% in the first estimate to 3.0% in the latest — both are a major deceleration from the 5.6% recorded in the 4th quarter of 2009.
Summers and Geithner’s concern is therefore clearly justified. US economic growth is losing momentum at a point in the business cycle, that of an early stage of recovery, when acceleration might have been anticipated. Overall US GDP is still 1.2% below its peak level of the 2nd quarter of 2008 — meaning that not only is this recession the deepest in post-World War II US economic history but recovery is also the slowest.
However while recognition of unfavourable symptoms is correct the diagnosis is not. The US downturn continues to be dominated by the massive collapse in fixed investment. As can be seen from Figure 1 in fact all major components of US GDP except for fixed investment — personal consumption, government consumption, inventories and net trade — are now above their previous peak in the 2nd quarter of 2008.The fact US GDP remains below its peak in the previous business cycle is entirely due to the severe fall in private fixed investment — which remains more than 20% below its level in the 2nd quarter of 2008. Calculated in constant prices, 2005 dollars, the $349 billion fall in fixed investment between the 2nd quarter of 2009 and the 1st quarter of 2010 is more than twice the $167 billion decline in GDP.
Furthermore the investment decline is not primarily caused by a fall in residential investment — as can be seen in Figure 2. The fall in investment is dominated by the $309 billion fall in non-residential fixed investment.
Until this fall in investment in overcome US economic recovery will inevitably remain slow and anaemic. The administration, because it has not diagnosed the disease correctly, is unlikely to have great success with its cures.
Source: www.istockanalyst.com.
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