GNP Not the Whole Story

Today from the AP:

Economy Has Worst Growth Since 2002

By JEANNINE AVERSA
The Associated Press
Thursday, May 31, 2007; 9:09 AM

WASHINGTON -- The economy nearly stalled in the first quarter with growth slowing to a pace of just 0.6 percent. That was the worst three-month showing in over four years.

The new reading on the gross domestic product, released by the Commerce Department Thursday, showed that economic growth in the January-through-March quarter was much weaker. Government statisticians slashed by more than half their first estimate of a 1.3 percent growth rate for the quarter.

The main culprits for the downgrade: the bloated trade deficit and businesses cutting investment in supplies of the goods they hold in inventories.

For nearly a year, the economy has been enduring a stretch of subpar economic growth due mostly to a sharp housing slump. That in turn has made some businesses act more cautiously in their spending and investing.

The economy's 0.6 percent growth rate in the opening quarter of this year marked a big loss of momentum from the 2.5 percent pace logged in the final quarter of last year.

Federal Reserve Chairman Ben Bernanke doesn't believe the economy will slide into recession this year, nor do Bush administration officials. But ex Fed chief Alan Greenspan has put the odds at one in three.

The first-quarter's performance was the weakest since the final quarter of 2002, when the economy recovering from a recession. At that time, GDP eked out a 0.2 percent growth rate. Economists were predicting the first-quarter performance this year would be downgraded, but not as much as it did. They were calling for a 0.8 percent growth rate pace.

GDP measures the value of all goods and services produced in the United States. It is considered the best measure of the country's economic fitness.

In more encouraging economic news, the Labor Department reported that fewer people signed up for unemployment benefits last week. New filings dropped by 4,000 to 310,000. That suggests the employment climate is weathering well the economy's sluggish spell.

Many economists believe the first quarter will be the low point for this year. They expect growth will improve but still be sluggish.

The National Association for Business Economics predicts the economy will expand at a 2.3 percent pace in the April-to-June quarter.

In the first quarter, there was a larger trade deficit than first thought. That ended up shaving a full percentage point from the GDP. Businesses cut back on inventory investment as they tried to make sure unsold stocks of goods didn't get out of whack with customer demand. That lopped off nearly a percentage point to first quarter GDP.

Those were the biggest factors behind the government slicing its initial GDP estimate released a month ago by as much as it did.

The sour housing market also restrained overall economic activity. Investment in home building was cut by 15.4 percent, on an annualized basis, in the first quarter. However, that wasn't as deep a cut as the 17 percent annualized drop initally estimated. And, it wasn't as severe as the 19.8 percent annualized drop seen in the final quarter of last year.

Even so, there is no doubt that troubled housing market is one of the biggest problems for the economy. Although some businesses tightened the belt in the first quarter, consumers did not. That helped to prevent the economy from stalling out altogether.

Consumers boosted their spending by a 4.4 percent growth rate in the first quarter, the most in a year. Consumer spending accounts for a major chunk of economic activity.

Some economists wonder how much interest consumers will have in continued brisk spending, however, given rising gasoline prices that have topped $3 a gallon in many markets. More money spent filling up the gas tank leaves less to spend on other things.

The chart up top shows income inequality in the U. S. over time. We now have a very top heavy economy, and average figures showing generally rising GNP mask the fact that the middle and lower ends of the income distribution scale are falling behind while the top 10% is cleaning up. Economists tend to pretend this doesn't matter because average GNP is up overall, but things don't work that way in societies.

The AP article above shows how consumers have so far been bailing out the economy, and it includes the necessary dose of economic happy talk to persuade people that the sun will come out tomorrow. But people will ignore the reality of their own lives for only so long.

The U. S. economy is in a very precarious position, as our current pattern of income distribution is unsustainable. We're close to the possibility of a new social, cultural and economic equilibrium in the U. S., where the establishment elites who have been benefiting most from the last 20 years of social and economic policy may no longer find themselves so influential. That's what happened during the New Deal under Franklin Roosevelt, where you see the big dip in the chart above. If we keep in the track we're headed in, then we're headed for another one of those radical shifts.

I'd like to say my peers in the intelligentsia understand this and will think more about how to support widespread prosperity, but I see the opposite going in the opposite direction. Businesses and economists are trying to cash out as best they can under the current equilibrium before the change comes, trying to support the status quo for as long as they can. Well, that's one way to go, but it's not sustainable, and it won't support our long term economic and social health.