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Greater Consumption and Lower Investment Raise Doubts About Future Growth
The U.S. economy is not strong enough to overcome its structural impediments and also offset the economic and financial drag from Europe. The reason is that U.S. GDP and personal income growth is neither strong, nor of high quality. Both are built on rapid increases in government debt, which funds consumption in GDP and transfer payments in personal income. The growth probably won’t have much staying power into 2013, given weak business investment and the artificial interest-rate environment. Over the last year, GDP grew roughly $600 billion while federal debt grew $1.3 trillion, explaining the rapid rise in the debt-to-GDP ratio. GDP grew 2.2% on an annualized basis in the first quarter of 2012; in nominal terms, it was up 3.8%. Making up the $15.5 trillion GDP figure, personal consumption was $11 trillion, private investment was $2 trillion, government purchases were $3 trillion, and net exports subtracted $600 billion (because part of the consumption and investment came from imports). The national debt grew at a 9.8% annualized rate in the first quarter. Some of the increasing national debt has gone into consumption, but the data are showing little in the way of “pump priming” or support for productive business investment. Indeed, business fixed investment fell 2.1% over the past quarter. Real private investment in industrial equipment fell at an 11.7% annualized rate in the first quarter from the fourth. We think any “multiplier” from government spending turns negative at high debt-to-GDP ratios because businesses begin to expect tax increases so they invest less. Personal consumption grew a strong 2.9% in the first quarter from the fourth, contributing 2 percentage points of the 2.2% GDP growth. Of that, motor vehicles and parts contributed the largest portion, 0.7 percentage points, reflecting the pent-up demand for autos after the deep 2008-2009 contraction in auto sales and production and the ready availability of financing for auto purchases. Subtracting from GDP, the first quarter data showed weakness in investment in business structures (contributing -0.4 percentage points to the 2.2% GDP growth) and a further slowdown in government purchases of goods and services (contributing -0.6 percentage points). Government purchases have now declined for six quarters in real terms, primarily due to a sharp falloff in national defense purchases. Over the last year personal income is up only 3.2% — slower than any non-recession reading since at least 1960. Real disposable income per capita has been flat for a year and a half, meaning that even with near-record transfer payments and the payroll tax cut, after-tax incomes are barely keeping up with inflation. The only notable acceleration in March personal income (up 0.4% from February) was in government transfers, which grew 0.5% in March. Despite the recovery, transfer payments are still running 17.6% of personal income, over 3 percentage points above the pre-crisis highs. Transfer payments are low-quality growth since, rather than generating more income for everyone, they are the equivalent of taking money from one group of people and giving it to another group. U.S. growth has been held back during the recovery by several factors that discourage business investment in people, equipment, and structures. First, the U.S. tax code is deeply anti-growth due to its uncertainty, complexity, and high rates. Second, health-care costs continue to rise rapidly, and the current health-care legislation has created uncertainty and even higher future costs. This is discouraging businesses from hiring, and harming worker mobility. Third, the near-zero Fed funds rate and the Fed’s disruption of the bond market have subtracted materially from GDP due to low payments to savers and the rechanneling of credit away from dynamism. Finally, bank regulatory policy has been pro-cyclical (meaning that it has fed bubbles and worsened economic slowdowns). This has channeled credit away from small banks and small businesses, though the good news is that credit policies are beginning to relax, which should have a positive impact on growth. The result of these barriers to growth is an economy that is suffering from an unusually weak recovery, especially given the depth of the 2008-2009 recession. Personal income growth has been particularly weak despite (or because of) record transfer payments that are building up the national debt. Of the GDP growth that has occurred, a larger-than-normal share has been consumption and a less-than-normal share has been investment, raising doubts about future growth.
2012 Economic Growth Fellow
David Malpass is president of Encima Global, and chairman of GrowPac. He writes a regular Current Events column in Forbes magazine, and his opinion pieces appear regularly in the Wall Street Journal. He sits on the boards of the Economic Club of New York and the National Committee on U.S.-China Relations. Formerly, Mr. Malpass was chief economist of Bear Stearns. Between February 1984 and January 1993, he held economic appointments during the Reagan and Bush Administrations. He was Deputy Assistant Treasury Secretary for Developing Nations, a Deputy Assistant Secretary of State, Republican Staff Director of Congress’s Joint Economic Committee, and Senior Analyst for Taxes and Trade at the Senate Budget Committee.Full Bio
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