Wednesday, May 18, 2011

The Brakes Are On: US Economy Slowing

US Gross Domestic Product slowed sharply in the first quarter of this year to a 1.8 percent annual rate.

Last year, GDP grew at 3.7 percent in the first quarter1.7 percent in the second quarter, 2.6 percent in the third quarter and 3.1 percent in the fourth quarter.

So, the economy will have to accelerate even faster than its best quarter last year to overcome the impact of the sluggish first quarter this year.

Nearly all of the federal stimulus money has already been spent. And with state governments tightening their belts — and even laying off employees — GDP will be further constricted.

A survey from the National Association for Business Economics predicts GDP will grow 2.8 percent this year — down from the group’s February prediction that it would grow 3.3 percent. 

The panel of 41 economists surveyed said they “remain highly concerned” about the growing federal deficit and that growth in the first quarter was weaker than expected.

The economists said they expect oil to average $105 per barrel this year, up from $93 predicted in the last survey. They anticipate that this will negatively affect consumer spending.

Consumers are getting squeezed by rising prices for gas, groceries and other household items. Because producers are paying more for the raw materials they need to make and transport their products, retailers are in turn passing along these price increases to their customers.

Sales at Walmart stores in the US have fallen for two consecutive years. The culprit has been high unemployment, stagnant wages, and rising food and fuel prices. 

Walmart is a bellwether of the US economy. When the store that has made “low prices” is mantra is hurting, it is a clear indication of just how much the US economy is hurting.

Walmart continues to see a paycheck cycle, in which people stock up around payday and then, as the money runs out, spend less as the month progresses. What this tells us is that Americans are living from paycheck to paycheck.

As of last year, 43 percent of workers said they had less than $10,000 savings, up from 39 percent in 2009, according to the Employee Benefit Research Institute’s annual Retirement Confidence Survey.

A stunning 27 percent of workers said they had less than $1,000 in savings, up from 20 percent in 2009.

After paying for basic necessities, most Americans simply have nothing left to save; wages have been stagnant since the 1970s.

This should come as little surprise since the median wage fell to $26,261 in 2009, meaning that half of all American workers made $505 a week or less. 

The increased costs of oil aren’t going away, and oil prices affect food prices and everything else. 

The International Energy Association (IEA) says that growth in worldwide oil demand is outstripping growth in new supplies by 1 million barrels a day per year. According to the IEA, it’s getting harder to access and exploit conventional resources and, “The age of cheap energy is over.”

Oil is a finite resource and the inability to match supply with demand will create a huge economic drag from now on. Continually rising prices will have profound impacts on the US and global economies going forward.

Slow economic growth results in lower tax revenues to the government, exacerbating an already dangerous fiscal problem.

While the Congressional Budget Office (CBO) rather optimistically foresees revenues increasing from $2.23 trillion this year to $3.65 trillion in 2015 (a $1.42 trillion increase), it also projects $4.8 trillion in new debt over the next five years. 

And let me be clear; government projections are almost always too rosy. In other words, the debt total will likely be even worse.

Congress will continue battling over which budget cuts to make in order to raise the debt ceiling and pass the fiscal 2012 budget (which is due October 1). But one way or the other, and in one variety or another, budget cuts are coming. That, in turn, will further cut into GDP. 

At this point, the US economy is totally reliant on government spending. It’s just an unfortunate truth. 

Our economy is facing multiple headwinds, and most of them aren’t going away. 

Though a declining dollar makes us exports cheaper overseas, our No. 1 import is oil, which is also priced in dollars. A weak dollar makes oil, and ultimately gasoline, more expensive, forcing the trade deficit further into the negative. Billions of dollars leave the US for other nations every month, and exports are not nearly enough make up for it.

The government’s revenue problem (and, yes, it does have one) will be lasting. 

The US government is particularly vulnerable to a revenue collapse in a deep recession because it is disproportionately dependent on income and payroll taxes, which take a particularly big hit when unemployment is high.

When unemployment surged to 10 percent in 2009, government revenues plummeted. Meanwhile, safety net programs — such as unemployment benefits, Medicaid and food stamps — grew rapidly. 

The combination led to huge, unprecedented and lingering deficits of more than $1 trillion. Those kinds of deficits remain on the horizon, as far as the eye can see.

Plunging taxes and surging benefits spending are part and parcel of a severe recession, and the US isn’t even technically in a recession anymore. Try telling that to tens of millions of Americans.

Should the US ‘double dip’ into a technical recession (two consecutive quarters of economic contraction), the impacts will be absolutely devastating.

Even if that doesn’t occur, we should remain prepared for a prolonged period of decline and despair.

1 comment:

  1. Anonymous3:07 PM

    "The brakes are on"? More like 'The wheels are coming off the wagon!'. We are in a death spiral, those who tell you otherwise are either fools or liars. You decide which.