The picture is remarkable smooth. The variations in the growth rate from quarter to quarter are barely perceptible. The variations are there as shown in the graph below. The decline in the growth rate for the fourth quarter of 2007 to 0.6 of 1 percent and the first quarter of 2008 to 1 percent (final estimate) should not necessarily be be construed as a slowdown in the economy. There has been a pattern of alternating high and low growth rates.

This might be an artifact of the statistical reporting or tabulating system rather than something that is actually happening in the economy. Also the growth rate for the first quarter of 2008 is an advance estimate involving a substantial margin of error.

A scan of the graph of real GDP for the U.S. since 2000I shows there were a number of times where the growth of the economy slowed and then went on to higher growth.

However, as it happens there an identifiable source for the slowing down of the economy which is revealed below.

If any macroeconomic problem is developing it should show up among the various components of aggregate demand.

Barely noticable is a downward trend in gross domestic investment purchases, shown in green in the above graph. Almost always if there is a macroeconomic problem it is manifested in a decline in investment purchases. Therefore the levels of invesment need a closer look.

There the problem is clearly the decline in residential construction investment. This is not a recent development. Residential construction investment has been declining since the last quarter of 2005. There is also a problem with the decline in inventory investment culminating with a net sell-off of inventory in the last quarter of 2007. Net inventory investment goes through some radical fluctuations and the upward fluctuations offset in the recent past the decline in residential construction. Now the down fluctuations in inventory investment are coinciding with the declines in residential construction.

There is a persistent worry among politicians and the general public about international trade. In particular the general public interprets the decrease in the value of the U.S. dollar with respect to other currencies as evidence of a deterioration in the U.S. economy. On the contrary the decreased value of the dollar has reduced the U.S. balance of trade deficit. Countries often devalue their currencies to stimulate their economies. China has maintained about a 400 percent undervaluation of its currency to insure that no one will be able to underprice its products.

The U.S. imports has exceded its exports by about a half trillion dollars per year but since the third quarter of 2006 this deficit has been declining.

The levels of purchases by the Federal and the State & Local governments have continued their inexorable rise.

Consumer purchases also tend to have a steady, regular rise, as shown below

There is a general concern about particular items such as gasoline. The following is a graph of the nondurable purchases shows, among other things, that purchases of energy products such as gasoline and fuel oil have been declining in recent quarters. Caution: These statistics, although stated in dollar amounts, reflect the volume of consumer purchases rather than the actual expenditures on the items.

Consumer durable purchases generally have been increasing but there was a significant decline in the fourth quarter of 2005 and a downward trend in 2007 which continued into the first quarter of 2008.

In the above graph Household Equipment includes furniture, television sets and other electronic devices.

The purchases of services now involves a greater dollar amount than the purchases of durable and nondurable goods combined. The trends in the levels of some services are of special interest.

The nature of housing services requires some explanation. Housing services includes the expenditures for rent but also an imputed value for the owner occupied housing.

The amount of medical services consumed continues to increase at an extraordinary rate. The graph displays the trend in the quantity of medical services. The trend in the cost of medical services is not shown in the above graph. It is notable that Americans spend about one fifth more on medical services than on food and about one tenth more than on housing. Clearly something is amiss in the matter of medical care in America and the public subsidy of medical care is not solving the problem but instead making it worse. Around 1900 America allowed the medical profession to create a cartel arrangement in which the production of doctors was artifically restricted. Medical schools were bullied with a threat of the loss of their accreditation into cutting their admissions to a fraction of what they had been. The reduced supply of doctors resulted in substantially increased income for doctors. However even though the medical profession created the opportunity for economic rents those rents did not entirely stay with the doctors. Medical schools increased the prices of their services so that doctors typically begin their practice with enormous debts from their medical education.

By cutting back the supply of doctors the cartel arrangement was able to create monopoly prices. The public subsidy of medical care just meant that the monopoly prices went even higher. The inadequate supply of doctors resulted in doctors being overworked and hence having little time to mull over the conditions of their patients. For more on this topic see Medical Cartel. For material on the high cost of pharmaceuticals see Pharmaceuticals.

Conclusions

The only components of demand that are faltering are residential housing construction and net investment in inventories. At this stage the current economic condition is not in the nature of a recession. Perhaps a more representative term would be an incipient economic malaise. The tax rebates to be sent out in 2008 may be saved, used to paydown debt, spent on foreign goods and services or spent on domestic goods and services. It is only this last category that will be of any benefit for stimulating the economy. Only a fraction of the total rebate will go for domestic goods and services. This will probably be from the rebates that go to the relatively young consumers. However, although there are good reason to doubt the effectiveness of tax cuts as an economic stimulus measure that was also the case in 1975 when a tax cut brought an end to the 1974-1975 recession. For a similar case of an economic malaise that turned into a recession see the 1980-1983 recession.

(To be continued.)