San José State University|
Department of Economics
& Tornado Alley
Recovery and Resurgence
as of October 2007
The figures for U.S. production over the last twenty quarters indicate that the U.S. economy has long passed from of a condition of economic recovery from the minor recession of 2001 into resurgence and sustainable robust growth. The final estimate by the Bureau of Economic Analysis of the real GDP for the second quarter of 2007 indicates a statistical acceleration of the rate of growth from 0.6 percent in the first quarter of 2007 to 3.8 percent in the second quarter of 2007. The advance estimate had been for a 4.0 percent growth rate. This is only mild surprise because the growth rate has fluctuated back and forth between high and low growth rates; i.e., there has developed a pattern of alternation between unusually high and unusually low growth rates. For example, the real GDP in the first quarter of 2006 grew at an annual rate of 5.6 percent. The second quarter rate was 2.6 percent and fell to 2.0 percent in the third quarter. Prior to 2006 there was a growth rate of 4.2 percent in the third quarter of 2005 and then a fall to a rate of 1.8 percent in the fourth quarter of 2005. In any case, the average growth rate for 2006 was about 3.4 percent which is generally in line with the rates of real growth in recent years.
It however needs to be noted that the gross private domestic investment rose slightly after having fallen for three quarters. From the second quarter to the third quarter there was a slight drop from $1,968.5 billion to $1,964.8 billion. But from the third quarter to the fourth quarter the drop was more significant; from $1,964.8 billion to $1,885.6 billion. The first quarter of 2007 brought a further drop to $1840.0 billion. This is a preliminary estimate but it is a worrisome development.
Here is the record of past growth rates for quarterly GDP.
|Quarter||Real Growth Rate|
Based upon the final estimate of real GDP for the fourth quarter of 2006 the real growth in the U.S. economy for the year 2006 was 3.13% which is down marginally from the real growth rate of 3.5 percent for 2005. The value of the real growth in GDP for the entire year of 2004 was 4.4 percent, a higher rate than that of 2003.
These recent rates of growth are strongly indicative of the U.S. economy being back on track and growing at rates that can be sustained for an extended period of time. These rates are appropriate and quite good for a mature industrial economy.
It is now ancient history but consider the history of the recession of a five years ago. Economists define recessions in terms of declines in real GDP, the national output valued at constant prices. By this definition the U.S. entered a recession in the first quarter of 2001 but statistics other than real GDP indicate that the problems for the economy developed in the summer of 2000. In terms of real GDP the recession bottomed out in the third quarter of 2001 and the U.S. economy began to grow in the fourth quarter of 2001 and it has continued to grow since then. The U.S. recession of 2001 ended a long time ago but some elements of the public continues to believe there are still recessionary problems. There may still be some economic problems in particular regions or sectors but the term recession is not the appropriate term for the overall economy. In the recent past, because employers were not confident of the economic future they were reluctant to put on new employees and squeezed the increased production out of their exisiting work force. This shows up as dramatic increases in labor productivity but there is a limit to how far this phenomenon can go. Employment has been increasing since the beginning of 2002. But for unemployment to decline the rate of growth of employment must be greater than the rate of growth of the labor force. This did not occur until the middle of 2003. Since then the total number of unemployed has been steadily declining.
The most serious economic problem seems to have been a reluctance on the part of businesses to invest in plant and equipment to the same extent they did in the past. Or, perhaps during a period of exuberance more investment was made than was necessary and it has taken some time to assimilate that past investment. The lastest information from the Bureau of Economic Analysis of the U.S. Department of Commerce indicates that these problems are disappearing.
Furthermore the level of real nonresidential fixed investment, a previous problem area, has exceeded its previous peak, which occurred in the latter part of 2000. Real nonresidential fixed invesment has been growing rather steadily since the beginning of 2003.
These are very favorable results. The increase of investment indicates that the business sector is recovering its confidence and getting back on track. High rates of increase for investment are not necessary. Recovery and resurgence require only that business make investment in keeping with the long term sustainable growth of the economy.
The current dollar and constant dollar (2000) quarterly GDP's for the past eleven years are shown in the chart below:
As can be seen from the real GDP (dotted line) in the above chart the production in the U.S. economy started to decline at the end of 2000 and declined until the third quarter of 2001 at which time the real ouput began to grow and has continued to grow. This means that the recession, defined strictly in terms of real GDP, began at the beginning of 2001 and continued until the third quarter of 2001. The numeral magnitudes of current-dollar-value GDP and constant-dollar-value GDP for the past twenty two quarters are shown in the table below. These are the figures available as of August 2006. The last quarter shows the advance estimate. There may be revisions in this figure but it is unlikely that the revisions will change the basic economic picture.
|Quarterly Gross Domestic Product
|2005 II||12,346.1||11,001.8||2005 III||12,573.5||11,115.1||2005 IV||12,730.5||11,163.8||2006 I||13,008.4f||11,316.4f||2006 II||13,197.3f||11,388.1f||2006 III||13,322.6r||11,443.5r||2006 IV||13,458.2||11,513.0||2007 I||13,613.0p||11,531.7p|
Clearly the economy has settled into a steady, sustainable growth path although the statistics are showing fluctuations about that path.
The problem of employment recovery in the past, as stated above, had been the tendency for employers to meet the increased demand by working their current labor force longer hours. This shows up in the statistics as increased labor productivity. The graph below shows the trend for the business sector.
An increase in output per hour that comes from higher productivity due to better equipment or methods is a good thing for the economy. An increase in output per worker that comes simply from working people longer and harder is not really an increase in productivity and is not beneficial to the economy.
The productivity figures are worth looking at in detail. The table below gives the recent indices of not only productivity but also real compensation per hour and unit labor costs. As the figures show although the real compensation paid per hour has been increasing the cost of labor per unit of production generally has been declining since the third quarter of 2001. This is a dramatic development for the U.S. economy.
|Productivity and Cost Indices
for the U.S. Business Sector
While the U.S. long ago emerged from the very brief recession of 2001 there is lingering concern about some aspects of the economy's performance. It is worthwhile to try to trace the source of those problems. The evidence that some economic trouble developed in the economy from the middle of 2000 prior to its official entry into a recession is shown below. The first item of this evidence can be seen from the chart for private domestic investment:
The chart shows that real private domestic investment which is made up of purchases of plant and equipment, new house construction and net inventory investment reached a peak in the second quarter of 2000 and declined until the third quarter of 2001. Since then real private domestic investment has been growing but did not attain the previous peak until the second quarter of 2004. Thus while the U.S. economy came out of the 2001 recession in 2002 investment, among other quantities, had not yet recovered fully from its decline.
The decline in investment purchases was in plant and equipment purchases and inventory investment; new resident fixed investment (new house construction) held a steady slightly upward trend. Inventory investment was substantially negative; businesses were selling off their stocks of goods and not replacing them up until the second quarter of 2002. During the initial stages of the recovery was in inventory investment. Nonresidential fixed investment in plant and equipment remained in a slump for quite awhile and this accounted for the initial weakness in the recovery.
As to what accounted for the decline in real investment in plant and equipment during the period from the fourth quarter of 2000 to the fourth quarter of 2002, it is instructive to look at some other economic statistics. For example, in the chart shown below, it is found that corporate profits (after taxes and uncorrected for price level changes) reached a peak in the last quarter of 1999 and declined until the last quarter of 2001. There was an increase in the first quarter of 2002 but a decline in the second quarter. Since then after-tax corporate profits have been growing but did not reach the level attained in the historic peak in the second quarter of 1997 until the third quarter of 2002.
Investment is driven by the potential for future profits rather than current profits but a decline in the profitability of past investment would surely depress the prospects for future profits from current investments. It is notable however that the decline in profits from the end of 1997 to the end of 1998 did not have much of a depressing effect on real investment in 1998. There was a slight decline in investment in the first quarter of 1998 and then an upsurge.
The chart for the stock market price level shows a picture similiar to those for investment and profits, a peak in 2000 and a decline until the first quarter of 2003.
In the case of stock prices there has not been a consistent recovery for a year after 2002. There was a upward trend in stock prices from the latter part of 2001 but the upsurge ended in the middle of 2002 and was followed by a larger, sharper decline. The end result is that the composite index for the week that ended April 5th, 2003 was down about 31 percent from its peak in 2000. Stock prices are affected by many factors besides real trends in the economy and are probably effects rather than causes of economic change but nevertheless lower stock prices mean a higher cost of capital for equity investment.
The other cost of capital is for debt capital and that cost is determined by interest rates. A chart for three interest rates is shown below:
The discount rate fell substantially and the T-bill rate fell with it. The interest rate on corporate bonds, the rate which is more relevant for investment decisions, shows much less of a decline. However, the evidence for interest rates is that the slump in investment is not due to any discouragement from the level of interest rates.
Since monetary policy of the Federal Reserve influences interest rates it is worthwhile to note what has been happening to the money supply.
It is notable that nominal M1 was declining throughout 2000 although M2 and M3 were both increasing at that time. Short term interest rates rose during the first half of 2000 as they had during 1999. Bond interest rates had also risen during 1999 but were stable or declining during the first half of 2000. M1 increased in 2001, and substantially so in September of 2001. The increase in M1 continued into 2002, but the rate of growth in 2002 slowed from what it was in 2001. The increase in the money supply brought a fall in the nominal interest rates but this did not offset whatever factor was accounting for the decline in investment compared to its previous peak.
While the economic recovery is proceding there are definitely some weak spots and industrical production is one of those and it fits into the pattern seen above for investment and after-tax corporate profits; i.e., a peak in the middle of 2000 with a decline until the beginning of 2002 and subsequent growth since then but not enough to recover to the previous peak levels.
The decline in U.S. industrial production might possibly be due not to a decline in purchases but possibly to increased imports of those products, but the chart shown below on business sales shows this is not the case. Manufacturing and trade sales shows the same pattern as the other variables.
Any statistical picture of the economy is not complete without looking at what has been happening in the labor market.
The labor force continued a trend of upward growth but with some fluctuations. Employment peaked at the beginning of 2001 and declined until about the beginning of 2002 and has been generally growing since then but with some short term fluctations. Unemployment which had been showing a wonderful downward trend until the end of 2000 began to rise. Since the beginning of 2002 the total number of unemployed has been about constant. Although recessions are defined in terms of real GDP it should be the unemployment rate that defines a condition of social and economic stress. It is notable that the pattern for employment follows closely that of the other variables which peaked in 2000, declined to the beginning of 2002 and has been growing since then but not have recovered the previous peaks.
The trend in consumer outlays (consumer purchases plus interest payments on consumer debt) is shown in the chart below along with the statistics on consumer disposable income. The difference between the two curves is personal saving. Personal savings has been showing a declining trend but at about the beginning 2000 personal saving went to virtually zero, as shown below.
One final element of the statistical picture is given by the government budget. At about the start of 1998 the Federal budget went into surplus. The surplus continued to grow but in 2001 there came a decline in the level of the surplus. The level of expenditures continued to grow exponentially and thus there was soon a deficit. The deficit whatever its other consequences did not lead to higher interest rates or inflation.
Americans need to recognize that the U.S. is at war, a war that was declared against it by Islamic fundamentalists. Observations about the War of the Terrorists on Americans In times of war the federal budget cannot be constrained in the way it might be in times of peace.
Information on the U.S. Price Level Situation
|HOME PAGE OF applet-magic.com |
HOME PAGE OF Thayer Watkins