US GDP growth on year-ago basis highest since 2005

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On a year-ago basis the US economy grew at it fastest pace in the second quarter this year since the first quarter of 2005. Year-on-year growth accelerated from an adjusted 2.39% in the first quarter to 3.17%. This was in line with the 3% to 3.5% implicated by the GDP-weighted PMI as I indicated a week or two ago.

Sources: I-Net Bridge; Plexus Asset Management.

The focus is now on the crucial ISM PMI Manufacturing and Non-manufacturing data for July due this week. I expect both numbers to come in somewhat weaker than June’s 56.2 for Manufacturing and 53.8 for Non-manufacturing, but both should remain comfortably above 50 and therefore continue to indicate expansion of the US economy, albeit at a more moderate rate.

I will not be surprised to see the GDP-weighted PMI falling to the 52.5/53 range from the current 54.36 level. That will imply that growth in the US economy has slowed to approximately the 2% to 2.5% range.

Lower numbers would certainly be fuel for the double-dip advocates! However, I believe the coming slowdown is a respite from the strong growth experienced over the past year and therefore from elevated levels. All other things being equal (therefore barring global shocks), growth should start to gain traction from the fourth quarter onwards.

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2 comments to US GDP growth on year-ago basis highest since 2005

  • It is true that year-on-year GDP growth in real terms is running at its fastest level in more than five years, but real GDP is still below its previous peak after ten quarters and counting – it typically takes five quarters for the economy to register a new peak, and the previous longest span was eight quarters following the 1973 downturn.
    More importantly from a corporate revenue perspective, nominal GDP has only just eclipsed its previous peak after seven quarters versus a post-war average of just two months. Nominal GDP grew at just four per cent year-on-year, and though sales are running at a six per cent pace, they have still registered a double-digit percentage decline over the past two years.
    The economy is slowing and year-on-year growth in nominal GDP could drop below three per cent by next year’s first quarter. This implies that the ability to generate decent sales growth will remain tough, and realised profits will fall well short of the current rosy estimates.
    Hard to be too optimistic!

  • Paul Sandison

    I would like to add another dimension. Further to the cyclical picture we also have the state of global credit, with world debt now at $188 tr. The US has a debt of $58tr and if you include the unfunded liabilities like Medicaid and Medicare, it is eight times US GDP, i.e. $104tr. This is all while the US GDP is $13 tr per annum, even though it is the largest GDP in the world.

    As the largest debt culprit, having run an official budget deficit policy for most of the last 30 years starting with Ronald Reagan, how is the US economy going to grow and pay off this gigantic debt? It is easy to see why some economists such as Marc Faber believe that the US will start a war in order to grab some assets somewhere. George W Bush tried, but Al Qaeda blew up the pipelines all the time so all that remained of that effort was a terrible cost, and a weak democratic regime that can revert to civil war, dictatorship and/or Islamic fundamentalism at any moment.

    Europe now also has its share of debt, mainly triggered by some stupid UK banks plus Deutsche Bank and the UBS in Europe which naively bought toxic US mortgage-based securities in the run up to the crash of 2008. In sum: it is this aggregate global debt burden that is becoming a drag on growth, and why double-dippers (sounds like naked bathing doesn’t it, like a club!) are growing more and more by the day.

    It would still be possible to avert the ultimate slump if the US and EU governments had a semblance of an industrial policy. Unfortunately, right now they have none. Were they instead applying intelligent Keynesianism, i.e. government guarantees for new industries within the environmental sector they would achieve 3 main advantages and would:
    1 reduce the use of fossil fuels and thus CO2 emissions, reducing the obnoxious impact on the environment. Only within the last month it was discovered that the upper layer of our thin atmosphere is now gone. This happens to mean that space junk we have put up there will no longer burn up but will continue circulating in cascades until it collides with new equipment we send up. But far the more troubling aspect is the fresh evidence our atmosphere is rapidly disappearing. A barren, dead planet, hot as hades, looms starkly. Human beings may forget it, because it is automatic, but they have to breathe. Yet no-one turns a hair.

    2 provide new jobs to soak up the unemployment (which in turn promote consumption and the option of saving more) and

    3 in those countries which are presently net importers of fossil fuels, produce energy at home thereby improving the trade balance and therefore also the state of the national debt.

    As I have long pointed out (and Bill Gross in his recent interview accessible via Investment Postcards today has now come to the same conclusion) the Obama administration has hitherto only been tinkering around with a few green projects and on a far too minor scale.

    The US has instead focussed spending efforts on bailing out banks with taxpayers money and the EU has focussed on bailing out national governments. Both have increased transfer payments to keep the growing ranks of the unemployed alive (currently at least 10% of the populations of both the US and EU).

    In addition, US monetary policy has also included allowing banks to borrow at cirka 0.25 percent and buy T-bonds with cirka 3.25 percent – making a tidy recapitalisation of 3% per year. Anyone wondering why banks are more interested in purchasing bonds rather than lending to individuals and small businesses?

    All this US money creation has been wasted. If the US had used the Swedish model of rapidly taking over, restructuring and re-privatising the ‘too big to fail’ banks in seven months flat, government guarantees could instead have been put to good use stimulating the establishment and growth of new industries. These industries would in turn employ those now unemployed. The newly employed would be able to spend again and the GDP would grow and the debt could gradually be paid off.

    At present, however, both the US and the EU are sittingly coyly on the sidelines, saying ‘No, we have no industrial policy! Are you mad? We are not socialists!’ They are both about to learn a hard fact of life. When the banks and private industry are in a symbiotic paralysis and cannot manage the creative destruction of obsolete production technology through the creation of new industries, the state government must step in and jump start it until the transition process is in full swing.

    In the meanwhile it is China who is now gaining yet another advantage by actively directing and massively stimulating alternative energy production. Very soon it will have the largest windpower park in the world and the largest concentrated solar power park in the world. China has realised that global warming is drying up the source of their water in the Himalayas, creating vast deserts and the risk of mass starvation among its still considerable peasant and migrant worker population. All while in the US it is a national taboo to say that fossil fuel use is aggravating global warming. Despite BP, the US population is sadly still totally and irrationally infatuated with oil.

    In the overall psycho-social perspective, the modern human being in the developed world is caught up in its very own trap of a cluttered technological lifestyle. The plethora of information and the stress of the modern 24/7 lifestyle makes profound analysis a practical impossibility. This kind of human being has both a short memory and completely lost the capacity to reflect and the inclination to be responsible for anyone else but its very own self.

    So the present march to the abyss continues, in slow motion zombie fashion, with Obama and the likes of Trichet in lockstep. The sight might even be hilarious if its portent wasn’t so ghastly. Unfortunately only an environmental and economic catastrophe that makes the skin burn and the body die is going to make the populations of the EU and US wake up and vote for a more informed and reflective kind of political representative to office. The way things are going that could happen sooner than we all think.

    The personal, social, regional, global economic and environmental are all connected. They always have been, but in former centuries there were always places for criminals, psychopaths and mass murderers, acting under the authority of their colonial and expansionist masters, to hide. Now the available places have dwindled.

    A current example of the crumbling of the present order can be seen in places like Ronald Reagan’s California. The days of the modern obstinate Californian Wild West types, intent on demanding good schools, roads and hospitals but unwilling to pay their taxes for them, and unwilling to pay for the debts that their deficits have created, are numbered. There is nowhere to hide and cheat anymore.

    They are so recalcitrant however, that most of them won’t realise it until it all collapses in front of their eyes. Some of course, like the die-hard right wing Ayatollahs of CNBC, will never shake off their ideology. Much like some of those sentenced by Stalin to hard labour for life in Siberia and who still believed in Stalin right until the end, they will still fanatically mouth the ideological tenets that presently drive them. In case you think that is an outlandish foreign example, consider what the Nobel Laureate Paul Samuelson said of Alan Greenspan as recently as 2009: “The trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can’t take the cult out of the boy.”

    Many people in the forty or so failed states in the world that are riddled with anarchy, injustice, corruption, bestiality, murder, war, massacres, non-existent health care and schooling, want nothing more than democracy, peace, good organisation, equality, justice and order.

    Yet in the US, and spread out throughout the EU, we have powerful local egoistical groups, or digitally connected loose national and international ones, who want nothing more than to destroy the modern democratic social order and think they will be all right because they will emerge on top. What they do not realise is that in the end anarchy eats its own children.

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