The US Economy in 2015: Off To A Roaring Stop

During the six years from 2009 to 2014, the US government has provided the economy with $6.3 trillion of fiscal stimulus through its budget deficits and the Fed has injected $3.7 trillion of monetary stimulus through Quantitative Easing. But despite this double-barreled blast of spending and printing, the US economy was only $3.2 trillion larger at the end of 2014 than at the end of 2008. That put average real GDP growth at just 1.4% a year over the last six years. Now, the just released data for the first quarter of 2015 shows that things have taken a significant turn for the worse. At the beginning of this year, the economy barely grew at all, nudging forward by only 0.2% at an annualized rate.

Worse still, the details of the GDP report paint an even worse picture about the health of the economy than the headline number suggests. Nominal GDP growth came in lower (+0.1%) than real GDP growth (+0.2%) because deflation became worse during the quarter. The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 1.5 % in the first quarter, compared with a decrease of 0.1% in the fourth quarter of last year. US Goods Exports fell 13% as the strong US dollar made it more difficult to sell US products overseas. Private investment in non-residential structures plunged 23% as the collapse in the price of oil caused a sharp drop in the installation of new oil rigs. Finally, the economy would have actually contracted had it not been for a big jump in private inventories. An increase in inventories boosts GDP during the quarter in which the build up occurs, but then tends to lower economic growth in the following quarter as new investment slows to allow those unsold inventories to run down. Any way you look at it, the first quarter GDP numbers were very bad.

So what happened? Yes, it was a cold winter again. That did not help. The work slowdown at the West Coast ports could have also had a negative effect. But there is much more to the economic slowdown than snow and port problems. Let’s begin with monetary policy.

Monetary policy works with a lag, as Fed Chair Yellen often points out. It is important to understand that the Fed began tightening monetary policy 16 months ago when it began “tapering” the amount of money it was creating and injecting into the financial markets each month through QE 3. It has now been six months since QE 3 ended completely. Therefore there has been a very significant tightening of monetary policy already. I believe that was a major factor holding back economic growth during the first quarter. After all, Quantitative Easing worked, in part, by pushing up the stock market and creating a “wealth effect” that allowed more consumption. Since QE 3 ended, the stock market has barely increased. That is one of the reasons why the increase in personal consumption expenditure, which makes up 70% of GDP, was weak. It grew by just 1.9%.

And, even more fundamentally, credit growth remains too weak to drive economic growth. Our economic system, Creditism, requires credit to expand if it is to grow. But the household sector, weighed down by more than $13 trillion of debt and suffering from near stagnant wage growth, can’t afford any more debt. Meanwhile, excessive fiscal austerity has resulted in the government borrowing significantly less than in recent years. Total government borrowing increased by only $11 billion in the first quarter. So long as household sector borrowing and government borrowing remain constrained, the economy is going to remain weak.

We should not forget that every time during the last 60 years when total credit (adjusted for inflation) grew by less than 2%, the US went into recession. In 2015, we will just barely hit 2%, and only then because the level of inflation is so low. Therefore, the odds of the US entering a new recession this year are high, while the odds of interest rate hikes are low. In fact, the launch of QE 4 is probably not that far away.

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