Wednesday, August 3, 2011

Keep Your Eyes on Growth: United States and Global Growth are Declining Not Slowing

United States  Q2 2011 GDP was a disastrous 1.3% and Q1 was revised down to 4 tenths of a percent as well as other prior quarters revised down as this chart from Econbrowser show:





The predicted stronger second half of 2011 seems decimated, leaving the FED sidelined, also as it looks, after the new data, more like 6 tenths of a percent and  7 tenths of a percent for Q3 and Q4 with the output gap widening even further as the graph from Tim Duy in the last link above shows.



Anyone who has invested and/or was consumed by the conviction of coming inflation can drop the illusions, because inflation is not happening in an economy in which growth is stalled and banking down.  The recession was deeper than thought and sheds some light on high lingering unemployment.

This week the Global Manufacturing PMI for July was down from 52.3 to 50.6, which is the lowest since July 2009.  The U.S. ISM Manufacturing PMI for July was down 50.9 from 55.3 for a two year low.  China HSBC Manufacturing PMI was down to 49.3 (any PMI below 50 is a contraction) from 50.1, while official China PMI was down to 50.7 for a 29 month low.  UK PMI was down to 49.1 for the lowest since June 2009.  Russia was down to 49.8, which was the first sub-50 since December 2009; Taiwan was down to 46.1, which is the largest decline since January 2009.  Eurozone PMI was down to 50.4 from 52.0 for the slowest pace in 22 months.  Australian PMI was down 9.5 points to 43.4.  This is a global decline in growth which is shaping up like a train wreck.

German June retail sales, which were reported this week, surprised with a 6.3% increase when only a 1.6% increase had been expected, but it was still down 1% from a year ago.  This is probably an outlier resulting from disruptions in the calendar shopping days with June having two less and May having three more this year.  While German car makers are optimistic for the rest of the year, electronics and DIY sales are down.  Eyes will be watching the July retail sales reported at the end of August.

53% of European companies which have reported earnings since July 11 have missed earnings which is the most in approximately five years.  Lenders in Brazil, Russia, India, and China are under increasing credit pressure from their growing economies raising questions about the level of possible non-performing loans.  If you look at our July, June, and May articles you will see several on the eurozone and China, such as this one on the consequences of trade imbalances and the debt dilemma.

All of this economic information quashed any short lived delusional euphoria over deficit reduction in the United States.  A sovereign nation which issues its own currency can only default by political choice, i.e., as an act of political will, as it can always pay its debts in its own currency.  As of Tuesday, August 2nd, we have had eight down days in the DOW for the first time since October 2008.  And we still have the ADP Private Employment Survey (consensus 100,000 up), the ISM service sector index (up a little), and the July employment report (consensus up 75,000).  If the July employment report is less than expected, as were the ISM Manufacturing, consumer spending, and GDP reports this week, it will cap a very negative week of declining growth which will be aggravated by the proposed austerity deficit reduction passed this week, which will cut growth by .3% and increase unemployment by .15% - .2% in 2012 and continue to cut growth in each year through 2021 with 2013 growth potentially cut 1.6% as the chart from, Macoadvisers in the immediately preceding link shows (multiply the columns by 2 for the economic multiplier effect, i.e., negative .15% = negative .3% for FY 2012 and FY 2013 = negative .8%):


This further contraction on top of growth moving towards stagnation in the United States and globally will only further push us futilely towards recession if not depression.  Take a look at the top ten biggest tax breaks which could be cut in deficit reduction and you will find the predominant burden is on the middle class not the wealthy who are being protected from tax increases. Despite public belief, taxes are at historical lows (they were as high as 90% in 1960 until John Kennedy lowered them) and tax revenues in 2009 (24%) are almost the same percentage of GDP as in 1965 (24.7%) as the OECD chart in the immediately preceding link shows:


In fact, Americans pay almost the lowest taxes of  the developed countries in the world with Chile and Mexico only having lower taxes.

As growth stagnates, the deep problems of unemployment officially at 9.2% in June and total unemployment, included discouraged workers, at 16.2% (approximately 22.6% if one used the old 1980's calculation) will only worsen.  The July GDP numbers, global PMI numbers, and the debt limit deficit reduction are final nails in the mystery of the lingering, long term high unemployment.  The charts at Calculated Risk (take a look at all of them here), such as this graph, show how significantly different unemployment as a result of this recession as opposed to other recessions and how exceptionally bad unemployment is.


When you consider all of the above and you add Cyprus, whose traded ten year bond yields are going higher from 8.9% to over 10% more recently, facing an invitation to a eurozone bailout and, if bond yields keep rising, Italy and Spain potentially running out of money in September and February respectively, you have converging global and United States contractions which will feed off each other and austerely intensify the pain.


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