News From the Real Economy
Both in general and on Friday, the entirely manufactured crisis of whether the U.S. will raise its debt ceiling is obscuring a very real crisis -- the ongoing collapse of the American economy. Friday's news on the real crisis was the government's report on gross domestic product growth for the second quarter of this year, which, at an anemic 1.3 percent, was about half a percent under what most economists had been predicting and clearly not enough to create very many jobs.
But the real shockers in Friday's report from the Commerce Department's Bureau of Economic Analysis were the downward revisions in GDP from previous quarters. The previous estimation of GDP growth in the first quarter, 1.9 percent, was revised downward -- actually, almost zeroed out -- to just 0.4 percent. The growth rate for the first half of 2011, then, is clearly under 1 percent. As a general rule, the U.S. economy has to grow at a rate of about 2.5 percent just to keep up with population growth, and more than that to reduce the unemployment rate. So these new figures make clear why the unemployment rate has been rising.
But the government's downward revisions in GDP don't stop there. The new report revises the numbers all the way back to 2005 and show that the decline of the economy in the wake of the Lehman bankruptcy in the fall of 2008 was far steeper than the numbers showed at the time. In the fourth quarter of 2008 and the first quarter of 2009, the GDP actually shrank by 7.8 percent, not by the 5.9 percent that was previously reported. But the revised data also show that in the second quarter of 2009, the decline in GDP shrank by just 0.7 and that the economy grew by 1.7 percent in the third quarter.
In other words, the stimulus worked. But the newer numbers on the months of precipitous decline following Lehman's fall raise a question: If the incoming Obama administration had had the accurate numbers to work off of, would it have asked for a larger stimulus than the one it sent up to the Hill? If a roughly 6 percent shrinkage of the economy yielded a $787 billion stimulus, what would a roughly 8 percent decline -- the figure by which the economy was actually shrinking -- have yielded? My guess, and it's no more than that, is that presented with those numbers, Obama's economists -- certainly Christina Romer and Jared Bernstein, and probably, and more important, Larry Summers, too -- would have recommended a bigger stimulus than the one that came before the president.
With these new numbers before us, it grows harder and harder (actually, all but impossible) to argue that the stimulus had no effect. It manifestly did arrest the slide. But today, with that stimulus almost entirely spent, and with the federal aid to the states that was part of the stimulus package now a thing of the past, one of the major factors in the economy's current stagnation is the cutbacks in state and local government. Spending by state and local governments decreased by 3.4 percent in both the first and second quarters of this year.
While the new study made downward revisions to the GDP and to personal income in 2009 and 2010, it made upward revisions to corporate profits for those two years. As economist Dean Baker noted, "The profit share of net corporate output rose to 23.8 percent for 2010, more than a full percentage point higher than any level previously recorded." This comports with the recent report from J.P Morgan Chase chief investment officer Michael Cembalest, about which I blogged a couple of weeks ago, that documented how profit margins of the S&P 500 are higher, and the share of corporate revenues going to wages lower, than at any time in the past half-century.
That's the news from the real economy. We now return you to the manufactured debt-ceiling crisis, the "solutions" to which -- further reducing government spending -- will only make life in the real economy nastier and more brutish.
(If there's one thing we know about comment trolls, it's that they're lazy)