US Q1 GDP..big picture concerns conflate with shorter term weakness!

The big picture is the risk that growth may well have peaked in the current cycle:

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And personal consumption expenditure flows (population adjusted) have arced in a worrying sign of secular decline for some time:

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GDP growth less private employment growth has been negative since Q4 2010, one of the very few such periods in the post war period and the weakest to date and symptomatic of weak productivity and wage growth:

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Preliminary US GDP grew by a real $22bn in the first quarter.  Given that we are unlikely to see the weather related bounce back in growth that we saw last year, we are left wondering where growth is going to come from in the second and third quarters, especially if global trade fundamentals remain weak.

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“Investing in social infrastructure as an anti-recession tool”

…is the title of a Washington Centre For Equitable Growth article.  I think that there is some logic to investing in social infrastructure in a slowing growth frame. 

WHY?

In a slowing growth frame less of a corporation’s revenue flows are likely to be reinvested and productive capital is likely to be increasingly depreciated over time, depending on the rate of decline of the frame.  At the moment this cash flow, distributed as either dividends or buybacks, is likely to go disproportionately to those with higher wealth and hence more likely to be reinvested in existing assets, driving up their prices.

In a competitive economic model cash flows would be used to finance the transition to lower growth, with flows consumed and/or used to reduce debt.  As people age the costs associated with complex medical and personal  care needs rise, but these are liabilities that are presently not that well funded.  It makes sense to optimise the allocation of flows to a) fund the economic costs of older adult communities and b) make sure that those at the younger end of the scale continue to receive the necessary education and employment skills training.   This would ensure that the expenditure flows in the economic habitat would be healthier in terms of optimising expenditure and investment.  Imbalances due to inefficient distribution of flows are likely to lead to higher asset price and financial system risks.

In a growth frame where higher levels of productive capital investment is needed it makes sense to have lower corporate tax rates, but in a slower growth frame where higher percentages are distributed it would make sense to tax these distributions at higher levels for more efficient distribution.   In a competitive efficient market place without asymmetric properties we would be less likely to have the present skewed distribution of income and wealth and associated funding pressures on key aspects of social infrastructure.

Some important dynamics from US Q4 GDP Update

A weak frame:

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Personal consumption expenditure is the most important component of US GDP and growth in real Personal Consumption Expenditure (PCE) is tied to the productive capacity of the economy.  So why on a real per capita basis has the economy failed to produce sustained increases in consumption capacity post the early 1980s?  And note that this is despite an increase in PCE as a % of GDP over the post war period. 

And also on a nominal basis:

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How reliant in fact has GDP been on the PCE component? Growth in PCE has eclipsed both GDP and equipment investment over the post war period, and significantly so.   The question begging to be asked is,”where is growth going to come from?”

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In another recent blog I exposited about asset valuations relative to GDP growth.  Now the charts above show the increasing reliance of US GDP on PCE, a component which appears to have outsized importance in GDP terms.  Well the following shows even PCE growth being dwarfed by increases in household asset values:

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In fact we can see that PCE expenditures have been less reliant on income growth post 2000s:

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And looking at nominal GDP only, if we adjust for inventories and the impact of changes in consumer credit we find a much subdued trend in growth:

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And nominal growth in expenditures have been declining:

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And motor vehicles etc continue to be an important part of consumer expenditure…

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And relative to the prior debt fuelled cycle we find that expenditure on MVPs and RV combined is a much greater…I have pointed out concerns with respect to the growth in non revolving consumer credit relative to income growth, a ratio which stands at historically high levels.

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Services expenditure has been increasingly volatile:

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And note the importance of health care expenditure:

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Interestingly if we take out healthcare expenditure from PCE, PCE as a % of GDP has been more more stable..

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And financial services expenditure has also picked up since Q1 2013:

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Interestingly, all the domestic investment components (on a nominal basis) are turning down in a synchronised way:

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Exports have been an important driver of growth recently, but more recently has fallen back as a nominal driver of expenditure: there are many explanations for this amongst them the recent decline in the oil price and weakening global demand growth.

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And of course the chart raises the question, where is the growth going to come from?

Finally, a quick peek at growth in commercial bank deposits relative to nominal GDP growth:

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US employment data…perspective 3

This is the third perspective dealing with concerns over US employment and related US growth dynamics:

A great deal of the growth in employment over the last few decades has been concentrated in the health and education sectors.  Student debt has become a major problem post the onset of the current financial crisis and health care has likewise become, over time, a tremendous economic cost and a structural barrier to growth.

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