The U.S. Economy Is Not Stronger

The headline gross domestic product (GDP) figure for the third quarter seemed to signal a return to growth and a significant improvement from the previous readings. Real gross domestic product (GDP) increased at an annual rate of 2.6 percent in the third quarter of 2022, in contrast to a decrease of 0.6 percent in the second quarter, according to the Bureau of Labor Statistics. However, the reality of the United States economy is that stagnation persists.

If we look at the components of GDP, a few one-off surprises may reduce the optimism about the headline. The entire improvement came from a bounce in net trade, as exports rose, mostly from natural gas and oil, and imports collapsed. This huge boost from the external sector is likely to reverse in the fourth quarter, as the nominal trade deficit has widened to $72.0bn in September. The advance report shows that exports fell by 1.5% while imports rose by 0.8%. Furthermore, if the United States economy improves from lower imports in a quarter where domestic demand is stagnant, it clearly proves that overall demand is weaker.

Gross private domestic investment continues to be underwhelming and means a negative contribution to GDP of -1.59 while government consumption adds 0.42. Without the boost from government spending and net trade the gross domestic product would show a negative change.

Another crucial factor in the positive figure was consumption, adding 0.97 to GDP. While consumption remains solid, the pace is weaker and almost half of the contribution in the third quarter of 2021, as real disposable personal income (DPI, personal income adjusted for taxes and inflation) remains poor. It increased 1.7% in the third quarter but decreased 1.5% in the second quarter. Real disposable income is down 3.9% from a year ago.

One of the surprises and biggest drivers of improvement is the reduction in the GDP deflator, which stands at 4.1%, the lowest since the second quarter of 2020, when it was a 9.1% in the previous quarter and an average of 6% in almost seven quarters. A lower GDP deflator translates into a higher real GDP figure.

While consumption growth is still positive, it was offset by weakness in investment, particularly residential investment, which contracted at a 26% annualised rate in the third quarter.

If we want to understand the strength of the domestic economy the best way is to analyse the figure of final sales to domestic private purchasers which slowed to 0.1% annualised in the third quarter, a significantly poorer reading than the growth of 0.5% in the second quarter.

The third quarter GDP is not proving the resilience and robust growth of the United States, it shows a stagnant domestic economy saved by the energy crisis abroad and lower demand for imported goods.

This GDP figure is not good on its own, but it is even worse when analysed in the context of a massive fiscal stimulus. In September 2022, the public debt of the United States was around 30.9 trillion U.S. dollars, around 2.5 trillion more than a year earlier. With a $1.37 trillion deficit in fiscal year 2022, the recovery of the United States is shockingly poor. Those that consider deficit spending as a tool for growth should be alarmed at the inexistent fiscal multiplier of government spending and the rising structural debt.

The third quarter GDP is not proof of the success of demand-side policies, it is the evidence of the disastrous result of wrongly called stimulus plans.

The unstoppable trend of deficit and debt is not stimulating anything except the size of government and the unsustainability of public accounts. The U.S. economy is in much better shape than the European Union or Japan, no doubt. But it is not stronger. It is fatter.

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