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Structural Slowdown and Cyclical Downturn in the US Economy Page 1

US Economy – The Combination of Structural Slowdown and Cyclical Recession

By John Ross

28 August 2010

Summary

This article focuses on evidence confirming long-term slowdown, as well as cyclical recession,
of the US economy as indicated in the latest release of the 2nd quarter 2010 US GDP figures.

Introduction

As widely reported, the second estimate of 2nd quarter 2010 US GDP revised annualised US
growth down from 2.4% to 1.6% - i.e. US GDP grew by 0.4% during the 2nd quarter. The main
changes compared to the first GDP estimate, in constant and annualised 2005 price terms,
were a downward revision of net exports by -$19bn, due primarily to an upward re-
estimation of imports by $14bn, and a revision of inventories downwards by -$13bn. Fixed
investment remained essentially unchanged compared to the earlier first GDP estimate,
with a revision downwards of -$1bn, and personal consumption was recalculated as $8bn
higher than in the first GDP estimate (Bureau of Economic Analysis, 2010b) (Bureau of
Economic Analysis, 2010a). An earlier article made a detailed examination of 2nd quarter US
GDP data and therefore only the implications for long-term trends are dealt with here. (Ross,
2010)

Slow recovery

The downward revision of 2nd quarter GDP naturally highlights how much slower present US
recovery is than in previous post-World War II business cycles. Ten quarters into the
downturn US GDP still remains 1.3% below its peak in the 4th quarter of 2007 – see Figure 1.
In the previous worst post-World War II business cycle, that following 1973, recovery to the
previous peak level of GDP was complete after eight quarters. Unless there is a significant
acceleration of growth, US GDP will not regain its peak level until 2011 – meaning at least
three years of net zero percent growth.

This slow recovery is, however, in line with a gradual but clear deceleration of long-term
growth in the US economy – see Figure 2. The moving 20 year average of US GDP growth
has now fallen gradually to 2.5% - significantly below its 3.5% historical average. Reasons
the US is unlikely to reverse this trend in the foreseeable future are analysed below.
Structural Slowdown and Cyclical Downturn in the US Economy Page 2

Figure 1

US GDP During Business Cycles


% change compared to peak of the previous cycle

2%

1%
1973
0%
1981
-1%
1990
-2%
2000
-3% 2007

-4%

-5%
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11
Quarters since peak of the previous business cycle
Source: Calculated from Bureau of Economic Analysis NIPA Table 1.1.3

Fixed Investment fall

The new GDP figures also cast clear light on the issues of whether the recession in the US is
primarily created by trends in consumption or investment. A number of analyses suggested
that the core of the US economic crisis would be deleveraging by US consumers– see for
example (Roach, 2009). If so the decline in US GDP would be centred in US consumption.
The present author has consistently argued that this analysis is in error and that the core of
the recession in the US is the decline in fixed investment. (Ross, 2010a) This is again strongly
confirmed by the new revision of US GDP data.

Due to the significant downward revision of the US GDP figures, and the small upward
revision of the consumer expenditure figures, consumption as a percentage of US GDP
clearly remains well above its pre-financial crisis level – see Figure 3. Between the peak of
US GDP, in the 4th quarter of 2007, and the 2nd quarter of 2010, US personal consumption
has risen from 69.9% of GDP to 70.5% and total US consumption has risen from 85.8% of
GDP to 87.6%.
Structural Slowdown and Cyclical Downturn in the US Economy Page 3

Figure 2

US GDP - Annual Average Growth


20 Year Moving Average, Annual Data
7%

6%

5%

4%

3%

2%

1%

0%
1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Source: Calculated from Bureau of Economic Analysis NIPA Table 1.1.3

The 1.8% of GDP increase in consumption as a percentage of US GDP is accounted for by a


0.8% of GDP increase in the share of military expenditure, a 0.6% of GDP increase in the
share of personal consumption, and a 0.4% of GDP increase in the share of Federal non-
military consumption.

In contrast the share of fixed investment in US GDP has fallen sharply by 3.6% of GDP. The
share of non-residential fixed investment has fallen by 2.1% of GDP and the share of
residential fixed investment by 1.5% of GDP.

The changes in components of US GDP, in terms of fixed price annualised 2005 dollars, are
shown in Figure 4. US GDP remains $172bn below its previous peak level. However net
exports, inventories, and government consumption are already above their 4 th quarter 2007
level – by $116bn, $51bn and $112bn respectively. Personal consumption is below its 4th
quarter 2007 level but only by $72bn. The US recession is entirely dominated by the $410bn
decline in fixed investment.

The US economy, therefore, has not responded to the financial crisis primarily by reducing
consumption, through personal debt deleveraging or other means, but by sharply reducing
fixed investment.
Structural Slowdown and Cyclical Downturn in the US Economy Page 4

Figure 3

US Personal and Total Consumption


% of GDP
90%

85%

80%
Total
75% Consumption
Personal
70% Consumption

65%

60%

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Source: Calculated from US Bureau of Economic Analysis NIPA Table 1.5.5

Implications for long term US growth rates

A severe decline in US fixed investment, however, does not have only short term effects. As
confirmed in the latest data of Jorgenson and Vu, capital investment continues to account
for more than fifty percent of US GDP growth – the percentage for the latest period they
analyse, in 2004-2008, is 61%. (Jorgenson & Vu, 2010) Under such conditions a severe
decline in US fixed investment, of the type seen during the current recession, in practice
excludes a rapid resumption of US GDP growth.

The slowdown that has been witnessed in long term US economic growth is therefore likely
to continue. The present recession confirms a pattern of not simply cyclical downturn but
structural slowing.

In that context the marked acceleration of US GDP growth which took place in 1995-2000
would appear to be a temporary upward fluctuation, financed by large scale import of
capital, within an overall context of a long term structural slowdown of the US economy. It
would not appear to mark the beginning of a more rapid US growth period.
Structural Slowdown and Cyclical Downturn in the US Economy Page 5

Figure 4

US - Change in Components of GDP


4Q 2007 - 2Q 2010, $ billion at 2005 prices

200

100

0 GDP

Private Fixed
-100
Investment
Personal
-200 Consumption
Government
-300 Consumption
Changes in Private
-400 Inventories
Net Exports
-500

Source: Calculated from Bureau of Economic Analysis Table 1 1 6

The above trends therefore indicate that not only short but medium and long term
projections for US economic growth should be assumed to be lower than historical averages.
The US economy has been gradually slowing in not only a cyclical but a structural fashion.

Bibliography

Bureau of Economic Analysis. (2010b, August 27). National Income and Product Accounts
Gross Domestic Product, 2nd quarter 2010 (second estimate). Retrieved August 27, 2010,
from Bureau of Economic Analysis:
http://www.bea.gov/newsreleases/national/gdp/2010/gdp2q10_2nd.htm

Bureau of Economic Analysis. (2010a, July 30). National Income and Product Accounts: Gross
Domestic Product: Second Quarter 2010 (Advance Estimate). Retrieved July 30, 2010, from
Bureau of Economic Analysis National Economic Accounts:
http://www.bea.gov/newsreleases/national/gdp/2010/gdp2q10_adv.htm
Structural Slowdown and Cyclical Downturn in the US Economy Page 6

Roach, S. (2009). The Next Asia. Hoboken, New Jersey: John Wiley and Sons.

Ross, J. (2010a, February 11). The myth of the decline of the US consumer. Retrieved August
28, 2010, from Key Trends in Globalisation:
http://ablog.typepad.com/keytrendsinglobalisation/2010/02/the-myth-of-the-decline-of-
the-us-consumer.html

Ross, J. (2010, July 31). US 2nd quarter GDP figures - investment remains the key issue for US
recovery. Retrieved August 28, 2010, from Key Trends in Globalisation:
http://ablog.typepad.com/keytrendsinglobalisation/2010/07/us-2nd-quarter-gdp.html

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