The Big Puzzle In Economics Today: Why Is The Economy Growing So Slowly

Ted

FYI: The growth of the US economy keeps falling short of expectations. On Friday, we learned that the US economy grew at an inflation-adjusted rate of 1 percent in the first half of 2016. That’s the slowest six-month growth rate since 2012, and it continues the slow growth that has characterized the recovery since 2009.

The weakness of the recovery has been surprising because conventional economic theory says that the bigger an economic downturn is, the bigger the subsequent boom will be. And the 2009 recession was the worst in decades, so post-2009 growth should have been massive
Regards,
Ted
http://www.vox.com/2016/8/1/12131216/theories-gdp-growth-slow

MOZART325

Many of the home contractors in my neighborhood ask to be paid at least partially in cash (e.g. off the books). I wonder if this trend has been growing across the country which causes the reported growth numbers to be too low.

davidrmoran

sense from a few months ago:

http://krugman.blogs.nytimes.com/2016/02/23/realistic-growth-prospects/

Old_Joe

I wonder if the contractors are hiding income from the IRS or from their wives? Or probably both.

dstone42

Much of the impetus driving markets and the economy is psychological – how good or bad do people – investors, consumers, entrepreneurs – feel about life, their situations and the future. For the past eight years, the Republicans (the Party of NO) have wanted Obama to fail, so they’ve complained and bashed and dragged their heels on almost anything that would improve the economy – they didn’t want anybody to feel optimistic about anything.

And despite all the lamentations from the right, the economy is not failing and in the worst shape ever – it’s just growing slowly. Many of the media commentators don’t bother to make such a distinction, so people think we’re in big trouble.

And what are the consequences -- if we can have slow growth for a long period without generating inflation and its concomitant problems, more the better.
David

BenWP

The US economy would be great again if we returned to the days when our then recent enemies and vast portions of the world devastated by WWII were no competition. However, that would be to return to a world when most boats were barely afloat while the US continent was in no sense of the word devastated. I am way better off being able to buy German, Japanese, Korean goods and travel to those countries. So the world growth rate is modest; should I bemoan our steady growth and vote for a demagogue who promises to turn back the clock? I'm with the folks who steered our economy to calmer waters after the crises of 2008.

Old_Skeet

One of the contributing factors for the slow growth economy, from my perspective, is the Affordable Care Act. Money, for many, that was spent for goods and services is now spent on health care premiums.

In addition, some full time positions were eliminated and are now staffed by part time employees over former full time workers. From a jobs creation perspective two new jobs were created (part time positions) and one (full time position) was eliminated for a net new job growth of one job ... however, many benefits were lost and the part timers combined, in most cases, make less than the full time person they now replace plus they now have to pay more for health care since most part time positions are not eligable for employer paid health care benefits. As I understand, this type of right sizing went on in a good number of large and samll companies resulting in the displacement of many full time employees while replacement part timers were emplyeed to carry the work load of the full timer.

So for some what might be good for them was indeed distractors for others.

Just my take as one of the causes for slow economic growth.

And, so it goes.

DanHardy

Old_Skeet said:

One of the contributing factors for the slow growth economy, from my perspective, is the Affordable Care Act. Money, for many, that was spent for goods and services is now spent on health care premiums.

Don, that is a factor. I'm wondering what the growth rate would be if health care and ACA were subtracted from the growth numbers - negative growth?

Add into the mix
off shoring of jobs
jobs created in service industries - lower paying then mfg
minuscule amount of workers with pensions
automation
artificial intelligence - coming soon

It all adds up to poorer workers who don't have a lot of discretionary income.

PRESSmUP

The original article states that the recovery should be bigger/faster correlating to the size of the original recession, and uses comments by Kenneth Rogoff to support this thesis.

I found it curious that the author did not use an earlier study by Kenneth Rogoff and Carmen Reinhart which was an empirical study of historical financial crises. This indicated that recessions caused by fiscal crises (such as what we had in 2008) induced recoveries dramatically different from "normal" recessions, and that our current recovery was in-line with those historical norms.

So, while the recovery could certainly be stronger, statements that our recovery has been historically weak are frankly incomplete.

Edmond

No doubt there are several factors which have a material impact on the slow GDP growth.

1. Debt. Much of the demand we might have expected to exist in 2016 (and 2017, 2018, etc) has already been pulled into prior periods via the use of debt. Fiscal & monetary policy pulls demand "forward" from the future to the present. Now that we are in yesterday's future, the demand that should have been here, has already been satisfied.

2. Unproductive investment (often using, yes, DEBT). Kids borrowing to earn unproductive (i.e. non-income generating) degrees; wasteful infrastructure spending (a lot of that where I live, in TX). Umpteen sandwich shops & Starbucks in your neighborhood, more coming soon. A major sub-category this is the homebuilding industry, which continues to build much bigger homes than people need, and much bigger than was typical in the 1960s/70's. Bigger homes, mean lower discrtionary income (more of your income goes to the mortgage), and bigger property taxes (more income going to the state).

3.A massive wage & wealth gap: The higher one's income & wealth, the lower the proclivity (or need) to spend it all. Joe Sixpack spends 100% (sometimes more) of his income.

4. ACA (Obamacare): Just had a conversation with my hair-stylist/barber. She a hard-working, legal, Honduran immigrant. On my last visit, out of the blue she starts complaining about ACA. Her premiums and co-pays are ridiculous. (+$400 premium, $6k deductible, if memory serves). This is a low-income haircutter. Those monthly premiums going to the insurance company are premiums not spent elsewhere. Multiply her by the millions covered by ACA.

davidrmoran

and this difficult reality:
https://www.washingtonpost.com/opinions/the-largely-false-globalization-narrative/2016/08/07/7a095582-5b25-11e6-9aee-8075993d73a2_story.html

BobC

Personally, I don't think there has been any real recovery. What we have had has been induced by the Fed's monetary action. Now where did all the government's stimulus dollars go? If they created jobs, they were not the kind of jobs lost in the recession. The post-recession economic recovery is smoke and mirrors.

davidrmoran

not to all those who have good new jobs!

BobC

But very few of the "good" new jobs are in the industries where the losses dominated. They tend to be in tech, health and other areas that those who lost their jobs cannot aspire to at age 50-60, and those younger must get new degrees and training. The jobs our parents and family tended to have for a lifetime are mostly gone now, or at greatly reduced wages and benefits.

davidrmoran

So goes the perception.

Old_Joe

@davidrmoran- Surely Bob's point regarding the improbability of older displaced workers qualifying for jobs with equivalent income deserves more than a casual "so goes the perception". The "perception" comment suggests that reality is actually different from the perception. If that's so, some reasonable examples would be helpful.

Also, if you're really suggesting that Bob's comment regarding "jobs our parents and family tended to have for a lifetime" is inaccurate, a rebuttal with some detail is warranted.

davidrmoran

k, point taken, will try and find some data; not easy though with generalities like "our parents and families ... for a lifetime".
One grandfather of mine was a steel sales VP in the Midwest (the other an overseas missionary). My father worked at Crowell-Collier in the Midwest, then a string of jobs (mutual fund salesman among them, also mental-health admin, also for local university). My best Midwestern friend's father ran the local jewelry store. I used to work for International Harvester, later a successful large weekly newspaper, then in consumer electronics, and finally two successful DoD contractors.

All of those jobs, each and every single one, are gone now, some of them long long gone. What does any of that have to do with anything other than the inevitable, relentless dynamics of an economy?

I was in part responding to this sort of thing: "don't think there has been any real recovery. What we have had has been induced by the Fed's monetary action. Now where did all the government's stimulus dollars go? If they created jobs, they were not the kind of jobs lost in the recession. The post-recession economic recovery is smoke and mirrors."

Smoke and mirrors, huh. Which reads like not-far-from-Trump bunkum. Perhaps I am being impatient about notions of 'displacement' and that somehow equivalent incomes could be an outcome. Life happens and it's often tough. Does that mean the data about the recovery are ... what? It does not take much digging to find out the actualities of the recession, really, including the stimulus dollars.

I would think you might point out that Bob C should supply cites for his assertions.

Old_Joe

"I would think you might point out that Bob C should supply cites for his assertions."

Fair enough. What's really bugging me here is that I highly respect both of you for your intelligent contributions to MFO, and I'm distressed to see this mutual descent into "Dex" type commentary.

DanHardy

BobC said:

But very few of the "good" new jobs are in the industries where the losses dominated. They tend to be in tech, health and other areas that those who lost their jobs cannot aspire to at age 50-60, and those younger must get new degrees and training. The jobs our parents and family tended to have for a lifetime are mostly gone now, or at greatly reduced wages and benefits.

True that the jobs are not good ... do you want fries with that ?

This is the new world and even low wage jobs are at risk of automation. Have you gone to a McDonald's recently where you order and pay via a computer touch screen?

Good jobs are going to Mexico. I just purchased a new Ram 2500 - MADE IN MEXICO. Think about all the really good manufacturing and assembly line jobs that have gone south and west outside the USA.

WASHINGTON — The deep recession wiped out primarily high-wage and middle-wage jobs. Yet the strongest employment growth during the sluggish recovery has been in low-wage work, at places like strip malls and fast-food restaurants.
http://www.nytimes.com/2014/04/28/business/economy/recovery-has-created-far-more-low-wage-jobs-than-better-paid-ones.html

http://money.cnn.com/2016/04/18/news/economy/fastest-growing-jobs/

DanHardy

BobC said:

They tend to be in tech, health and other areas that those who lost their jobs cannot aspire to at age 50-60, and those younger must get new degrees and training. The jobs our parents and family tended to have for a lifetime are mostly gone now, or at greatly reduced wages and benefits.

A couple of other points. Tech has been and will be hit by globalization and automation
- call centers in India etc
- programming moved to India, China etc
- manufacturing moved to China etc
- automation replacing jobs - Foxcom fired 30,000? and replaced them with robots

Artificial intelligence will eliminate more jobs.

The other aspect of retraining at 50-60 is the cost of the education that people can not afford and if they could who would hire a person that old?

Gary

I would say Government stimulus - spending went to prop up the so called banking system. We are victims of all the liar loans that were bought up. Takes a long time to digest.
Just my 2 cents.

davidrmoran

Better than perceived, yet also worse, and yes, training and actual cash supports:
https://piie.com/blogs/realtime-economic-issues-watch/new-middling-us-labor-market

Also:
https://piie.com/blogs/trade-investment-policy-watch/misconceptions-campaign-trail-us-manufacturing

(only indirectly relevant)
https://piie.com/blogs/trade-investment-policy-watch/misconceptions-campaign-trail-benefits-trade-agreements

ditto:
https://piie.com/system/files/documents/pb16-5.pdf

You want that truck to be made in Mexico, mostly.

DanHardy

Gary said:

I would say Government stimulus - spending went to prop up the so called banking system. We are victims of all the liar loans that were bought up. Takes a long time to digest.
Just my 2 cents.

That is part of it. Money on stimulus project also flowed outside the USA. The republicans wanted a clause in the stimulus bills saying that the money had to be directed to USA firms. The China etc lobby and Democrats would not allow that clause. So, although trillions were spent a lot of it did not stimulate the USA economy. That is the flaw in current economic thought. We do not live in a closed/country economic system. So, the classical stimulus ideas have lost their power.

davidrmoran

https://www.washingtonpost.com/news/wonk/wp/2012/09/09/everything-people-think-they-know-about-the-stimulus-is-wrong/

Gah, so easy to check rather than spout. Whether you think it was right or wrong or a good idea or bad, or enough. And this was the state of play 4y ago.

Old_Joe

This timely article from NPR:

Presidential Campaigns Are Talking Around The Robot In The Room

JohnChisum

I see we are in MSNBC mode here.

Mexican trucks? Well, when they can figure out how to put rings on Pistons correctly, then I'll consider.

Robots will be the biggest cause of job loss in the next 20 years. JMO.

DanHardy

JohnChisum said:

I see we are in MSNBC mode here.

Mexican trucks? Well, when they can figure out how to put rings on Pistons correctly, then I'll consider.

Robots will be the biggest cause of job loss in the next 20 years. JMO.

Wow!

What is your prediction for the internet; do you think it will catch on?

TSP_Transfer

BUSINESS JOURNAL REPORTS: LEADERSHIP
How to Revitalize U.S. Manufacturing
Nine policies that could spark new growth in factory jobs and the economic benefits they bring By BOB TITA The Wall St Journal
June 7, 2016 10:05 p.m. ET
Now researchers, politicians and business leaders are coming forward with strategies to accelerate job gains and investment in manufacturing. Their ideas range from pruning regulations that raise the cost and effort of running a manufacturing operation to imposing a value-added tax on imports to beefing up training programs so companies have an easier time finding skilled workers.

Reviving the manufacturing sector won’t be easy—but, these advocates argue, it’s crucial.
The Nine policies
Make exports more valuable
Impose a value-added tax
Deal with an overvalued currency
Look at the true cost of offshoring
Purge duplicate regulations
Look at more than jobs
Turn community colleges into career factories
Spend more on manufacturing R&D
Create regional centers of expertise
http://www.wsj.com/articles/how-to-revitalize-u-s-manufacturing-1465351501
Sourced from;
http://www.themadeinamericamovement.com/blog/

@JohnChisum said
Mexican trucks? Well, when they can figure out how to put rings on Pistons correctly, then I'll consider.

Hopefully They'll Figure out the Formula For my Double Stuffed !!
From Made in America Blog
Nabisco Ships 600 Jobs to Mexico. Time To Give Up Oreos
I may have to give up one of my longest-standing indulgences: the dunking of an Oreo cookie in cold milk.....Why give them up? Because this week, Irene Rosenfeld, the head of Mondolez (the food conglomerate based in Illinois that has Nabisco in its portfolio), a woman touted for breaking the glass ceiling upon becoming the head of Kraft Foods and then its spin off, announced that rather than invest $130 million in modernizing the plant in Chicago, where Oreos have been lovingly produced for the past 100 years, she will instead move the jobs to a new factory in Mexico. The result: a loss of 600 well-paying and community-sustaining jobs on Chicago’s Southwest Side.
http://www.themadeinamericamovement.com/jobs/nabisco-ships-600-jobs-to-mexico-time-to-give-up-oreos/

From HFCSX Q and A
Would you please discuss a recent Fund purchase?
During the first quarter of 2016, we established a 1% position in AMETEK, Inc. (AME) which makes a wide variety of specialized electrical and mechanical instruments for industrial applications. AMETEK compounded earnings per share at close to 16% per annum over the last 10 years by acquiring leading niche instruments businesses and dramatically improving them using management tools such as low cost sourcing, value engineering and lean manufacturing. The team that executed this business plan remain largely in place, and we believe the company can continue executing this acquisition model over the next decade.

https://hennessyfunds.com/resources/docs/literature/commentary/Focus_Fund.pdf?636064498496690000

July 26, 2016 | 2nd Quarter Conference Call Slide Deck OTCRX
LONG INVESTMENT THEMES
The "3G Effect" /3G Capital has reset the industry benchmark for profitability, pressuring peers to improve. Mondelez (MDLZ)
http://www.ottercreekfunds.com/media/pdfs/OCL_Call_Presentation_2Q20161.pdf

***3G Capital is a partner with Warren Buffett's :BRK.A in the Heinz takeover. OTCRX is also long BRK.A .

catch22

From the WSJ ariticle:
"A VAT would need to be coupled with an elimination or reduction of existing taxes on businesses, including payroll taxes for Social Security and Medicare. Likewise, consumers would need tax relief to make up for the higher prices they would face for most purchases.

The rap on VAT, as with state sales taxes, is that it’s a regressive tax on essential, everyday items, like clothing, that every buyer faces regardless of their ability to pay. The upside: A VAT would put the U.S. on the same kind of tax system used throughout the rest of the world. In theory, that would make our exports more attractively priced because they wouldn’t be taxed twice—once in the U.S., as they are now, and then when they enter other countries."

>>>From which "theory of economics" study does the above arrive?
Many consumers are already doing the "deflation" game with waiting upon the next sale.
On a different, but related economic note. I can't help but think when seeing the summer travel/tourist/vacationer numbers in Michigan where this money is coming from. I doubt that many of the dollars have been saved from a budget for such spending. I will then presume credit card money to be paid off when other budget monies allow.
The Michigan economy does receive large amounts of "summer vacation dollars". I always thank the "cars" I see with license plates from Ohio, Illinois, etc. for spending their money in this state.
Just a few rambling, low on coffee intake and early in the day disjointed thoughts.
Take care,
Catch

hank

catch22 said:

I can't help but think when seeing the summer travel/tourist/vacationer numbers in Michigan where this money is coming from.

Hi Catch,

I see the same thing and wonder "Where are all these people going?"
Not just Michigan. We were in NYC for a few days recently and have never seen the place so crowed. Didn't matter where you went. Long lines and arm-to-arm people. All having a good time - but Geez.

I guess there's some evidence that in recent years consumers have been spending a smaller share of disposable income on things , including clothing, and more on entertainment, travel and other life enrichment activities. Probably true in our case.

And oh - Maybe these low gas prices are fueling the summer travel boom? What would a doubling back to near $5 do?

Take care.

DanHardy

catch22 said:

From the WSJ ariticle:
"A VAT would need to be coupled with an elimination or reduction of existing taxes on businesses, including payroll taxes for Social Security and Medicare. Likewise, consumers would need tax relief to make up for the higher prices they would face for most purchases.

The rap on VAT, as with state sales taxes, is that it’s a regressive tax on essential, everyday items, like clothing, that every buyer faces regardless of their ability to pay. The upside: A VAT would put the U.S. on the same kind of tax system used throughout the rest of the world. In theory, that would make our exports more attractively priced because they wouldn’t be taxed twice—once in the U.S., as they are now, and then when they enter other countries."

In practice, in Europe, VAT did not produce a "reduction of existing taxes on businesses, including payroll taxes for Social Security and Medicare."

The debt will probably the reason for enacting a VAT.

I believe exported items have special corp tax treatment - either lower rate or none - check that. The problem is repatriating the profit - it gets taxed. But confirm that.