What Is GDP?

By Kimberly Amadeo, About.com Guide

(Credit: Bill Pugliano/Getty Images) US Economy Ads

Economy GDP Growth by Year GDP Statistics GDP Chart Economy to India

The U.S. Economy Is Measured by G.D.P.:

The best way to understand the U.S. economy is by looking at Gross Domestic Product (GDP), which is the statistic used to measure the economy. In other words, the U.S. economy, as measured by GDP, is everything produced by all the people and all the companies in the U.S. In 2010, it was $14.7 trillion. To make sure that GDP can be most accurately compared year-to-year, the Bureau of Economic Analysis (BEA) usually reports real GDP. Nominal GDP is the measurement that leaves inflation in the estimate. It is, therefore, much higher than real GDP.

How GDP Is Calculated:

To calculate real GDP, the BEA makes three important distinctions:
1. Imports and income from U.S. companies and people from outside the country are not

included, so the impact of exchange rates and trade policies don't muddy up the number.
2. The effects of inflation are taken out.

3. Only the final product is counted, so that if someone in the U.S. makes shoelaces, and it is used to make shoes in the U.S. (there are a few companies left!) only the value of the shoe gets counted.

GDP Growth Rate:

GDP is measured by the BEA quarterly. The BEA revises estimates as it receives better data throughout the next quarter. To compute economic growth, it compares each quarter to the previous one. For a summary of all GDP growth reports since Q4 2006, see GDP Current Statistics

How GDP Affects the US Economy:

GDP is important for three reasons: 1. Most importantly, it is used to determine if the U.S. economy is growing more quickly or more slowly than the quarter before, or the same quarter the year before. 2. It is also used to compare the size of economies throughout the world. 3. It is to compare the relative growth rate of economies throughout the world. Investors look at GDP growth to see if the economy is changing rapidly so they can adjust their asset allocation. In addition, investors compare country GDP growth rates to decide where the best opportunities are. Most investors like to purchase shares of companies that are in rapidly growing companies. The Federal Reserve (Fed) uses the GDP growth rate as one of the indications of whether the economy needs to be restrained or stimulated. (See The Federal Funds Rate and How It Works).

How GDP Affects You:

For example, if the GDP growth rate is speeding up, the Fed may raise interest rates to stem inflation. In this case, you would want to lock in a fixed-rate mortgage, because you know that an adjustable-rate mortgage will start charging higher rates next year. If GDP is slowing down, or is negative, then you should dust off your resume. Declining GDP usually leads to layoffs and unemployment, but it can take several months. Declining GDP means business revenues are down. It can take awhile before executives can put together a layoff list and package. If you follow GDP statistics, you can be better prepared. You could also use the GDP report from the BEA to look at which sectors of the economy are growing and which are declining. This would help you determine whether you should invest in, say, a tech-specific mutual fund vs a fund that focuses on agribusiness. It can also help you find training in sectors that are growing. Even during the Great Recession, healthcare- related industries continued to add jobs.

Recent GDP Trends:

In 2008 and 2009, the economy contracted for four consecutive quarters. The last time this happened? The Great Depression. The economy fell 1.8% in Q1 2008 with the Bear Stearns bailout, but resumed 1.3% growth by Q2. When the banking system imploded in the third

quarter, the economy shrank 3.7%. The Lehman Brothers collapse delivered a crippling blow-the economy dropped 8.9% in Q4, contracting .3% for the year. GDP plummeted 6.4% in Q1 2009. By the second quarter, the economic stimulus package started to work: the economy shrank only .7% in Q2. It finally grew 2.2% in Q3 and 5.6% in Q4.(Source: GDP Current Statistics) The financial crisis was worse than the 2000 recession, which was over by 2003 when the economy grew 2.5%. It expanded 3.6% in 2004, and was slowed only briefly (2.9%) by Hurricane Katrina in 2005. By March 2006, the economy peaked at 4.8%, driven by the housing bubble. By the end of the year, the economy only grew 2.7%. When the housing bubble broke, the economy only grew 1.2% in the first quarter of 2007. A falling dollar boosted exports, spurring growth to 3.2% in the second and 3.6% in the third quarters. When the Subprime Mortgage Crisis hit in October, growth slowed to 2.1%. Overall, the economy expanded 2.1% in 2007.

GDP Outlook:
The Philadelphia Federal Reserve predicts that GDP will grow 1.7% in 2011, 2.6 percent in 2012, and 2.9 percent in 2013. That seems reasonably conservative for three reasons:
1. First, the $14 trillion national debt the U.S. is saddled with will limit further fiscal

stimulus. 2. Home prices will stay flat through 2011, thanks to an 15-month pipeline of homes going into foreclosure. 3. Commercial real estate will experience continued weakness through 2011. Unfortunately, growth needs to be 3% or greater to really stimulate job creation. Therefore, unemployment will probably stay at around 9% in 2011, which will limit demand and keep growth flat. Growth will come from companies that export to growing emerging market countries. (Source: Philadelphia Federal Reserve (Article updated September 5, 2011)
GDP Related Links

Components of GDP GDP Current Statistics Ideal GDP

Negative GDP Related Articles

What Is a Recession? Recession History What is Deflation?

GDP Growth Related Articles

The Power of the U.S. Economy What Is Inflation? Employment Statistics History

Related Articles

GDP Growth Rate - The Ideal GDP Growth Rate - What Is a Healthy GDP Growth ... GDP Growth Rate - GDP Growth Rate Defined and How the GDP Growth Rate Affec... Retail terminology definition for gdp gross domestic product GDP Current Statistics - A Summary of Current US GDP Statistics - What Are ... GDP - A Definition of Gross Domestic Product

Kimberly Amadeo US Economy Guide

Sign up for My Newsletter Headlines Forum

Advertisement
Sponsored Links

Stock Market TipsEarn 5 Lacs per Month from Stock Market. Daily 3-4 Calls.CapitalVia.Com/Join-Now-For-Free Stock Ideas For Long TermGet The "Multibagger Stock Ideas" Report. Free & Exclusive. Act Now!Equitymaster.com/Unbiased_Opinions L I C , Invest With New Planswww.policybazaar.com/Insurance Related Searches gdp growth rate relative growth rate nominal gdp real gdp bureau of economic analysis world investors Explore US Economy Must Reads

Understand the Economy in Just 5 Days Obama's Jobs Speech Best Solution to Unemployment Where Do Your Tax Dollars Go?

The Inflation "Threat"

Most Popular

Value of the U.S. Dollar U.S. National Debt GDP Economic Stimulus Package Fiscal Year

By Category

Critical Issues GDP and Economic Growth Supply and Demand Fiscal Policy Obama and the Economy Trade Policy World Economy Financial Markets Monetary Policy and Inflation Glossary Economic Indicators U.S. Economy Leaders

US Economy Home News & Issues US Economy GDP and Economic Growth 5. GDP Definition - What Is the Gross Domestic Product
1. 2. 3. 4.
US_Wireless_Data_Market: I dont know who you are but I wont mind a bailout package. The US wireless data market shrugged off the economic doldrums in Q3 2008 and grew 7.3% Q/Q and 37.5% from Q307 to reach $8.8B in data services revenues. The total for the year (for first 9 months) stands at $24.5B which is equal to the revenues generated in 2007 (full year). While the flailing economy has started to hit hard on the wireless data ecosystem esp. the infrastructure and handsets segments, consumers havent really pulled back on mobile data spending, just yet. But will they? That is a $700B question. It is likely that more people will be willing to downgrade their Internet services, wireline usage, cable premium channels, restaurant eating frequency, energy consumption, vacation trips, and the gas mileage every week than reduce their wireless usage. But what about data services - broadly, they are divided into messaging, web and information access (includes data cards and subscriptions) and downloadables (games, ringtones, etc.). It is highly unlikely

that people will change their messaging (which now accounts for approximately 40% of the revenues) habits overnight though we might see more subs going for package deals and family plans to save. We might also see growth in prepaid subscriptions in the US market. In fact, Q3 saw a jump in messaging volumes in the US by 38% and messaging revenues grew 6%. Wireless WAN data card access is very useful for road warriors though some corporations might start limiting the number of employees using such services, we dont think it will make substantial impact in most cases except for the fact that the layoffs in various sectors will start to ripple into the mobile sector and will start cutting into some of the enterprise mobile data revenues. The downloadables have already been in the declining mode for the last 9 quarters and we might see acceleration of that trend. Next question is - will the increase in the subscriber base nullify the loss in data subscriptions and the answer seems to be - likely yes. But, if the job loss rate increases substantially, more than it has been in Q3 and into Q4, we might, just might, start to see flattening of data revenues in Q109 and gradual decline over the course of the year. Despite the unprecedented bailout from the US Treasury to abort a long recession, we are likely to be in for a longer winter than most anticipate because current efforts dont even start to address the fundamentals of the financial crisis. The basic industry structure is still flawed. Unless the new administration strikes at the root cause of this mess, wireless data segment wont be completely immune to the wider economic crisis. We have already started to see infrastructure (operators are slowing down 3G/4G investment) and device segments (replacement cycles are getting longer) getting hit pretty hard. Another factor at play is the growth in 3G and smartphone penetration in the US market, both of which have been responsible for increasing the usage and hence the revenues. At the end of Q308, 3G penetration was approximately 37% and the data penetration had reached 56%. Smartphone penetration has been inching up as well. In fact, all the service providers and OEMs have been targeting sub-$200 price point, which seems to be a good sweet spot for consumer adoption. The above two factors will also help negate any cancellations or downgrading of data plans. However, we are likely to see price pressure on subscription plans and as a result, voice ARPU will continue its downward trend and data ARPU will become a more dominant factor of the overall ARPU mix by the end of 2009. The percentage contribution from data is likely to exceed 25% by the end of 2008 and 30% by the end of 2009. Operators in Europe have already started to feel the pinch starting with Vodafone and Telefonica who experienced decline in revenues (due to the decline in MOU and price pressure) some of which is a function of the heavy prepaid penetration. But, it should be noted that for Vodafone, though overall service revenues declined 1.7%, data revenues grew 30%. As we have been saying for years, datamindset is needed for strategy, infrastructure design and investment to stay competitive in the changing landscape. Better offer packaging and lower price plans will also help in reducing service churn. Operators will also look to reduce their opex to boost profits. Coming back to the 2008 forecasts, we still think that the US wireless data market is likely to come close to hitting our original estimate of $34B for the year given the seasonality of Q4 which is likely to negate any decline experienced by the industry. So, it might not be until Q109 before we know where the various data sub-segment are trending. If consumer confidence starts to reverse its trend in early 2009, we are likely to see slower growth but the data revenues will continue to grow from the current levels. However, the lack of policies or correction will further downgrade consumer sentiment, then, we might start to see decline in the US wireless data market for the first time probably starting around late Q209. Against this backdrop, the analysis of the Q308 US wireless data market is:

The US Wireless data service revenues grew 7.3% Q/Q to $8.8B in Q208. Compared to Q307, the data service revenues grew 37.5%. Overall ARPU decreased by $0.04. Average voice ARPU declined by $0.94 while average data ARPU grew by $0.90 or 8% almost negating the drop in voice ARPU. Sprint led in data ARPU with $13.50 (or 24.11% of the revenues, followed by Verizon at$13.30 (or 25.49% of the revenues - first carrier to cross the 25% threshold), AT&T at $12.29 (or 24.20%), and T-Mobile at $9 (or 18%). All the top four carriers experienced approximately 8% increase in data revenues compared to the Q208 levels. Verizon with $2.8B in data revenues led AT&T at $2.7B, Sprint at $1.6B and TMobile at $850M. Both AT&T and Verizon are on target to be two of the three operators to exceed $10B in data revenues for the year for the first time by (global) operators besides NTT DoCoMo (the two US carriers are already over 75% of the target). China Mobile is the other operator which is going to cross the $10B mark in 2008. AT&T and Verizon now account for 62% of the market data services revenues. Sprint had a second consecutive quarter of data revenue growth after falling behind its peers for the past couple of years. The average industry percentage contribution of data to service revenues exceeded 23%. A year ago, the percentage contribution stood at approximately 17.7%. US market is likely to exceed the 25% mark in Q408. The number of data subscribers has been on the rise with Verizon leading the way. At the end of Q308, Verizon had 74% of its subscribers using some form of data services. The messaging volumes in the US market now average over 105B messages/month or at the frequency of a message/sub every 2 hours. In comparison users in Philippines average routinely send on an average, a message every hour. In terms of net-adds, Verizon continued to lead in Q308 with 2.1M net-adds (aided by an acquisition), again edging AT&T which had 2M net-adds for the quarter. Sprint continues to lose subscribers at an alarming rate, loosing another 1.3M in Q308. T-Mobile USA moved to number 9 in the top 10 rankings of global mobile operators by data revenues. For the quarter, Verizon and AT&T improved their rankings to #3 and #4 respectively at the expense of KDDI which dropped to #5. Sprint Nextel maintained its # 6 spot. AT&T and Verizon are in the select group of five global operators who are now generating $2B or more in data revenues/quarter (the other three are NTT DoCoMo, China Mobile, and KDDI). Non-messaging continues to grab 50-60% of the data revenues for the US carriers. The flat-rate pricing movement that was started by Willcom in Japan which moved to Europe started to take firm roots in the US market with industry wide flat-rate pricing plans that included data. Sprint has been the most aggressive with its Simply Everything plans that include data services. 30% of its $100 plan is assigned to data revenues (for accounting purposes). All the major carriers seem to be offering flat-fee access plans for most of the new smartphones being introduced in the market. Approximately 13% of the consumers have flatrate data plans. As expected, the blockbuster acquisition of Alltel by Verizon got approved and the deal will close in the next few weeks making Verizon the top carrier in the US market with close to 85M subs by the end of year. Q3 also saw the launch of the fabled G-phone as G1 Google phone launched by T-Mobile in the US market and it is slowly making its way into Europe. While G1 is no iPhone, it introduced long-awaited features such as multiple processes, more open APIs, and others. Motorola is said to be planning to launch Android devices in 2009. The smartphone segment has clearly shaken up the market with Apple, Google, RIM, and Nokia being the main competitors. Microsoft keeps misreading the market and is heavily under leveraging its strength and experience. There are probably 18-20 sub-segments within mobile data services and consolidation looms. Who will be the last man standing post the nuclear winter? While the valuations are still high for rapid consolidation, we think that by Q209, the M&A scene is likely to heat up. Will Mobile Advertising be the rising star from the crisis or one of its victims? Clearly, there are a number of advertisers and brands that are scaling back on the experimental dollars thus

shrinking the mobile ad spend. On the other hand there are some savvy brands who are pulling back from the traditional mediums like print which dont really work and putting more money into digital including mobile. It will be interesting to see if operators use the opportunity to lay the foundations of a long-term mobile advertising strategy. Stay tuned for some of our thoughts on the subject. Venture money in the mobile sector experienced a rapid decline. Compared to Q307, venture financing declined by 88%, and the yearly totals are 35% lower than what they were a year ago. (Source: Rutberg) Nokia eclipsed 100M unit sale in Q308 for the sixth straight quarter. It sold over 111.7M handsets in the quarter, more than the next three players combined. Nokias global market share declined to 37%. Samsung surged to 52M handset sale. Apple surpassed RIM in smartphone sales. For the year, the industry looks to again eclipse the 1 billion handset mark for 2008 but the overall handset sales will decline in 2009 (though still easily exceeding 1B). The 3G penetration in the US went past 35% in Q308, with Verizon leading the pack with over 61% 3G subscriber penetration compared to the 30% 3G subscriber penetration at AT&T. TMobile is slowly expanding its 3G coverage. 3G subs have over $23 in data ARPU. The growth in 3G and smartphones is helping offset any downward pressure on the data revenues and overall ARPU. As we had mentioned back in July, Apple easily surpassed its 10M target in Q308 buoyed by its 100 country expansion plan. The broadband and appstore capabilities are quite attractive to consumers and it shows. VPN and direct access to Exchange is helping in getting many more users into the mix and making IT folks less apprehensive. The clearcut business model of 30/70 split is also attractive. T-Mobile also launched its own Appstore (and so did Google and RIM, even Microsoft) along the lines of Apples initiative with promises of greater control to the application developers. The growth in smartphone usage is also putting pressure on the networks which are not able to handle the load during peak times in certain cities thus forcing carriers to look for alternate strategies to satisfy the demand for broadband - metered billing, UMA, Femtocells, Hotspot buys, WiMAX, LTE, and others. We deal with the whole topic of Wireless Broadband in great detail in our recently released book Wireless Broadband - Conflict and Convergence (Coauthored with one of the leading entrepreneurs in the space - Vern Fotheringham, published by IEEE Press and John Wiley). We will have more to say on the subject in the coming days and months. After raising $14.5B from friends and family, Clearwires net-adds continued to drop in Q308. While the deal got approved, the economic climate is putting pressure on a comprehensive rollout strategy. Sprint did launch WiMAX in the Baltimore market with initial feedback from the sparse usage to be as advertised. In a sign of convergence battles to come, T-Mobiles @Home and Sprints Femto cell initiatives started to take hold. Cable operators are also aggressively seeking triple-play by providing the wireless component of the service. Dont be surprised by some acquisitions in 2009.

Global update China and India added approximately 52M subscriptions combined in Q308 with India edging out China. In Sept, India added more than 10M monthly subscriptions for the second time this year and its net-adds total for the first 9 months stands at 82M. By comparison China added 77M and US increased its tally by 11M. NTT DoCoMo continues to dominate the wireless data revenues rankings with almost $3.9B in data services revenue in Q308, thus exceeding the $10B mark in just 9 months. Almost 41% of its revenue now comes from data services. DoCoMo also crossed 86% in 3G penetration in Q308 and is expected to cross the 90% mark by early 2009. Most of the major carriers around the world have double digit percentage contribution to their overall ARPU from data services. Many operators are consistently exceeding 30% with DoCoMo and Softbank being over 40%.

finance

INTERNATIONAL : ITALY - ECONOMIC SLOWDOWN Its Time to Shun Berlusconi Italys High Level of Government debt makes it Vulnerable to a Worsening Sovereign debt crisis. Can Italian PM Silvio Berlusconi, who is Currently Facing Sex & Power abuse Charges, save Italy from a free fall? Issue Date - 09/06/2011 While the Italian Prime Minister Silvio Berlusconi has been extremely successful in organising his famous Bunga Bunga parties (which he denies of and is currently facing sex & power abuse charges), the 74year-old TV magnate-turned-conservative politician has totally failed when it comes to handle the Italian economy which has been struggling to gain momentum following the 2009 recession that forced the value of its economic output to shrink by 6.7% (Q1 2009). A closer look at the numbers and one can easily sense the real trouble. First, at 130%, the debt-to-GDP ratio of Italy is surpassed by no other eurozone nation (except Greece and Ireland, which have already opted for EU-IMF bailout package). Second, its anemic nominal GDP growth rate of 1.23% per annum over the past decade makes it the second slowest growing economy in the euro area after Portugal (Portugals growth rate has averaged only 1% during the past ten years). If this isnt enough, Italys recovery has already started losing momentum as GDP growth slows to 0.1% (q-o-q) in Q1 2011 from 0.3% in Q3 2010, the weakest performance over the last one year. In fact, several economists expect the Italian GDP growth to slow to 0.6% in 2011 from 1% in 2010 as major fiscal consolidation at the domestic level, as well as in most of its European trading partners, weighs on demand. While fiscal tightening across Europe is set to dampen demand for key Italian exports as four of its five biggest trading partners (Germany, France, Spain and UK) are in Europe, private consumption (which comprises over 50% of Italys GDP) too is expected to remain under pressure considering high unemployment, subdued wage growth, and tight credit situation in the country. Softer domestic and export sales could even prompt some companies to stop hiring and slim workforces. This, combined with public sector job cuts, is set to put upward pressure on the unemployment rate, which is already hovering at 8.7% at present. Further, the economy lacks one of the most important components of all if growth is expected to be sustainable the gross fixed investment, which has once again started falling after growing at a healthy rate of 4.6% during first quarter of 2010. In fact, the rate of gross fixed investment is expected to deteriorate further as the weak economy erodes profit margins and puts downward pressure on capacity utilisation. Whats more?

Moodys Analytics anticipate the growth in gross fixed investment to come down to literally zero by Q3 2011.

Italys high level of

government debt too makes it vulnerable to a worsening sovereign debt crisis. According to Eurostat data, Italys government debt reached 119% of GDP in 2010, the highest in the euro zone (considering that Ireland and Greece have already opted for a bailout package). In fact, a bailout of Italy (to fund its bond redemptions and finance modest budget deficits over the next few years) would require more than $1.4 trillion, way above the $390 billion bailout packages of Greece, Ireland and Portugal put together, and more than double the amount required by Spain ($600 billion), if it fails. This probably is beyond the ability of the European Union (EU) and the International Monetary Fund (IMF) to deliver as the combined rescue fund of both the organisations stands at just $1 trillion. Although there is a small possibility that Italy will need a bailout (as Italys budget shortfall, at 4.6% of GDP in 2010, compares favourably with Irelands at 32.4%, Greeces at 10.5%, Spains at 9.2% and Portugals at 9.1%, which implies that Italys financing requirement is relatively small compared with those of some of its counterparts), one cannot deny of a mishap considering that the slow economic growth in the rest of the euro area and real exchange rate appreciation in Italy probably will constrain Italian export growth for the foreseeable future. In fact, considering the economys poor growth prospects, international ratings agency Standard & Poors (S&P), on 20 May 2011, downgraded the outlook for the Italian economy to negative from stable. This makes the situation all the more difficult for the Italian policymakers who are struggling to find investors for Italian bonds (yields on 10-year government bond are already hovering at around 4.8%, and are expected to only move north). While Banca dItalia didnt respond to the queries sent by B&E (till the time this magazine went to print), Jay H. Bryson, the New York based Global Economist at Wells Fargo Securities agrees to the fact as he tells B&E, Growth in Italian domestic demand has been sluggish, even in the years preceding the downturn, and significant acceleration in consumer and business fixed investment spending does not seem likely anytime soon. Therefore, signs of weaker-than-expected Italian economic growth could raise concerns

about debt sustainability in Italy. In fact, if critics are to be believed, Italy, which has more than $800 billion worth of government bonds maturing by the end of 2012, could be forced to restructure its debt profile if investors desist from rolling Italian government debt. Interestingly, Italian households too have grown more pessimistic about their economic and personal financial situations. In fact, recently released data from National Statistics Office, shows that the consumer confidence has fallen to 105.3 in March from 106.3 in the previous month, the lowest since August 2010. Well, to fix the problem, all Italy needs is a structural reform that not only boosts competitiveness and productivity, but also reduces risk premium in interest rates thereby supporting sustainable growth over the long term. While all of this is doable, it wont be easy. Reason: The trial is likely to take Berlusconis focus off reforming Italys economy over the coming months, leaving it with a relatively inflexible labour market, low productivity growth, and high unit labour costs. So, whats the way out for this beleaguered euro nation? Shun Berlusconi, we would say! Manish K. Pandey

Q3 GDP Growth Review: Is US Economy Headed Out Of Recession?

Posted on August 20, 2011 by admin Q3 GDP Growth Review: Is US Economy Headed Out Of Recession? A pall of gloom seemed to have hit the US economy, with the US commerce department revising downwards, Q3 GDP growth estimates at an annualized rate to 2.2%, from the earlier 3.5%, which had been revised downwards to 2.8%. This suggests that the US economy did not grow as fast as earlier estimates had implied, dampening the positive mood that the economy had swung into. Even though there has been a downward revision in GDP growth estimates for the third quarter of 2009, it is still the first quarter of positive growth after the onset of recession. US GDP had shrunk by 6.4% in Q1 2009 following a 5.4% contraction in Q4 2008. The positive Q3 growth in the US GDP is attributable to higher consumer spending, improved investment in homes, government spending, better exports and a more gradual inventory reduction. The decline in the new estimates for Q3 appears to stem from a lower revised estimation on the counts of business investment, consumer spending and a faster paring of inventories as against production. However, lower inventory levels are likely to boost production in the next quarter as demand rises, which could prove positive for GDP growth in the next year. The other worrisome point is that the Q3 US GDP growth received a strong boost from government programs like the cash for clunkers rebate and once the rebate comes to an end, the demand may fall to earlier levels and dampen growth. However, all does not appear to be lost in this game of revisions as US home sales grew robustly in November. ]]> The data analyzed suggested that home sales grew by a robust 7.4% as opposed to the projected 3.3% increase. This news seems to have added wind to the sails of the US

economy and stock markets moved upwards on the news, in spite of the downward revision in the Q3 GDP growth estimates. A Federal Housing Agency Report from Washington suggested that home prices fell 1.9% in October from a year earlier. The combination of lower prices, somewhat improved employment conditions and low interest rates, seems to have led to growth in home sales. The figure of 7.4% was also at its highest in nearly three years signifying renewed interest and possibly a sustainable recovery in the sector. As per reports, over 50% of home sales in November were to first time home buyers, suggesting that they were taking advantage of tax credits allowed to first time home buyers. The used home sales rate of growth of 7.4% translated into an annualized sale rate of 6.54 million homes in November, as compared to the figure of 6.09 million homes for October. Economists had widely projected an increase of 3.3% or sale of 6.3 million homes at an annualized rate. Supporting this were the low interest rates which fell to 4.88% in November for a 30 year mortgage form 4.95% prevailing in October. All said and done, it appears that the US economy is headed out of the recession albeit slowly and that the government bailout packages and the support being provided by the government at the consumer level at present have played a key role in helping the US economy. Hopefully, the US economy has entered a positive cycle due to the governmental intervention and will continue its forward march into better health this year. The secret to success with forex is keeping abreast with important updates: Forex News website will guide you. Follow the trading trends with forex analysis sources.

Sunday, 31 July 2011

Weakness of the current US economic recovery compared to previous US business cyles

By John Ross It has been pointed out that the present US economic recovery is the slowest since World War II. However the precise parameters of this are frequently not analysed nor are they placed in a longer term context. Both are significant as they show not only the cyclical situation but the continuation of a prolonged slowing of the US economy.
As regards the immediate weakness of the present recovery this is shown in Figure 1, which charts the course of US business cycles since 1973. The starting date in each case is the peak of the previous cycle and the numbers along the horizontal axis show the quarters since that peak. Also shown are a 2.6% growth trend line and a 1.6% trend line these representing, as analysed below, 20 and 10 year moving averages for US GDP growth.

As may be seen not only was the downturn in US GDP in this recession deeper than in any previous one since World War II but recovery is far slower. The previous deepest decline in GDP in any US post-war recession was 3.2% following 1973 and by eight quarters after the previous peak in that cycle US GDP had regained its previous peak level. In the present cycle the

maximum fall in GDP was 5.1% and 14 quarters into the cycle US GDP has still not regained its peak level. For comparison in the slowest previous US recovery, that following 1980, by 14 quarters after the peak of the previous business cycle GDP was already 4.9% above its previous peak level, whereas in this recession it is still 0.4% below it. In short this is both the deepest recession and slowest recovery in US post-World War II history by a considerable margin.
Figure 1

Even more significant strategically is the long term slowing of the US economy. This is illustrated in Figure 2, which shows a 20 year moving average for US growth with the latest data being for the 2nd quarter of 2011 utilising such a long time frame removes the effect of purely cyclical fluctuations. The downward trend of US long term growth is clear. The annual average US GDP growth rate has declined from 4.3% in 1969, to 3.0% in 1990, to 2.6% by the 2nd quarter of 2011.

Figure 2

The current growth rate of the US economy is even lower if a 10 year moving average is considered. This is shown in Figure 3. By the 2nd quarter of 2011 the 10 year moving average of US GDP growth had fallen to 1.6%.

Figure 3

As noted, the 1.6% and 2.6% trend lines in Figure 1 therefore represent average 10 and 20 year growth rates for US GDP. As may be seen the recovery in the present recession is far lower even than these long term averages - which are themselves falls from previous levels. In short the US economy is progressively slowing not only in cyclical terms but from a long term point of view. The present slow recovery is therefore not at aberration but a part of a long term trend.
Such a deep rooted slowing of the US economy clearly has major implications not only for the United States itself but for the pattern of development of the world economy. *** This article originally appeared on the blog Key Trends in Globalisation. Posted by John Ross at 16:35 0 comments Email This BlogThis! Share to Twitter Share to Facebook Links to this post

US GDP figures even worse than they look

By John Ross The 2nd quarter 2011 US GDP figures, showing annualised growth of 1.3% in that quarter and a newly revised downwards annualised 0.4% in the 1st quarter of 2011, were interpreted as bad. But they are far worse even than they look at first sight.
First, the downward revision to the depth of the recession, to a trough of 5.1% in the 2nd quarter of 2009, means that instead of having already recovered its prerecession GDP level the US economy remains 0.4% below its peak in the 4th quarter of 2007. This is shown in Figure 1.

Figure 1

Second, as shown in Figures 1, 2 and 3, it is misleading to draw attention to personal consumption expenditure, and its weak annualised 0.1 per cent increase in the 2nd quarter of 2011, as the key feature of the downturn. The really fundamental cause of the US recession is the collapse in fixed investment.

As may be seen from Figure 2, in the 2nd quarter of 2011 US GDP, in 2005 constant prices, was $56 billion below its peak level in the 4th quarter of 2007. However all major components of GDP except for fixed investment were already above their 4th quarter of 2007 levels private inventories $37 billion above, government consumption $51 billion above, personal consumption $66 billion above, and net exports $159 billion above. However private fixed investment was $342 billion below its 4th quarter 2007 level i.e. the entire decline in US GDP was due to the fall in fixed investment.

Figure 2

Nor was this decline in fixed investment entirely accounted for by the residential sector see Figure 3. The overall fixed investment fall was divided essentially half and half between residential and non-residential fixed investment the decline in residential fixed investment being $199 billion and the decline in non-residential fixed investment being $192 billion.

Figure 3

In short, as this blog has continuously pointed out, the core of the Great Recession in the US, as in other countries, is not a decline in consumption but a huge fall in fixed investment. The Great Recession is actually The Great Investment Collapse. Until this reality is grasped, and the policy consequences drawn, US GDP figures are likely to continue to surprise on the downside.

Meanwhile the latest US GDP data is shockingly bad - worse even than the features the official press release and initial press commentary concentrates on. *** This article originally appeared on the blog Key Trends in Globalisation.

Posted by John Ross at 16:29 0 comments Email This BlogThis! Share to Twitter Share to Facebook Links to this post

Thursday, 28 July 2011

Boris Johnson economic proposals should have put Londoners before bankers
Ken Livingstone has a new article taking apart Boris Johnsons economic proposals, including the Tory Mayors call to get rid of the 50% top rate of income tax, on the Guardian's Comment is Free here.

It analyses Boris Johnson's economic proposals, made following weak UK GDP figures this week and centring on cutting the top rate of income tax from 50%, are part of his campaign to be the next Conservative party leader. He is courting the Tory base, including its right wing. Proposing to cut income tax on those earning over 150,000 a year plays well with them Johnson's proposals constitute part of his continuing policy of hitting Londoners in their pockets in pursuit of his political ambitions and record of backing bankers the two coming together in Tory party politics. These proposals, however, are economically incoherent and uncosted. Johnson's positions, both on tax and on fares, aid the best off. They do not help ordinary Londoners. The mayor should be putting Londoners first not bankers or his political ambitions.
Posted by Socialist Economic Bulletin at 12:20 0 comments Email This BlogThis! Share to Twitter Share to Facebook

Links to this post

BRICS say Greek bailout too soft on the banks

By Michael Burke The rapid growth of the so-called BRIC economies (Brazil, Russia, India and China) is providing a global benefit in terms of economic growth. But their increasing weight in the world economy will also provide a growing benefit specifically to all the European economies, and most especially the majority of citizens in the most crisis-hit countries. The latest example of this arises in relation to the Greek crisis. Because of their more rapid growth the BRIC economies subscription of the funds for the IMF are growing. Their weight in the IMF is growing as a result, where previously the interests of the US have always held sway. It is clear from a report in the Financial Times on July27th that representatives of the BRICs are unhappy with the term of the latest bailout involving Greece. The complaint is twofold - that the austerity measures imposed on Greece are too harsh and the level of losses imposed on the banks is too small. According to the FT, Paulo Nogueira Batista, who represents Brazil and eight other countries on the IMFs executive board, said the Greek governments austerity plan was too tough and the restructuring of Greek debt held by European banks was too small. Greece is not having an easy time, he told the FT. The mostly European private creditors of Greece have had an easy time. Mr Batista also went on to argue that, while there were suspicions about bias towards European bondholders (EU banks), Christine Lagarde the new IMF MD and former French Finance Minister had the perfect opportunity to dispel such suspicions (by taking a tougher line on bank losses). Further, the FT reports, Arvind Virmani, the Indian executive director on the board, said the plan dealt with short-term cashflows but left Greece with a large and precarious sovereign debt stock, threatening further defaults. I am not convinced [the plan] addresses the basic problem of liquidity versus solvency, he said, adding the fund had dodged the question for more than a year. The clear implication is that Greece requires further debt write-offs if it is to become solvent. Both men also argued that the size of the IMF loan would be unacceptably large and would not have been made available to a developing country. The obvious implication is that either European taxpayers or bondholders should make a greater contribution- and it was clear that their preference is for the banks to take greater losses. According to the latest official documents, the debt-reduction for Greece will be 26.1bn, less than 12% of total debt outstanding of 350bn. Clearly, this is a welcome first step but wholly

insufficient to bring about solvency. Once all forms of credit enhancement (very expensive insurance) on the debt being restructured are paid for, the total estimated debt reduction is actually smaller than the 28bn projected level of Greek privatisation receipts. As the BRIC representatives say, the cuts are too harsh and the losses for bondholders too small. Politically, as well as economically, the rise of the BRICs is a major benefit. Progressive forces in Europe (including Britain) and elsewhere should increasingly look to them. Not only is it possible to learn from their rapid growth, but it is also very valuable to have them as allies in the interests of the overwhelming majority of the population of Europe, and against the interests of the bankers.
Posted by Socialist Economic Bulletin at 09:53 0 comments Email This BlogThis! Share to Twitter Share to Facebook Links to this post

Wednesday, 27 July 2011

The stats show the Tories make you worse off and less safe
By Michael Burke A small but growing number of commentators have analysed the way Tory policies make the average person worse off. New data released on police numbers and crime also show the way Tory cuts are making you less safe. Even the Tories admit that the recession, which their cuts policies are deepening, will raise the threat of crime. In particular crime is increased by the cuts in welfare benefits which is what the Tories are concentrating on. The Times reported () on June 29th on the opinion of senior police officers on this coming increase in crime: It wont be an even, upward progress, there will be a ragged line with different patterns in different areas and some crime types shooting up, while others remain level, one said. Chief constables and criminologists say that there is usually a gap between the worst of the financial crisis and the impact of austerity on the public before the effects are reflected in crime patterns. They believe that crime will rise more dramatically as sections of the public feel the impact of public spending cuts, unemployment and, perhaps most significantly, cuts in benefit payments. As The Times reported (), some crimes are already going up:

Kenneth Clarke, the justice secretary, told the Commons last week that burglary was one of the crimes that is rising at the moment, adding: It is going up rather alarmingly compared with a year ago. Ministers are nervous that rises in property crime herald the long awaited recession crime wave that will worsen if unemployment increases substantially and people have less cash in their pockets There are indications that crime is about to turn. The reason it has not gone up yet is because unemployment has not risen that much, one minister admitted. Yet confronted with this rising threat of crime the Tories are actually cutting police numbers. The report (pdf) published by Her Majestys Inspectorate of Constabulary (HMIC) on July 21st confirmed there will be 16,200 fewer police officers in the UK as a result of the Tory led governments cuts. London the Tory Mayor makes you less well-off and less safe This increase in various types of crime is already feeding through into London. After the Tory Mayor of London has made Londoners worse off through his unnecessarily large above-inflation fare increases, the Conservative-led government and the Tory Mayor are additionally making Londoners less safe. As The Times reported (): Burglaries, robberies and muggings are on the rise for the first time in years as fears grow among ministers that the economic downturn is driving up crime. Figures from Britains biggest police force provide the first indication that years of falling crime are coming to an end. The Metropolitan Police has reported big increases in robbery, burglary and motor vehicle crime in the past 12 months Robbery, including muggings, pick-pocketing, burglary, shoplifting, theft of bicycles and interfering with motor vehicles increased, the Metropolitan Police report says. Figures show that there were more than one thousand more burglaries last month compared with May last year. Robberies in the capital jumped by 15 per cent from 3,257 in May last year to 3,749 this May; house burglaries rose by 18.5 per cent from 4,410 to 5,228; and thefts of and from vehicles by 6 per cent to 9,299. Yet despite this trend the Tory Mayor is pressing ahead with cuts in in police numbers. In the last year police numbers in London were already cut by 926. By 2014 there will be 3,111 fewer Metropolitan Police staff including 1,907 fewer officers, 820 less PCSOs, and 324 less police staff. Tories talk and not action on crime

These trends show clearly the picture which always exists: the Tories, whether as the UK government or as the Mayor of London talk a great deal about crime but take actions which increase it both by deepening the recession and by cutting police numbers. As Ken Livingstone said about the situation in London: Boris Johnsons cuts mean on average every London borough will lose over 50 police officers. These cuts risk undermining the work which the police and local communities are doing to make our streets safer. The Conservative Mayors cuts will mean some of the most experienced and able officers losing their jobs, including 300 of the 600 sergeants who manage local police teams. The story is the same across Britain and in London: the Tory-led government and the Tory Mayor make you less well-off and less safe. *** This article originally appeared on Left Foot Forward.
Posted by Socialist Economic Bulletin at 06:21 0 comments Email This BlogThis! Share to Twitter Share to Facebook Links to this post

Tuesday, 26 July 2011

British Economic Stagnation

By Michael Burke

The British economy continues to stagnate. Just over one year after the Tory-led Coalition announced its first Budget the British economy is virtually still in the water. In the preliminary estimate of GDP in the 2nd quarter growth was just 0.2%. In the three quarters since the Comprehensive Spending Review (CSR) this figure constitutes the sum total of economic growth, i.e. just 0.2% - with the previous 6 months having registered no growth at all. Tory supporters are sufficiently concerned to have begun he discuss the need for a growth strategy, although the remedies offered are likely to exacerbate the situation, as will be discussed below. As SEB has previously shown , before the Tory-led governments policies began to take effect there had been an economic recovery. For comparison, in the three quarters preceding the CSR the economy had grown at a moderate rate of 2.1%. This is in sharp contrast to current

performance which now reflects the effects of cuts to public spending and their wider impact on the economy. In the three quarters since the CSR, the economy has expanded by just 660mn, compared to 26.7bn in the preceding 9 months. No wonder most households and businesses feel poorer and gloomier. It is possible that the situation may get worse. Economies only respond to policy changes after a certain time lag. In both the phases of recovery and in the subsequent stagnation the economy as whole responded two quarters after significant changes in government spending. Although there was an emergency budget in June 2010 and VAT was increased in January 2011, most of the cuts did not take place until the beginning of the Financial Year in April 2011. The depressing effect of those cuts is therefore only beginning to be felt and is likely to increase throughout the rest of this year. Despite the fact that the recovery began at the end of 2009 GDP output is still 3.9% below its peak level. Other European economies such as Germany and Sweden have already recovered all the output lost in the recession, by taking precisely the opposite course. Growth was stimulated via a series of measures - most effectively by increased government spending. The consequence is their public sector deficits are falling, while in Britain the official forecasts for the deficit are being revised upwards. The reason for this is simply that tax revenues in Britain continue to disappoint as growth remains elusive. In the Great Depression of the 1930s it took exactly 4 years for the previous level of output to be restored. The 2nd quarter of this year was the beginning of the 4th year since the recession. It seems extremely unlikely that the economy will grow by close to 4% by the 1st quarter of 2012. This depression will not be as severe as the Great Depression, but it seems likely to be even longer. The stagnation of the economy and the damage this is doing to Tory popularity has sparked a debate about the need for growth. Predictably, it ignores that fact that the recovery was fostered by increased government spending, including investment and is being throttled by government spending cuts. Instead, the focus is on tax cuts for corporations and the rich, an end to all carbon reduction policies, a reduction in the minimum wage, abolishing employment laws, privatisation and so on. This is a recipe for more of the same and, as in other countries, the effect of this huge transfer of incomes from poor to rich would be to depress economic activity even further as well increasing the public sector deficit. Few of these ideas are likely to find much support outside Tory circles. But one which has is the idea of a corporate tax cut to boost investment. This call ignores two important facts. First, the government is already cutting corporate tax rates from 28% to 23%, yet the private sectors investment strike continues and accounts for 80% of total lost output. Secondly, the nonfinancial corporate sector is already sitting on a cash mountain, which is simply financing dividend payments, enormous executive pay and takeovers- that is, everything but investment.

The call for lower corporate taxes obscures a central truth about the current crisis. In any normally functioning market economy the household sector is a net saver, that is it retains a portion of its income and does not consume it immediately. The savings are mainly held in banks. The corporate sector is a normally a net borrower for investment, and borrows from the banks. The government can either be a saver (budget surplus) or borrower (budget deficit). This depends on its own tax and spending policies, but also on what happens in the rest of the economy. In the chart below, the level of lending or borrowing for these 3 main sectors is shown. Borrowing is a negative number and lending positive. Other important sectors (especially financial corporations and the rest of the world) have been disregarded for the sake of clarity. Figure 1

What the chart shows is the British non-financial corporate sector has not been performing its designated role over a prolonged period. It has been a net saver. Disregarding the sectors not shown, in general the sum of these three sectors must balance to zero. Saving by one sector must have another sector its borrowing counterpart. The saving of the corporate sector had two effects. In the first instance corporate savings (achieved through lack of investment and low wages) obliged the household sector to become a net borrower to finance consumption. It also obliged the government to increase its borrowing as the lack of investment depressed taxation revenues. When, at the beginning of 1998, the household sector took fright and returned rapidly to its traditional role of net saver, the government was obliged to sharply increase its own borrowing and the public sector deficit ballooned. The primary cause of both the unsustainable nature of the prior business expansion and the subsequent recession was the failure of the corporate sector to borrow to invest. Rather than cut

their taxes and increase this saving, the whole thrust of policy should be designed to oblige the corporate sector to borrow for investment. A progressive government policy would be to encourage business investment by increasing the governments own investment. If necessary, a radical government would simply seize these corporate savings and use them for investment purposes on its own account. But in no case should there be a reduction in the incomes of the household sector via wage cuts and public spending cuts. This only diminishes its ability either to spend or save, and does not create business investment.
Posted by Socialist Economic Bulletin at 15:02 0 comments Email This BlogThis! Share to Twitter Share to Facebook Links to this post

The electoral myths of 'blue Labour'

By John Ross
Recent reports are that the current blue Labour is coming apart - with former leading supporters stating they no longer wish to be associated with the project following Maurice Glasmans widely criticised interview with the Daily Telegraph on immigration. But it is also important to understand that the entire basis of the factual claims by blue Labour were inaccurate.

The name blue Labour summarises its analysis. It claims that the politics represented by the colour blue, that is the Conservative Party, are deeply attractive to those who can or did support Labour. As one analysis by a blue Labour leader put it: Appealing to Lib Dems is all well and good. But we have to start to reach out to the millions of working class former Labour voters who left us for the Tories.
Unfortunately there is no factual basis for a claim that the fundamental reason for Labours decline in support is the attractiveness of the Conservative Party and values it represents. Indeed the facts show the reverse.

There are naturally short term swings at elections, but Labours entire strategic net loss of votes over the period since it last came close to enjoying majority support in the electorate, a decline from 47.9% in 1966 to 29.9% in 2010, has been to the Liberal Democrats and other parties chiefly Scottish and Welsh nationalists. None of this net loss of votes was to the Conservative Party.
Labour

To show clearly the factual trends of Labour support Figure 1 charts the Labour percentage of the vote at all general elections up to 2010.

As can be seen the trend is clear. There are, naturally, many short term fluctuations, but Labours support rose until the early 1950s, the absolute peak being reached at 48.8% in 1951. Support remained at a high level until the mid1960s with 47.9% of the vote being secured in 1966. After 1966, again of course with short term fluctuations, Labours vote fell from its previous level.

Figure 1

It therefore may be accurately said that from 1966 the social/political coalition which had made Labour a force commanding the support of almost half the total electorate progressively came apart. The key strategic issue therefore is where did Labours votes go?
To show what happened to Labours former support Figure 2 shows the change in the partys share of the vote after 1966. As may be seen in that period:

Labours vote fell by 18.9% . Liberal/Liberal Democrat votes rose by 14.6%. Support for parties other than the three major ones rose by 10.2% - this being chiefly the SNP and Plaid Cymru. The Tory vote, far from rising as it would have if it had attracted electors from Labour, fell by 5.9%

Therefore none of Labours net decline in support went to the Conservatives. The facts show, in short, that far from being attractive to Labour votes, the Conservative Party and Conservative values were deeply unattractive. The whole of the loss of Labour votes was to the Liberals/Liberal Democrats and other parties chiefly Scottish and Welsh nationalists.

Figure 2

The Conservative vote

Taking as a starting point for comparison 1966, a peak of Labours popularity, furthermore understates the decline of Tory support. Strategically the Conservative vote, naturally with short term fluctuations, has been declining for a prolonged period as is clear from Figure 3. The post-war Conservative peak was in 1955, at 49.6% and Tory overall support, again inevitably with short term fluctuations, has been declining since.

Figure 3

The Tories failure to win an overall majority at the last general election was therefore not a surprise. Every Conservative victory since 1955 has seen the Tory vote fall to a lower percentage of the vote than the previous one.

The Conservative Party secured 49.6% of the vote in 1955, 49.4% in 1959, 46.4% in 1970, 43.9% in 1979, 42.4% in 1983, 42.2% in 1987, 41.9% in 1992, and 36.0% in 2010. The average decline of the Tory vote per year between victories is 0.3%.
The Liberal Democrats

Given Tory support was not rising but falling throughout this period the main parties receiving rising support were the Liberal Democrats as shown in Figure 4, and others chiefly Scottish and Welsh nationalists, as shown in Figure 5
Between 1966 and 2010 support for the Liberals/Liberal Democrats rose by 14.6%. Support for other parties rose by 10.2%

Figure 4

Figure 5

Conclusion

The facts on the erosion of Labours former support are therefore clear.

Strategically the Tory party has not shown itself attractive to Labour voters. None of the strategic net loss of support of Labour has gone to the Tories. On the contrary the Tory it is a party whose vote is in long term decline. The strategic loss of Labour support has been to the Liberal Democrats and Scottish and Welsh nationalists.

Posed in terms of values the conclusion of this is equally clear. Conservative values have not shown themselves attractive to former Labour supporters at all on the contrary they have shown themselves unattractive. It is Liberal, Democrat and Scottish and Welsh nationalist values that have shown themselves attractive to Labour voters. Therefore, far from moving closer to Tory values, what Labour has to do is to be more attractive to those who have shared the values of Liberal Democrats and Scottish and Welsh nationalists.

Appendix Percentage of the Vote at General Elections 1931-2010

The vote at general elections is set out in Table 1 below.

Table 1

Posted by John Ross at 10:41 4 comments Email This BlogThis! Share to Twitter Share to Facebook Links to this post

Tuesday, 19 July 2011

The Job Losses at Bombardier

By Michael Burke It is widely expected that Bombardiers failure to win the government contract for new Thameslink rolling stock will lead directly to the loss of approximately 1,400 jobs. This will indirectly cause other job losses in the area around the Derby works as well as in related industries. It will also negatively impact government finances.

The contract has been won instead by Siemens. The fact that Siemens is a German company has inevitably led to expressions of chauvinism on the British press, with the Daily Mail in particular focusing on the companys national base and the Daily Telegraph campaigning that this is an issue of British jobs for British workers. . It is no such thing. It is instead a product of chronic private under-investment, the absence of any policies to promote production or jobs, declining government investment, the effects of privatisation and the dominance of the City in all aspects of policy. In short, it is a product of Thatcherism and New Labours refusal to reverse it. Decline The knee-jerk response by large sections of British society to any loss of jobs to overseas competitors is to claim that they are being undercut on pay. But investment (and the jobs it creates) does not flow to the lowest paying producer. In Europe, Bulgarias average rates of pay are one-seventh those of Germany yet Germany receives more than 500 times Bulgarias level of Foreign Direct Investment (FDI). In fact Britain is the biggest recipient of FDI in the world, belying any notion that British jobs are lost through the process of international investment .. In fact it is the failure of British capital to use that vast inflow productively which is the cause of Britains relative economic decline and the consequent destruction of jobs. In one sense, Bombardier is simply the latest example of this trend. Bombardier An interesting report by the Guardians economics leader writer Aditya Chakrobatty highlights how run-down the Bombardier factory and surrounding industrial park were, even before the latest set-back . This is symptomatic of chronic under-investment. A very valuable academic report highlights the reason for this1[i]. Even compared to the Bombardier operation in Germany, let alone the successful bidder at Siemens, the rate of investment in the British operation was less than 40% of its German counterpart. Further, the proportion of value added consumed by interest payments was three times greater in the British operation. Government tendering policy compounded these weaknesses. Although the contract remains secret, it is clear that the firms bidding for the work were not simply in the train-building business. The contract stipulated a PFI-style financing arrangement involving maintenance and leasing for 30 years in which, crucially, the bidder would have to arrange the financing for the acquisition of the rolling stock. For a firm already burdened with triple the interest burden, this was an impossible stipulation which added an estimated 700mn in costs to Bombardiers bid. This model of PFI-style financing has proved disastrous in all areas, most especially in largescale transport projects. It is a function of the earlier privatisation of the rail industry including British Rail Engineering Limited, which had produced rolling-stock. The Bombardier plant in Derby is a vestige of that privatisation, having had 5 different owners in the intervening period. It is claimed that PFI deals lower government borrowing and lowers its need to invest. In fact, it inefficiently increases the overall costs of investment and thereby reduces the level of investment

itself. Private PFI consortia have features similar to monopolies, and lead to price gouging of the state. In addition, private borrowing costs are always higher than those of government, leading to further costs, which are again borne by the state. The sole beneficiaries of this adherence to PFI financing are the private consortia members and their financial backers. Since even under the most favourable terms many of these consortia still manage to go bust , the most consistent beneficiary of PFI financing are simply their financial backers among the major banks, who achieve a return irrespective of the failure or otherwise of the project.. Campaign On July 23rd unions operating in the Derby works have called a demonstration to campaign against the job losses. They are right to do so. But there can be no concession to the reactionary dead-end of British jobs for British workers. German labour costs in the rail equipment sector are almost exactly the same as those in Britain adjusted for the exchange rate, 46,382 compared to 44,081. Siemens won the contract because the various owners of Bombardier did not invest in the company, compounded by government policies which represent the interests of the banks. The campaign should be directed against the government- a demand to publish the contract to expose how loaded it was, for increased government investment in rail and for an end to PFIstyle financing, which benefits the bankers, not the workers. Notes 1. Knowing what to do? How not to build trains, CRESC Research Report, Manchester Business school.
Posted by Socialist Economic Bulletin at 12:37 0 comments Email This BlogThis! Share to Twitter Share to Facebook Links to this post

Saturday, 2 July 2011

How To Wreck A Recovery- Tory policy and Q1 GDP Data

By Michael Burke
The latest publication of the British GDP data for the 1st quarter of 2011 (Q1 2011) is unrevised - the economy expanded by 0.5% having contracted by 0.5% in Q4 2010.

However the much fuller data provided in this third estimate of growth, as well as revisions to prior quarters, gives a clear picture of the dynamic of the economy. The economy has effectively stagnated since the Tory-led government introduced the Comprehensive Spending Review in October (in fact it has marginally contracted). In the previous four quarters to Q3 2010 the British economy had expanded by 2.5%. By examining the data in detail it is possible to determine the causes of that stagnation.
Cause of Recession

The peak of the last business cycle was in Q1 2008 and the trough of the recession was in Q3 2009. From the beginning of 2008 to that latter date the economy contracted by 88.6bn in real terms, on an annualised basis. Household consumption fell by 41.5bn, one of the biggest percentage declines of the major economies, a drop of 4.9%. In the OECD as a whole the fall in household consumption was a more modest 1.5%.
By contrast government current spending rose by 7.4bn. Net exports also rose entirely as a function of collapsing demand for imports, which fell faster than exports. Combined net exports made a positive contribution to growth of 16.4bn during the recession. But investment (gross fixed capital formation, GFCF) fell by 43bn. Of this decline in investment, the private sector is responsible for 51.1bn, as government investment expanded during the recession by 8.1bn. Therefore of a total decline in GDP 88.6bn the decline in private sector investment accounts for 51.1bn, or 57.7% of the total.

These main aggregates of the national accounts in the recession are shown in figure 1 below.
Figure 1

Despite a recovery that began in Q4 2009 the level of GDP remains well below its peak. At the end of Q1 2011 GDP is still 56.3bn below its previous peak level three years ago in Q1 2008, a shortfall of 4.1%. Household consumption has recovered to some extent so that it is now 36bn below its peak level. Government current expenditure and net exports have both risen, by 13bn and 17.3bn respectively. Investment has resumed its decline in the last two quarters. It is now 36.1bn below its peak, fractionally more than the decline in household consumption. Of this decline in investment, the private sector is responsible for 44.9bn as government investment has risen by 8.8bn. This private sector investment strike accounts for 44.9bn of a total loss of output of 56.3bn this is 79.8% of the total.
The main aggregates of the national accounts in from the end of the prior boom to date are shown in Figure 2 below.

Figure 2

Cause of Recovery
As previously stated, recovery began in Q4 2009 and lasted four quarters - the economy expanding by 32.8bn. Consumption rose by 11.7bn, up 1.4%. Net exports did not add to growth, but subtracted from it by 12.6bn. Government current spending rose by 3.8bn. Investment rose by 12.5bn. The private sector contribution to this was 15bn, as government investment has been contracting under the impact of the new governments policies.

This may have lulled the government and the Office for Budget Responsibility (OBR) into the false idea that that recovery would be driven by investment even as government spending was cut. (The other officially projected component of growth is net exports, but the rise in net exports currently remains entirely a function of the slump in import demand. British exports in Q1 2011 remain below their pre-recession peak despite the sharp rebound in world trade).

The OBR forecast1 in March this year that private investment would rise by 6.7% this year. Currently it is moving in the opposite direction. In Q1 private sector investment fell 3.8% from the final quarter of last year.

To see why the government and the OBR have been proved wrong in projecting higher private sector investment the dynamic underlying the recovery and subsequent stagnation must be examined.
In Figure 3 the trends in GDP and investment are shown in relation to the end of the expansion in Q1 2008.

Figure 3

As already noted the decline in investment is the driving force behind the recession and the subsequent failure to recover to the previous peak level of output. Private sector investment accounts for 79.8% of that total shortfall. As the chart shows public investment moved in the opposite direction, increasing through 2008 and rising sharply in 2009 and peaking in Q1 2010 - the last quarter of the Labour government.

By the time GDP began to recovery modestly in Q4 2009, public sector investment had risen by an annualised 10.5bn. This was far greater than the initial rise in GDP, which was just 6.1bn higher. Therefore the rise in public sector investment was entirely responsible for the recovery.
Private sector investment did not rise as soon as the economy began to expand. It began to rise only after recovery had begun. Since all private investment is determined by anticipated profits, this inability of the private sector to lead the recovery is no surprise.

However, over the course of 2010 private sector investment was the biggest single contributor to growth rising by 22.3bn. Private sector investment increased as a result of growth fostered by the sharp increase in the level of public sector investment.
But instead of understanding that public sector investment was leading to economic recovery, including stimulating private sector investment, both the Tory-led government and the OBR subscribe to the idea that government spending crowds out the private sector and if public spending is cut, private investment will increase. The opposite is the case. Government investment crowds in private investment.

The false Tory/OBR idea is also demonstrated by the negative reaction to the subsequent cut in public sector investment. Public sector investment peaked in Q1 2010 where it was 38.4% higher than at the end of the prior business expansion. It began to fall as soon as the Tory-led Coalition took office in Q2 2010. Shortly afterwards, in Q4 2010 GDP began to stagnate. Immediately afterwards, private sector investment began to contract once more.
Technical Issues

For those readers interested in these topics, this next section deals very briefly with some interesting technical issues highlighted by the recent zig-zagging of the British economy- from recession to recovery to stagnation. Other readers can skip straight to the Conclusion.
Leading and lagging indicators: Public investment has clearly behaved as a lead indicator for the economy as a whole. Private investment is a lagging indicator. While public investment rose continuously throughout the recession, the significant increase did not take place until after the March 2009 Budget, when the rate of increase doubled. GDP responded two quarters later, in Q4 2010. Private sector investment responded 3 quarters later by recording its first rise in Q1 2010.

Similarly, public investment began to fall in Q2 2010. GDP contracted two quarters later, in Q4 2010. Private investment fell once more 3 quarters later in Q1 2011.
Multipliers: The OBR concedes a point that is almost unanimous in the literature that the multiplier effect of government investment is greater than all other types of government spending. However, hamstrung by the notion of crowding out and determined to promote it, the OBRs multiplier for government investment is just 1, meaning that there is no more economic effect than simply the government spending itself2. Its multiplier for cuts in welfare is 0.6 and for a VAT hike is 0.35, meaning that both of these have far less than the effect of government cuts or increased spending. Bizarrely, the logic is that private agents, both households and businesses, become more confident because of the cuts, and so offset their effects by increased spending and investment.

The economys recent gyrations provide evidence to the contrary. It is impossible to determine the precise effect of increased government investment in stabilising the economy prior to actual recovery. But it has already been shown that a cumulative rise in public investment of 10.5bn led to a rise in private sector investment of 22.3bn. This alone is a multiplier of 2.12. The rise in investment will also have boosted household incomes a well as government income (both via increased tax revenues and lower welfare outlays than otherwise). But, as a minimum, it can be stated that the multiplier from government investment is higher than 2, and is likely to be considerably higher.
Conclusions

The recession was driven by the collapse in private sector investment. The fall in household consumption was also important, much more so than in the OECD as a whole.
The resumed private sector investment strike now accounts for close to 80% of the entire output loss since the recession, and the economy remains more than 4% below its prior peak level.

The government and the OBR promote the notion that cuts to government spending will lead to spending in the private sector from households and businesses. The opposite has been the case. The entire recovery was engendered by the rise in public sector spending and private investment followed later.
The Tory-led government has reversed the rise in public investment through its cuts policy. This has led first to stagnation and now contraction of private investment in Q1 2011. The fall in private and public investment combined more than accounts for the entire slowdown in the British economy in the last two quarters. Tory policies have wrecked the recovery. Only a rise in public investment can revive it.

Notes
1. OBR, March 2011, Economic and Fiscal Outlook

2. Treasury, June 2010 Budget, Table C8.

Posted by Socialist Economic Bulletin at 08:59 0 comments Email This BlogThis! Share to Twitter Share to Facebook Links to this post

Friday, 1 July 2011

Greece and other failures of EU bailout packages

By John Ross

The great majority of serious economic commentators know that the bailout package just agreed between the EU and Greece is going to fail. That in the end Greece will be forced into partial default worsening the terms for its creditors. This will, of course, be politely termed rescheduling, reprofiling or some similar phrase in order to attempt to camouflage reality. The camouflage may, however, be so transparent that the ratings agencies will still declare a default. The main discussion is whether it is better for Greece to default immediately or whether the bailout package is a good idea, not because it will work in the end, but because it will postpone the default.
It is therefore useful to understand that all three bailout packages agreed between the EU and its member countries struck by debt crisis are failing in their declared purpose of promoting economic recovery that is not only in Greece but also in Ireland and Portugal. This is clear from Figure 1, which shows the trend in GDP for these three countries since its peak in the last business cycle.

As may be seen in none of these countries is serious recovery occurring. Attempts to claim it is, for example by making optimistic publicity about the latest quarters GDP figures from Ireland, consists of taking data out of context Irelands GDP figures were better only in comparison to the precipitate collapse which had occurred in the previous quarter.
Taking the three countries which have made agreements with the EU the latest available data, for the 1st quarter of 2011, shows:

Greeces GDP is 9.9% below its peak with an insignificant recovery from the low of 10.0% below.

Portugal had been recovering, but its GDP has turned down in the last two quarters and is now 2.7% below its peak.

Irelands GDP is 11.5% below its peak and is the same level as in the 3rd quarter of 2009 i.e. no net growth has taken place for the last year and a half of austerity packages.

In short no serious recovery has been created by any EU bailout.

Figure 1

*** This article originally appeared on the blog Key Trends in Globalisation. Posted by Socialist Economic Bulletin at 09:16 0 comments Email This BlogThis! Share to Twitter Share to Facebook Links to this post Newer Posts Older Posts Home Subscribe to: Posts (Atom)

Blog Archive

2011 (51) o September (2) o August (7) o July (10) Weakness of the current US economic recovery compa... US GDP figures even worse than they look Boris Johnson economic proposals should have put L... BRICS say Greek bailout too soft on the banks The stats show the Tories make you worse off and l... British Economic Stagnation The electoral myths of 'blue Labour' The Job Losses at Bombardier How To Wreck A Recovery- Tory policy and Q1 GDP Da... Greece and other failures of EU bailout packages

o o o o o o

June (3) May (3) April (6) March (4) February (10) January (6)

2010 (56) 2009 (41) 2008 (97) 1997 (1) 1996 (1)

Latest Twitter Updates

SocEconB
SocEconB New rticle 'Weakness of the current US economic recovery compared to previous US business cyles' - http://t.co/lB3L6Bj 54 days ago reply retweet favorite New article 'US GDP figures even worse than they look' http://t.co/yZHm36I 54 days ago reply retweet favorite Article by John Ross on China's new Five Plan http://bit.ly/dGvWXx 197 days ago reply retweet favorite 'publicly owned banks and their cash mountains should be at the heart of an investment programme' Seumas Milne http://tinyurl.com/66hgo... 197 days ago reply retweet favorite Martin Wolf on Ireland, that taxpayers bail out creditors of banks at risk to solvency of the state unreasonable http://tinyurl.com/4kpv6... 212 days ago reply retweet favorite Michael Burke analyses unemployment in Tory recessions http://tinyurl.com/5syt7... 218 days ago reply retweet favorite Gigantic impact if US govt tries to withdraw from mortgage support. 92% of new US mortgages backed by the govt http://on.wsj.com/f0g4Ee 222 days ago reply retweet favorite

Irish bailout faces new problems WSJ.com http://on.wsj.com/hgeFDN 222 days ago reply retweet favorite US big business will stamp on Tea Party opposing US military spending despite analysis of Raymond Barrett http://t.co/oJXZZUk via @guardian 222 days ago reply retweet favorite ComRes poll, cuts are unfair because they will be felt more by poor than by wealthier - agree Nov 56% Dec 57% Now 63% http://ind.pn/h6vCjF 222 days ago reply retweet favorite
Join the conversation

Receive Updates by Email

Your email address:

Powered by FeedBlitz

Subscribe To Feed for SEB

Posts All Comments

Main Socialist Economic Bulletin Articles on the Financial Crisis

01. Why Asia will continue to grow more rapidly than the US and Europe 02. Fundamental driving forces of the financial crisis 03. The Paulson plan and unrest in US politics 04, The most important article on financial crashes 05. The fall in asset prices is causing the liquidity crisis, not the liquidity crisis the fall in asset prices 06. How far can bank shares fall 07. From the threat of a heart attack to the danger of gangrene 08. Recession or depression 09. The dilemma of the dollar and the coming international summit meetings 10. Obama's key decision 11. Japan tries to come to the aid of the US 12. China and the international financial crisis 13, On 15 November a new era in world history begins 14. How the new phase of the financial crisis must be tackled 15. Seven key proints that must be included in any programme for dealing with the economic crisis

Progressive Economic Analysis

Conference of Socialist Economists Key Trends in Globalisation

Labour and Capital Larry Elliot in The Guardian Left Economics Advisory Panel The Conscience of a Liberal

Links for Socialist Analysis

Bloggers4Labour Compass Online Morning Star Socialist Worker Tribune Twenty First Century Socialism

Key Link's on London

Boris Watch Dave Hill's London Blog MayorWatch Progressive London The Tory Troll

Articles by Topic

banks (1) Barclays (1) BRIC (1) China (21) Credit Crunch - Analysis (32) economic theory (1) EU (1) Eurozone (1) Ge (1) Germany (1) Greece (1) HBOS (7) India (5) International financial crisis (28) Ireland (1) Japan (9) Keynes (2) Lloyds TSB (7) Marx (2) RBS (7) Russia (1) shares (1) Tory economic policy (1) UK (5)

UK government policy (43) US (33) US. international financial crisis (6) Venezuela (1) Vince Cable (1)

Political Parties

Green Party Labour Party