I’ve been looking for signs that a concerted effort by most central banks (except the much wiser BoJ) to curb growth and force unemployment up is actually working. My premise, of course, is that interest rates won’t significantly reduce economic growth in the short run, but if they get high enough, they could start to affect the spending patterns of low-income households. The next data that will help us correlate the impact of interest rates on spending by one-fifth of income groups in the US is due in September 2023, so I’ll be watching closely. However, the latest US national accounts data do not support the prevailing view that monetary policy is the most effective tool to curb spending. far away.
Monetary policy is ineffective – the US economy
On June 29, 2023, the U.S. Bureau of Economic Analysis released the latest U.S. National Accounts data—— First quarter 2023 GDP (third estimate), corporate profits (revised estimate), and GDP by industry – Displays “Real gross domestic product (GDP) grows at an annual rate of 2.0% in the first quarter of 2023”.
Growth in the December 2022 quarter is 2.6%.
The 2 percent figure in the “third estimate” was a revision from the previously published 1.3 percent, reflecting “more complete data” received.
According to the U.S. Bureau of Economic Analysis:
The increase in real GDP in the first quarter reflected increases in consumer spending, exports, state and local government spending, federal government spending, and nonresidential fixed investment, which were partially offset by declines in private inventory investment and residential fixed investment. Imports increased.
Note that BEA is using annualized quarterly figures here (multiplying the March quarter growth rate of 0.5% by 4), not actual annualized (year-over-year) growth rates, which are the percentage change from the March quarter of 2019 to March 2020 quarter.
The total was up 1.8% from 0.88% in the December 2022 quarter.
The series of charts below chronicles the story.
The first graph shows the annual real GDP growth rate (year-over-year) and quarterly growth rate (blue line) from the peak of the previous cycle (December 2007 quarter) to the March 2020 quarter (gray bar). Note that the dateline starts in the March 2008 quarter.
The chart below shows the evolution of the private investment-to-GDP ratio from the March 2008 quarter (the peak real GDP before the GFC recession) to the March 2023 quarter.
Business investment is one of the national accounts aggregates considered by mainstream economists to be highly sensitive to changes in interest rates.
The data doesn’t show this.
The disruption caused by the pandemic is palpable, as is the stagnation in performance following the initial recovery from the global financial crisis.
But investment rates, now around pre-pandemic levels, now show dynamics that resemble a dramatic “cliff fall.”
contribution to growth
The next graph compares the December 2022 quarter (gray bars) contribution to real GDP growth at the level of broad spending aggregates with the March 2023 quarter (blue bars).
The main driver of the rebound in GDP was stronger personal consumption expenditures, which may also have contributed to the decline in retail trade inventories.
U.S. levels of government and net exports are also driving growth.
Business investment weakened growth in the March quarter – which could be taken as a sign that rate hikes are starting to have an impact (see below).
The chart below breaks down the government sector and shows the dominance of federal non-defense spending.
Governments at all levels made a strong contribution to economic growth.
To better understand the picture of investment spending, the chart below breaks down the contribution of each component of investment to real GDP growth.
The overall decline was driven by lower inventories, while other capital formation expenditure components were mostly positive, contributing to production.
Equipment spending held back overall GDP growth.
My initial assessment is that the inventory cycle is largely driving the negative contribution of investment spending to GDP growth.
But we have to be careful to understand what that means.
Household consumption spending rose strongly, which I suspect has somewhat surprised producers and led to a decline in unsold inventories.
Companies are likely to look to replenish inventories in the June quarter, reinforcing positive sentiment in other investment classes.
The point is that I don’t see any material impact of negative interest rates in these data.
U.S. Household Consumption and Debt
Publications of the Federal Reserve Bank of New York – Household Debt and Credit Reports – Last Updated March 2023 Quarter (Published May 2023) – (PDF download).
show:
…total household debt balances increased by $148 billion in the first quarter of 2023, a 0.9 percent increase from the fourth quarter of 2022. The current balance is $17.05 trillion, an increase of $2.9 trillion since the end of 2019 (before the pandemic recession)…
Mortgage loan balances as reported by consumers increased by $121 billion in the first quarter of 2023 to $12.04 trillion at the end of March, a modest increase in…
Credit card balances were flat in the first quarter at $986 billion, bucking the typical trend of declining balances in the first quarter. Auto loan balances increased by $10 billion in the first quarter, continuing an upward trend that began in 2011.
So consumer borrowing doesn’t appear to have taken a major hit despite the “slower home sales”.
The data also showed that:
The overall delinquency rate is roughly flat in the first quarter of 2023 and remains low after falling sharply in the early days of the pandemic.
Again no signs of breakdown.
Australia’s housing shortage – and it’s getting worse
There’s a huge housing scandal in Australia right now – summarizing it isn’t enough.
But the reality is more complicated than that.
It also involves much of the new housing and apartment stock being completely inadequate to meet future environmental challenges.
There are many large apartment developments out there that have major construction deficiencies – some completed, some completed but now abandoned, and some still under construction.
The NSW government’s head of building standards recently shut down two building sites in Newcastle for serious breaches of building codes.
I speculate that in 20 years many buildings built in the past 20 years will be abandoned because they are not safe and will collapse.
Several high-profile apartment buildings in Sydney, for example, are already in the state, and they haven’t even been occupied after they’ve been built, despite developers making millions of dollars in profits and then declaring bankruptcy.
The problem here is that the government is privatizing the role of building inspections that used to be performed by public sector officials.
Now we have all these profit-seeking personalities checked and there is strong evidence that they get paid off from the developers and turn a blind eye to it.
Some inspections of the complex are apparently done via Facetime, with builders holding their phones while inspectors sit in the comfort of their offices miles away.
Another problem is that these buildings are not fit for purpose – very energy inefficient.
We have hectares of farmland now replaced by concrete and roofs, leaving little green space for the suburbs to breathe.
These homes are leaky and generally too large and inefficient.
But what does this have to do with the housing shortage?
Well, the shortage came about because neoliberal economists took over the government infrastructure sector, and all ‘fiscal’ KPIs called for a surplus.
How to pursue them?
Well, just cuts to social housing investment, which has been the state government’s primary responsibility from day one.
As states cut back on the stock of social housing — that is, housing for low-income families — it has lagged far behind demand.
The shortfall is estimated to be around 800,000 units — a shortfall in supply relative to demand.
This creates huge problems – rental demand is very high and landlords reap huge rewards, which exacerbates income inequality.
More and more people are now sleeping in cars, tents and under bridges – in one of the richest (material) nations on earth.
So the solution is to drop austerity and actually start looking after those who need our collective help.
But for neoliberals, this is all too straightforward.
Their solution is to deregulate zoning, building codes, and all the other restrictions that try to make sure buildings actually survive, don’t scurry around and eat up green spaces, etc.
The neoliberal solutions that developers are now demanding to introduce will only make things worse, pocketing developers and leaving more urban blight and horrific streetscapes.
Wrong decisions lead to further wrong decisions.
Neo-liberalism.
Music – Max Richter – Young Sailor
Here’s what I heard at work this morning.
It is the soundtrack released by Deutsche Grammophon for the soundtrack to the film Henri Meuran, released on October 27, 2017 and recorded in Berlin.
The film was released in 2008 and the music was composed in 2007.
The song “The Young Mariner” ranked 13th out of 14 tracks on the album.
Post-Minimalist Composer and Pianist – Max Richter – Joiner:
1. Chris Worthy – cello.
2. Ian Birch – cello.
3. John Metcalfe – Viola.
4. Natalie Fuller – violin.
Enough for today!
(c) Copyright 2023 William Mitchell. all rights reserved.
