In March, consumer confidence tumbled to 67.5% from 77.5% in February. Before the New Depression hit in late 2007 consumer confidence was in the 90s. Then consumer confidence fell, hitting a 28 year low in November 2008 at 55.3%.
On Friday, the BEA released its final revision for GDP during the fourth quarter of 2010. The rise in GDP during that quarter was led by increased consumption demand and improved net exports. The following table shows the components of aggregate demand and their contributions to GDP growth during each of the four quarters of 2010:
|Contributors to Real GDP Growth|
|Business Fixed Investment||0.41%||2.19%||0.19%||0.86%|
|Total Change in Real GDP||3.68%||1.71%||2.53%||3.08%|
During the second and third quarters of 2010, the United States would have grown robustly if a worsening trade balance hadn't slowed economic growth. During the second quarter, deteriorating trade subtacted 3.37% from economic growth and during the third quarter it subtracted 1.70% from economic growth.
But during the fourth quarter of 2010, Ben Bernanke at the Federal Reserve began a massive purchase of U.S. government bonds (QE2). This had two effects:
- Increased household consumption. Bernanke's purchases caused inflation which drove short-term U.S. real interest rates into negative territory, which reduced household savings and thus increased household consumption.
- Improved net exports. Bernanke's purchases caused private savers to move their savings out of dollars and into other currencies where they could get a better real return. These dollar sales caused the dollar to weaken, and the purchases by private savers of foreign assets increased asset values in the emerging market economies. The falling dollar, combined with rising inflation in the emerging market countries, improved net exports.
It is clear from the consumer confidence figures for March 2011 that household consumption is not going to continue driving economic growth. The question is: will QE2 continue to improve net exports? I do not think so:
- QE2 can't continue. Bernanke can't continue QE2 without causing inflation to rise above 2%, his target.
- Foreign governments will resume mercantilism. Right now the emerging country governments are fighting their QE2 caused inflation. Once they get a handle on inflation, they will resume growing their trade surpluses with the United States.
In short, I expect U.S. economic growth to slow during the second quarter of 2011. The United States economy is not yet out of the New Depression.