'New Depression' Not Over Yet

by: Howard Richman

According to preliminary estimates released this morning by the BEA, economic growth slowed dramatically from 3.1% during the fourth quarter 2010 to just 1.8% during the first quarter of 2011. The following table shows the contributors to aggregate demand for American products, and how they have been changing:

Contributors to Real GDP Growth
Year 2010-1 2010-2 2010-3 2010-4 2011-1
Household Consumption 1.31% 1.53% 1.66% 2.78% 1.90%
Business Fixed Investment 0.41% 2.19% 0.19% 0.86% 0.09%
Government Consumption -0.31% 0.75% 0.75% -0.33% -1.04%
Net Exports -0.26% -3.37% -1.70% 3.23% -0.06%
Inventory Change 2.48% 0.75% 1.59% -3.17% 0.83%
Total Change in Real GDP 3.7% 1.7% 2.5% 3.1% 1.8%
Click to enlarge

Government consumption is now a drag on aggregate demand, as state and local governments are being forced by their balanced budget requirements to tighten their belts. During the third quarter of 2010, governments added 0.75% to economic growth, but in the fourth quarter they subtracted 0.33%, and in the first quarter of 2011 subtracted 1.04%.

Meanwhile, inflation has been growing at a tremendous rate, about a half percent per month. It will soon force the Federal Reserve to cut back on its monetary expansion. With governments pulling back on their spending, the Federal Reserve being forced to cut back its monetary expansion, business investment stagnant, and net exports stagnant, it is clear that the Obama-Bernanke recovery has failed.

Business investment almost pulled the United States out of the New Depression during the second quarter of 2010, expanding economic growth by 2.19%. Expanded government spending had encouraged expanded business investment. Obama's "summer of recovery" almost worked. But the trade deficit expanded even faster than business investment that quarter, removing 3.37% from U.S. economic growth that quarter.

When economic historians write the story of Obama and Bernanke's failed recovery, it will be pointed out that they would have gotten the United States out of the New Depression had they simply required balanced trade from America's trading partners.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.