Two-of-a-kind generally isn’t a winning hand
In the game of poker, one of the weakest hands that a player can possibly draw is a pair. Not often a winning hand, unless everyone else has essentially nothing and is simply operating with a “high card” opportunity to win. So, two-of-a-kind may be better than nothing, but just barely.
Over the past several years, government policymakers have been playing a high-stakes poker game with the American economy, hoping that a strong dose of monetary and fiscal policy stimulus will produce a winning hand. Sadly, the Keynesian gamble has not paid off, with a second consecutive year of very modest growth at the beginning of the year, even as high hopes abounded as each new year began.
In 2011, the first quarter saw the economy nearly stall out, with a barely perceptible pulse in economic growth of just 0.4 percent. And this was despite analysts proclaiming at the end of 2010 that the economy had finally turned the corner (for the umpteenth time) and the good times were about to roll. Fortunately, modestly better growth rates did ensue as 2011 unfolded and by year’s end a respectable — though certainly unspectacular — growth pace of 3 percent was recorded.
Care to take a guess what this led the nation’s crystal-ball watchers to predict for 2012? If you said far faster economic growth and yet another turned corner, give yourself a pat on the back. But for the second year in a row, the vast majority of economists were wrong. Growth tapered off yet again, though the deceleration in inflation-adjusted growth from last year’s final quarter of 3 percent was not nearly as calamitous as in the prior year, with the 2012 January-though-March economic growth coming in at a 2.2 percent rate.
Particularly depressing in 2012’s first quarter performance were business and government spending. After eight straight quarters of advances in business spending on plant and equipment, the latest period saw a worrisome drop of 2.1 percent. The decline in spending by all levels of government was an even bigger 3.0 percent. The drop in federal government spending was especially steep at 5.6 percent. Under traditional Keynesian theory, this kind of reduction is just what should be happening at this point. But after a couple of years when federal government spending was going through the roof — with the idea of providing a stimulus that would eventually accelerate growth substantially in the private sector — the drop in both federal government and business spending has got to be a huge Keynesian disappointment and a basic miscalculation of the dynamics of the present American economy.
Fortunately, as these two sectors were receding, the consumer and net export sectors were advancing. In the case of consumer spending, the growth rate accelerated from the end of last year, with the fourth quarter’s real consumer spending growth rate of 2.1 percent advancing to 2.9 percent in first quarter, 2012. And since the consumer sector accounts for about 70 percent of U.S. economic activity, this growth more than offset the lack of progress in the business and government sectors. As well, with the growth rate in exports (at 5.4 percent) greater than that of imports (4.3 percent), economic transactions with the rest of the world were a net positive for first quarter GDP.
So, what do these figures (and others) suggest about the rest of the year? My best guess is that positive growth will continue through the remainder of the year, perhaps sliding a bit during the second quarter, before settling at about a 2.0–2.5 percent advance for the second half. A couple of likely developments point toward this outcome.
First, consumer sector growth in the first quarter came at the expense of a reduction in the personal savings rate, dropping from 4.5 percent in last year’s final quarter to 3.9 percent in 2012’s first three months. While this is not a monstrous drop-off, it does suggest people’s ability to spend will become more dependent upon wage and salary income.
That brings us to the second — and highly related — area of concern, job growth. Setting aside the issue of a poorly performing seasonal adjustment process (as discussed in a couple of recent columns), the recent upward movement in the number of initial claims for unemployment insurance suggests employment growth is decelerating.
If true, the two-of-a-kind first quarter economic performances in 2011 and 2012 may suggest another losing economic hand for many struggling American families.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.