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.

Posted by Jim Newton on May 2 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.