The third quarter US GDP figures give graphic insight into the state of the US economy and the political discontent that is both fuelling Obama’s surge in the polls but which is likely to continue if, as appears likely, he is elected.
What is striking is not the headline 0.3 per cent contraction in GDP. That indicates clearly the US recession has started but it is not a fearful figure in terms of historical comparisons for downturns. What is of historic proportions is the decline in personal income and consumer spending as the overstretched credit balloon contracts.
US disposable personal income dropped at an 8.7 percent annualised rate in the third quarter - the sharpest fall since quarterly records began in 1947. Overall consumer spending fell at an annualised 3.1 per cent, the largest drop for 28 years. Consumers cut spending on durable goods - such as cars, household goods and furniture - at a 14.1 percent annual rate, the biggest fall for 21 years. Even spending on nondurable goods, such as food, which is normally relatively resilient in recession, fell by 6.4 per cent - the sharpest fall for 58 years.
This is really great economic pain for ordinary Americans. The reason is also clear. Median working incomes dropped by 1.1 per cent in real terms between 2000 and 2006, or by about $2,000. Consumers therefore cannot engage in a significant increase in their level of purchases due to increased wages. Instead the rate of consumption growth has been maintained through borrowing.
As the credit crunch bites increased borrowing is no longer possible, and therefore a sharp contraction in consumption takes place. This will be amplified, with sharp falls in income, as unemployment continues to rise.
Taking other sectors of the economy, private investment fell at an annualised rate of 1.9 per cent, with, in a classic pattern for a recession, fixed investment falling even more sharply than consumption, with a 5.6 per cent annualised rate of decline. Within that latter figure residential construction fell at an annualised rate of 19.1 per cent.
Export growth also fell, running at a 5.9 per cent annualised rate compared to an increase of 12.3 per cent in the preceding quarter.
Really striking is the degree to which the US has become a ‘Keynesian’ economy. By far the strongest component of domestic demand was government expenditure - which rose at a 5.8 per cent annualised rate, with federal expenditure rising at an annualised 13.8 per cent.
The world’s most ‘private sector’ economy is being forced to rely on government expenditure to limit the scope of the recession - a point highly relevant to the debate between Labour and Tories in this country.
The political dynamics of this are clear - because the recession will clearly continue for several quarters. Given the biting fall in consumption the unpopularity of the incumbent Republicans is no surprise. But it also means that if Obama wins, unless he is prepared to take rather strong economic measures to aid the population, his popularity is also likely to be undermined fairly rapidly. Clearly the first economic decisions he would take will therefore be very critical.
This post first appeared on the blog Key Trends in the World Economy