U.S. Still in Recession for the Working Class

[RichardAWilson]

WASHINGTON (AP) -- The economy expanded at meager 1.3 percent annual rate in the spring after scarcely growing at all in the first three months of the year, the Commerce Department said Friday.

The combined growth for the first six months of the year was the weakest since the recession ended two years ago.

The government revised the January-March figures to show just 0.4 percent growth, down sharply from its previous estimate of 1.9 percent.

The data was much worse than economists expected and caused many of them to lower their growth forecasts for the rest of this year.

Consumer spending only increased 0.1 percent in the April-June quarter, the smallest gain in two years.

Government spending fell for the third straight quarter.

Overseas sales may also give the economy a lift in the second half of the year. Exports rose 6 percent in the April-June quarter. Large U.S. exporters are benefiting from a weaker dollar and stronger growth in foreign markets, a trend economists expect to continue.

Still, economists don't expect growth to pick up enough in the second half of the year to lower the unemployment rate, which rose to 9.2 percent last month.

The economy typically needs to grow by 5 percent for a full year to reduce the unemployment rate by a full percentage point.

Growth of 3 percent is generally enough to keep up with population changes.

After-tax incomes, adjusted for inflation, rose only 0.7 percent, matching the previous quarter and the weakest since the recession ended.

The drop in government spending was driven by cuts at the state and local level. Those governments have slashed spending in seven of the eight quarters since the official end of the recession.

State and local government spending accounts for roughly 12 percent of the economy.

In the past two years, state and local governments have cut more than a half-million jobs.

The economy shrank 5.1 percent during the recession, which lasted from December 2007 through June 2009. The government now says the economy is smaller than it was before the recession.


Here we are in the summer of 2011 and our economy hasn't recovered from 2009's trough. America is reverting to the mean. The unsustainable bubble-boom growth that we've had since Clinton was in the White House is starting to be corrected. It won't be long before the Federal Reserve releases Quantitative Easing Number Three.

[RGacky3]

Just shows how inefficient Capitalism is, that you need a Giant boom to lower the unemployment rate, and a large rate of growth just to keep unemployment going up.

But yeah, we're not out of it, nor will we be for a long long time.

[RichardAWilson]

We're going to have to have another bubble to sustain 3% annualized growth. I'm wondering where the bubble will be this time around. I'm betting we'll see a bubble in stock values.

American companies have become multinational, meaning they're tapping emerging economies for growth.

As long as Asia and Latin America continue growing, America's multinationals (the entire Dow 30) will continue appreciating. Meanwhile, our low interest rates and bond yields will remain favorable for stocks. The problem is that a stock bubble that's based on foreign growth won't generate much growth for us. The wealth-effect adds 5 cents to consumer spending for every dollar in new wealth. We will need something more.

The U.S. Dollar will continue to be weakened. We've abandoned the Strong Dollar Policy. We will have to maintain a weak dollar to revive our manufacturing and export-oriented sectors.

Nonetheless, there's even a problem with this approach. Our trade imbalances with Western-Europe and Japan will be resolved. However, our trade imbalances with China and the Arab World will continue to increase.

The international commodities and materials bubble is hurting us more than it’s benefiting us. We’re not blessed with oil like Canada and Norway and we’re not blessed with a wealth of metals and minerals like Australia. We're paying the price of this bubble boom.

We can no longer afford a consumer spending boom (I.e. Which saved us in 1982, 1992 and 2001).



1. Americans don't have the savings.
2. The consumer indebtedness to income ratio is too high.
3. Financial organizations aren't going to lend.
4. Housing values aren't going to allow consumers to use their homes for quick cash.
5. Real (inflation-adjusted) incomes aren't increasing and aggregate income has declined.


I don't foresee 3% annualized growth for quite a long time.

[RGacky3]

THe stocks will go up, I don't think thats a bubble, I think they are tapping markets in teh third world, meaining they are gonna move their industries to the third world, AND their consumer base to other countries, which means that the multinationals will no longer really care about the US.

Meaning profits might raise due the emerging markets, but the American people won't see anything of it. They don't have the money to buy stuff any more.

The US can weaken the dollar if they want, and it might have some short term benefits, but in the end unless you have real consumer spending its not gonna help, and even with a weak dollar, they are competing with places like China, with much cheaper labor costs.

[RichardAWilson]

Stocks are a bubble right now. The Market Capitalization to GDP Ratio is above the historical norm. Dividend yields are below the historical norm and price-to-earnings ratios are above the norm. There are undervalued stocks and over valued stocks.

I happen to believe the bubble will grow much larger. QE1 and QE2 have stimulated the financial markets. We're going to have a QE3. Bush's low tax approach to capital and corporate dividends will be preserved.

As you said though, such a bubble won't translate into wealth and jobs for working class Americans.

Our jobs will continue being relocated and outsourced.

[RichardAWilson]

Labor costs wouldn’t matter in an unregulated (I.e. floating) exchange rate system. They wouldn’t even matter in a regulated global system. (I.e. the Post-War Woods System)

The problem is that China, Japan and Korea are practicing Mercantilism as a means of industrializing. As such, exchange rates aren’t allowed to be corrected.

Asian countries aren't going to revalue their currencies because they're maintaining export-oriented economies that have to remain competitive against the Americans and Europeans.

American and European multinationals like this problem because they're able to make even more money by sending production to those countries where profit margins are even higher.

For instance, America maintains a trade surplus with Greece, even though Greek wages are much lower than in France and Germany. The same can be said of Poland, with which we're running close to balanced trade.

The problem with China is that the Chinese Yuan is undervalued by over 30%.
The problem with Japan is that the Japanese Yen is undervalued by as much as the Yuan.

Nominal Exchange Rate for Japan:

http://upload.wikimedia.org/wikipedia/commons/thumb/b/bb/JPY_Nominal_Effective_Exchange_Rates_%281970-%29.svg/700px-JPY_Nominal_Effective_Exchange_Rates_%281970-%29.svg.png

Korea and Taiwan are also undervaluing their respective currencies in a bid to industrialize via production, exportation and business spending.

[RGacky3]

The Market Capitalization to GDP Ratio is above the historical norm.

Sure but that does'nt matter when most of the buisiness is overseas.


Labor costs wouldn’t matter in an unregulated (I.e. floating) exchange rate system. They wouldn’t even matter in a regulated global system. (I.e. the Post-War Woods System)


It depends how much your saving by perchasing an undervalued currency, of coarse labor costs will have something to do with it.

[RichardAWilson]

Labor costs will influence the trade balance. However, exchange rates were designed to maintain self-correcting trade balances. This self-correction is considered a law in macroeconomics and has worked when it was allowed to work.

There's a big difference between nominal income and exchange rate adjusted income.

Here's a crude illustration:

Year X

Yuan / Dollar Exchange: 6 Yuan = $1
U.S. Wage Per Hour: $10
China Wage Per Hour: 12 Yuan ($2)

Year Y

Yuan / Dollar Exchange: 3 Yuan = $1
U.S. Wage Per Hour: $10
China Wage Per Hour: 12 Yuan ($4)

In this case, China's nominal wages remained the same. However, since the Yuan rose in value against the dollar, the Chinese wage relative to the U.S. wage did increase.

Since Chinese labor is much less productive than American labor, such an increase in the Yuan would lead to a balancing of U.S. - Chinese Trade.

A wonderful example was the Post-War Woods System, which had maintained balanced international trade.

Under the Woods System, countries were prevented from undervaluing their currencies to grow their economies at the expense of another nation's economy.