Recession denialists seized on third-quarter economic data showing GDP increased by 2.6 percent, averting an endemic case of cognitive dissonance that would be required to explain how three consecutive quarters of negative growth couldn’t mean recession. Unfortunately the latest report suggests the American economy is in a more dire state than is being acknowledged by the current political leadership. The positive economic growth of 2.6 percent is due largely to a spike in net exports which added 2.77 percentage points to the third-quarter results. The US trade deficit declined, but the actual number of exports remained steady, indicating that Americans are reducing their spending on overseas products while the rest of the world continues to consume American products.*
Demand is falling in the United States faster than it is in our trading partners, says Kevin Hassett at National Review:
[A] spike in growth from declining trade deficits happened at the beginning of every single one of the five recessions we’ve experienced since 1980. And the only quarter that saw a bigger impact from net exports was the third quarter of 1980, when net exports added 4 percentage points to GDP in a deep recession that was destined to turn into an economic rout in 1981. As was the case back then, the rest of the world catches up to the U.S. with a short lag; the negative effect on GDP from the reversal of this blip is sudden and about the same size as the positive blip. It happens virtually every time.
We can chalk this up to a number of variables, including rising inflation, recent tax increases and more regulations from the Biden administration, the removal of very large stimulus compared to the rest of the world, the Fed’s aggressive tightening compared to other central banks, and the simple fact that much of the world is currently doing better than we are.
Of course America won’t be the only country to suffer recession potentially coinciding with massive inflation (i.e., stagflation); we are just the canary in the coal mine, and our trading partners will eventually feel the same impact. And as the Fed continues to raise interest rates, the deficit will grow exponentially.
“Normally, a deep recession leads to bipartisan discussion of stimulus,” writes Hassett, “but in this case, given how little fiscal ammunition is left, discussion of stimulus would likely lead to a bond disaster at least on the scale of that which upended the government in the U.K.”
The answer, according to one report from the American Enterprise Institute for Public Policy Research, is deficit reduction. But specifically, this deficit reduction must be accomplished not from tax increases but from spending decreases, that is a “fiscal consolidation” that reduces both government spending and wealth transfers through entitlements.†
As the deficit decreases, the potential for a future economic meltdown becomes less dire if not less likely. The ultimate goal is stability and a reduction in fear for both consumers and investors alike. A reduced deficit also increases the feasibility of economic stimulus to the citizenry at large, or even financial bailouts for major industries should they become necessary to stave off mass layoffs or even bankruptcies.
Investors in particularly are driven by the two opposing forces of greed (or hope) and fear. But fear always trumps the former when it becomes endemic. Again the goal is to reduce the fear of future economic messes of any sort and to restore a sense of normalcy, or predictability, that encourages both risk-taking (investments, entrepreneurship) as well as consumption (making that big purchase you had previously put on hold).
Finally, the excessive government spending that resulted from the pandemic (or at least our government’s response to it) means that there is more room than ever for a reduction. Should we ignore the lasted warning signs from the third quarter, and continue the spending spree at its current rate of acceleration, the global recession that has already begun will undoubtedly grow more dire.
M. Danko
November 19, 2022
Terse.blog
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* “GDP increases when there is a trade surplus: that is, the total value of goods and services that domestic producers sell abroad exceeds the total value of foreign goods and services that domestic consumers buy.” — Investopedia
† Entitlements constituted 49 percent of total federal expenditures in 2020 and 2021