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Consumer confidence is tumbling - economic growth will likely slow during 2nd Quarter
Howard Richman, 3/28/2011

In March, consumer confidence tumbled to 67.5% from 77.5% in February. Before the New Depression hit in late 2007 consumer confidence was in the 90s. Then consumer confidence fell, hitting a 28 year low in November 2008 at 55.3%.

On Friday, the BEA released its final revision for GDP during the fourth quarter of 2010. The rise in GDP during that quarter was led by increased consumption demand and improved net exports. The following table shows the components of aggregate demand and their contributions to GDP growth during each of the four quarters of 2010:

Contributors to Real GDP Growth
Year 2010-1 2010-2 2010-3 2010-4
Household Consumption 1.31% 1.53% 1.66% 2.78%
Business Fixed Investment 0.41% 2.19% 0.19% 0.86%
Government Consumption -0.31% 0.75% 0.75% -0.33%
Net Exports -0.26% -3.37% -1.70% 3.23%
Inventory Change 2.48% 0.75% 1.59% -3.17%
Total Change in Real GDP 3.68% 1.71% 2.53% 3.08%

During the second and third quarters of 2010, the United States would have grown robustly if a worsening trade balance hadn't slowed economic growth.  During the second quarter, deteriorating trade subtacted 3.37% from economic growth and during the third quarter it subtracted 1.70% from economic growth.

But during the fourth quarter of 2010, Ben Bernanke at the Federal Reserve began a massive purchase of U.S. government bonds (QE2). This had two effects:

  1. Increased household consumption. Bernanke's purchases caused inflation which drove short-term U.S. real interest rates into negative territory, which reduced household savings and thus increased household consumption.
  2. Improved net exports. Bernanke's purchases caused private savers to move their savings out of dollars and into other currencies where they could get a better real return. These dollar sales caused the dollar to weaken, and the purchases by private savers of foreign assets increased asset values in the emerging market economies. The falling dollar combined with rising inflation in the emerging market countries improved net exports.

It is clear from the consumer confidence figures for March 2011 that Household Consumption is not going to continue driving economic growth. The question is: will QE2 continue to improve net exports? I do not think so:

  1. QE2 can't continue. Bernanke can't continue QE2 without causing inflation to rise above 2%, his target.
  2. Foreign governments will resume mercantilism. Right now the emerging country governments are fighting their QE2 caused inflation. Once they get a handle on inflation, they will resume growing their trade surpluses with the United States.

In short, I expect U.S. economic growth to slow during the second quarter of 2011. The United States economy is not yet out of the New Depression.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]