Merry Christmas?
It is no secret that the US consumer is the key to the global economy. US consumer spending accounts for 70% of US GDP, so how is it possible that GDP has been increasing when credit in 70% of the economy has been shrinking? Well, obviously the other 30% has been expanding.
First off, if you look at the Federal Reserve's published figures on consumer credit , you will see that the consumer has been deleveraging at an annual rate of 4% (this number is interesting in itself since in all but Q1 in 2009 the FRB shows consumer credit declining at an annual rate of negative 6% or greater! Now who really believes that consumers were spending MORE in Q1 than Q3? If so, then the subsequent decline is ominous). The increase in Federal spending was 18%. So the 20% of the economy that is government spending added about 4% to GDP ($3,522 vs. $2,978). [We know that the Federal Government ran a budget deficit of $1.4 Trillion which is about 10% of GDP (I am being generous as this does not include $274 B from the "trust funds" which will need to be "repaid")].
During this period the official GDP numbers state that the economy declined about 2.5%, so the remaining 10% of the economy (business expenditures) must have dropped 25%. That is what happened according to Bureau of Economic Analysis. In FY 2010, Federal spending is estimated to increase 1%. The latest figures from the Fed indicate that consumer credit is declining at a 6% annual rate in the last half of 2009. This implies that business spending will need to climb 40% to keep ZERO GROWTH all else being equal. Now maybe consumers will open their wallets and spend this Christmas, but somehow I doubt with credit card companies hiking rates to 28% plus. More realistic assumptions are that consumers continue to shrink debt at a 6% rate, the government continues to increase spending 10-15% and business keeps a lid on costs with increased investment no greater than 10%. Such numbers provide a GDP growth rate of 0%, best case scenario. If governments actually holds spending to the stated 1% increase and business spending holds steady, look for 4% decline in GDP in 2010. Admittedly, these back of the envelope calculations would not hold up to close scrutiny, but I don't most official economists would either. Regardless, a double dip in 2010 is all but a certainty.
First off, if you look at the Federal Reserve's published figures on consumer credit , you will see that the consumer has been deleveraging at an annual rate of 4% (this number is interesting in itself since in all but Q1 in 2009 the FRB shows consumer credit declining at an annual rate of negative 6% or greater! Now who really believes that consumers were spending MORE in Q1 than Q3? If so, then the subsequent decline is ominous). The increase in Federal spending was 18%. So the 20% of the economy that is government spending added about 4% to GDP ($3,522 vs. $2,978). [We know that the Federal Government ran a budget deficit of $1.4 Trillion which is about 10% of GDP (I am being generous as this does not include $274 B from the "trust funds" which will need to be "repaid")].
During this period the official GDP numbers state that the economy declined about 2.5%, so the remaining 10% of the economy (business expenditures) must have dropped 25%. That is what happened according to Bureau of Economic Analysis. In FY 2010, Federal spending is estimated to increase 1%. The latest figures from the Fed indicate that consumer credit is declining at a 6% annual rate in the last half of 2009. This implies that business spending will need to climb 40% to keep ZERO GROWTH all else being equal. Now maybe consumers will open their wallets and spend this Christmas, but somehow I doubt with credit card companies hiking rates to 28% plus. More realistic assumptions are that consumers continue to shrink debt at a 6% rate, the government continues to increase spending 10-15% and business keeps a lid on costs with increased investment no greater than 10%. Such numbers provide a GDP growth rate of 0%, best case scenario. If governments actually holds spending to the stated 1% increase and business spending holds steady, look for 4% decline in GDP in 2010. Admittedly, these back of the envelope calculations would not hold up to close scrutiny, but I don't most official economists would either. Regardless, a double dip in 2010 is all but a certainty.
posted by Matt Butler at 12:09 PM
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