GDP Growth Slides with Worse News Behind the Numbers

The Commerce Department Thursday morning released its estimate of growth of the U.S. economy, and the numbers showed that growth slowing even more than forecasters had predicted. For the period from January through March of this year, the gross domestic product—a standard measure of the total value of the economy's output of goods and services—grew by 3.1%, down from fourth quarter, 2004, GDP growth of 3.9%, and below the first quarter growth of 3.5% expected in a concensus forecast by select economists. Coupled with rising prices throughout the economy, real GDP growth is eroding strongly, giving evidence of waning business and consumer activity in the face of rising domestic interest rates and the increasing burden that steep energy prices are placing on budgets.

Perhaps more troubling than the lower growth of GDP was the less-noticed reason for much of what growth there was: business inventories in the period rose on weakening consumer expenditures, meaning that companies must eventually cut back production to clear their shelves of the growing stockpiles.

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In recent years, businesses have been able to maintain lower inventories at any given point in time through computerized inventory management and shorter order-to-production cycles.

  Typically, businesses slow production by employing fewer workers and by ordering lower levels of intermediate goods and services upstream in the production chain. Businesses slow production by employing fewer workers; but this will mean that households have less disposable income to clear those inventories that are building up, and this will induce further cutbacks in employment. Also, as producers of final goods and services reduce upstream orders, their suppliers will have to cut back their production, too, thus magnifying the problems in the labor market and, therefore, in consumer spending. With the official U.S. unemployment rate still above five percent, some economists state flatly that the labor pool can ill afford any further pull-back in the demand for workers.

With recessionary pressures looming, the desirable response would be for the federal government and the central bank to work together to foster an environment of lower interest rates to stimulate business investment and consumer spending. However, that cannot be done in this era. The federal government, already burdened with record budget deficits, has no room for higher levels of expenditures to stimulate the economy. Far worse, those budget deficits have put substantial upward pressure on interest rates as the Treasury sops up large quantities of funds available for lending.

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Far worse than inflation, itself, is when the expectation of inflation sets in: the expectation starts showing up in rising prices, higher interest rates on consumer and business loans, and demands for sharper wage increases.

  As far as the central bank goes, it has no room to help, either. Because of what it glibly described as "accommodative" monetary policy during the first four years of the current Administration, far too much money was printed for tax cuts and war, and the result is the escalating inflationary pressures now seeping into the prices of goods and services. To cool the inflation before it becomes seriously embedded in business and consumer expectations, the Federal Reserve must pursue a tight monetary policy, with rising interest rates that will hamper growth. With both the federal government and the Federal Reserve unable—and, some would argue, ideologically unwilling—to enact counter-cyclical fiscal and monetary policies, the road ahead for the economy, as well as for the real, flesh-and-blood people in it, is not bright.

In other news, President Bush will appear tonight in a nationally televised news conference billed in part as his most significant opportunity yet to promote his plan to partially privatize the Social Security system by allowing workers to borrow money from the Social Security taxes withheld from them to invest in the stock and bond markets. No word has come out of Washington on what advice Mr. Bush will be providing to the millions of prospective new investors as the U.S. stock markets continue a slow, downward trend that has created negative nominal and real growth in broad-based stock market indices over the entirety of his Presidency. But even though average workers will be facing what could prove to be a challenging investment environment that will leave them impoverished in their retirement years, much excitement still exists over the far more important aspect of this plan, which is the $2 trillion jobs program it will create for the stockbrokering and banking industries, a jobs program that will be financed by the federal government and ultimately paid for by the citizens of the United States, in general, through higher global interest rates, and by the workers participating in the new system, in particular, through repayment of the funds they borrow from the government to invest, as well as through the brokerage and banking fees they will have to pay for the privilege of sacrificing defined benefits to achieve the neo-conservative vision of an ownership society.