Economy Becoming Increasingly Ill

Yesterday the government announced its first revision of first quarter annualized GDP growth. The revision, as expected, was downward so that Q1 growth  is no longer recorded as the first estimate of +0.2%, but is now listed as a -0.7% contraction. Many expect that it will “rebound” in Q2 to an annualized growth of around 2%, which if true would be the smallest first-half performance since 2011. That is if the general expectations are true. There is “many a slip ‘twixt cup and lip” as they say, and we have been seeing many slips lately.

For example, one of the few supports for economic growth over the past few years has been provided by the oil boom produced by the fracking revolution. Lately what we have seen is that there is now a relative glut of oil and natural gas due to fracking at the same time that we see consumption and demand for those commodities falling (See here and here). As one would expect from both the law of marginal utility and the law of supply and demand, a sudden new supply in an environment of falling demand  leads inevitably to a falling price for oil and natural gas and less of the commodity produced. The present price for those two commodities have fallen roughly 50% and 80% respectively at the present time. With price having fallen so much, it should surprise no one that the oil industry is laying off a lot of people and contributing less to GDP.

In addition quarterly earnings of U.S. companies are generally falling. In fact MarketWatch, a publication of the same company that owns the Wall Street Journal, reports that U,S, corporate profits have fallen 5,9% in the first quarter. They also fell two quarters in a row, the first time that has happened since the middle of the 2007-2009 recession.  Profits had fallen by 1.4% in the fourth quarter of last year. If you look at the actual dollar amounts of profits according to the Commerce department, adjusted profits fell $125.5 billion in the first quarter of this year and $30.4 billion in the fourth quarter of last year, This means (for those readers who know something about calculus) not only is the first derivative of GDP with respect to time bad, but so is the second derivative.

In addition, the U.S. dollar is increasing in value relative to most foreign currencies as foreign central banks try to emulate the “quantitative easing” of the Federal Reserve, just as the Fed has ended its QE program. This means we cannot depend on foreign trade to help us out at the present time.

None of this sad tale should be a surprise to anyone who has taken note of how much the federal government has tried to kick the economy in the gut at every chance it had. On this subject, see here and here. In addition to all this, the Federal Reserve’s monetary policy has been equally destructive, but that is a tale for another day.

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