Catching Up to the USA 1990 to 2017

Happy December!

I had so much fun last week with data I decided to do even more this week. This time I have some tables to discuss and they need a little explaining. But first, a little background. The idea today is to shed some light on how much the world has changed in the last 28 years. My data starts in 1990 and looks at changes through 2017. The data come from the International Monetary Fund; it's their measure of real GDP per capita. RGDP per capita is one way to measure changes in the economic welfare of the average person.

This sort of cross-country comparison is not easy. I chose per capita real GDP because it seems closest to the buying power of people in these countries. Country comparisons usually require conversions of non-US currencies to the dollar so all the GDP figures below have been translated to dollars. It is traditional for longer-run comparisons to use an exchange rate called the purchasing power parity value of the exchange rate to the dollar. The IMF used the 2011 PPP value of the dollar for these comparisons. Yes, using PPP is highly debatable but I am sticking with it!

Much has happened in the world since 1990. The Soviet Union imploded, and the Berlin Wall came down. Globalization re-started. Many free trade agreements were consummated. The year 1990 was a time when the USA had a considerable lead on most countries in terms of economic size and competitiveness. Home Alone was the most popular film in 1990, and Windows 3 was released by Microsoft.

Table 1 lists 36 countries I selected to compare with the US. In 1990, real GDP per capita in the USA was nearly $37k. Right behind the USA in 1990 were Germany, Italy, Canada, France, and Japan. Saudi Arabia was ahead of all these countries with a value of $46k. Among those at the bottom in 1990 were two countries freed from the Soviet Union (Lithuania and Latvia) and three Asian countries (China, India, and Vietnam).

Table 2 measures the growth of real GDP per capita of these same countries between 1990 and 2017.  During that time period US per capital GDP increased to almost $54k and grew about 2.5 times. Twenty-two of these countries grew faster than the USA. But three stick out in the list for growing more than the rest, with China growing 10 times between 1990 and 2017. You might say that since the per capita real GDPs of those countries were small in 1990, they had the chance to grow faster and that would be true. But notice that not all of those countries with lower incomes in 1990 grew so fast. Obviously the speed demons had something special going on that helped assist the growth. Latvia and Estonia took advantage of the dissolution of the Soviet Union. Several Asian countries -- especially China, Vietnam, and India -- showed remarkable ability to change and grow.

Table 3 focuses on how fast this group of 24 is closing in on the per capita RGDP of the US. I did a double-take and then some research just to check the top line of Table 3 that shows Ireland's per capita real GDP was $66K in 2017. Ireland's value went from 60% of the US in 1990 to 120% in 2017. Now that is catching up! Where's the Irish whiskey? I am ready to drink to that. No offense intended to JD.

The order of countries in Table 3 is in terms of how much each country caught up to the US. Taiwan is second in the table because it went from 40% to 80% of US per capita RGDP. Countries that closed the gap on the US the most were Ireland, Taiwan, S. Korea, Lithuania, China, Latvia, Poland, Turkey, Vietnam, India and Israel.

Mexico is one of the countries that did not close the gap with the US. Mexico's per capita RGDP was about 30% of the US in 1990 and it remained at 30% in 2017. Canada's values were larger than Mexico's but Canada did not gain on the US either, remaining at about 80% of the US in 2017.

Some countries slid downward. For example, the bottom of the chart is taken by Saudi Arabia whose per capita RGDP was 120% of US in 1990 and fell to 90% in 2017. Other sliders were Italy, Venezuela, Greece, Japan Russia, France, S Africa, Brazil, Haiti, and Germany. Recall, the US grew by 2.5 times in those 28 years. These last countries grew slower than that.

There are many factors that contribute to a country's growth in real purchasing power. Today's blog post does not explain why some countries grew faster than others. But it does show quite a disparity in performance over a 28-year time period. We are not all the same in relative terms as we were when we watched Home Alone in 1990. These differences will reflect the bargaining positions and powers as trade and other relationships are fashioned in the years ahead. Understanding changes in economic power might be useful as we negotiate in the future.

Real GDP Per Capita (Purchasing Power Parity)

Source: IMF: World Economic Outlook Database October 2017

Table 1

Country	1990	2017
Argentina	11,225	18,844
Brazil	10,562	14,127
Canada	31,411	43,875
China	1,515	15,151
Colombia	7,523	13,174
Egypt	6,848	11,842
Estonia (1995)	11,003	28,684
Ethiopia	644	1,926
France	30,421	39,691
Germany	32,067	45,757
Greece	21,442	25,314
Grenada	7,210	13,470
Haiti	2,027	1,650
Hungary	17,015	26,348
India	1,802	6,538
Iran	11,571	18,255
Ireland	21,208	66,196
Israel	20,065	33,037
Italy	30,969	34,606
Japan	30,362	38,878
Korea	11,633	35,897
Latvia (1995)	8,298	24,873
Lithuania (1995)	9,307	29,105
Mexico	12,411	17,753
Poland	10,163	26,658
Puerto Rico	22,286	34,537
Russia	20,801	25,427
Saudi Arabia	45,643	50,365
South Africa	9,899	12,215
Spain	23,662	34,788
Taiwan	15,546	45,412
Turkey	10,834	24,109
UK	27,077	39,755
US	36,999	54,223
Venezuela	14,786	11,290
Vietnam	1,473	6,267
Table 2
Country	1990	2017	Change
China	1,515	15,151	10.0
Vietnam	1,473	6,267	4.3
India	1,802	6,538	3.6
Lithuania (1995)	9,307	29,105	3.1
Ireland	21,208	66,196	3.1
Korea	11,633	35,897	3.1
Latvia (1995)	8,298	24,873	3.0
Ethiopia	644	1,926	3.0
Taiwan	15,546	45,412	2.9
Poland	10,163	26,658	2.6
Estonia (1995)	11,003	28,684	2.6
Turkey	10,834	24,109	2.2
Grenada	7,210	13,470	1.9
Colombia	7,523	13,174	1.8
Egypt	6,848	11,842	1.7
Argentina	11,225	18,844	1.7
Israel	20,065	33,037	1.6
Iran	11,571	18,255	1.6
Puerto Rico	22,286	34,537	1.5
Hungary	17,015	26,348	1.5
Spain	23,662	34,788	1.5
UK	27,077	39,755	1.5
US	36,999	54,223	1.5
Mexico	12,411	17,753	1.4
Germany	32,067	45,757	1.4
Canada	31,411	43,875	1.4
Brazil	10,562	14,127	1.3
France	30,421	39,691	1.3
Japan	30,362	38,878	1.3
South Africa	9,899	12,215	1.2
Russia	20,801	25,427	1.2
Greece	21,442	25,314	1.2
Italy	30,969	34,606	1.1
Saudi Arabia	45,643	50,365	1.1
Haiti	2,027	1,650	0.8
Venezuela	14,786	11,290	0.8
Table 3
Country	1990	2017	Rel to US	Rel to US	Chg Rel
Ireland	21,208	66,196	0.6	1.2	0.65
Taiwan	15,546	45,412	0.4	0.8	0.42
Korea	11,633	35,897	0.3	0.7	0.35
Lithuania (1995)	9,307	29,105	0.3	0.5	0.29
China	1,515	15,151	0.0	0.3	0.24
Latvia (1995)	8,298	24,873	0.2	0.5	0.23
Estonia (1995)	11,003	28,684	0.3	0.5	0.23
Poland	10,163	26,658	0.3	0.5	0.22
Turkey	10,834	24,109	0.3	0.4	0.15
Vietnam	1,473	6,267	0.0	0.1	0.08
India	1,802	6,538	0.0	0.1	0.07
Israel	20,065	33,037	0.5	0.6	0.07
Grenada	7,210	13,470	0.2	0.2	0.05
Argentina	11,225	18,844	0.3	0.3	0.04
Colombia	7,523	13,174	0.2	0.2	0.04
Puerto Rico	22,286	34,537	0.6	0.6	0.03
Egypt	6,848	11,842	0.2	0.2	0.03
Hungary	17,015	26,348	0.5	0.5	0.03
Iran	11,571	18,255	0.3	0.3	0.02
Ethiopia	644	1,926	0.0	0.0	0.02
Spain	23,662	34,788	0.6	0.6	0.00
UK	27,077	39,755	0.7	0.7	0.00
US	36,999	54,223	1.0	1.0	0.00
Mexico	12,411	17,753	0.3	0.3	-0.01
Germany	32,067	45,757	0.9	0.8	-0.02
Haiti	2,027	1,650	0.1	0.0	-0.02
Brazil	10,562	14,127	0.3	0.3	-0.02
Canada	31,411	43,875	0.8	0.8	-0.04
South Africa	9,899	12,215	0.3	0.2	-0.04
France	30,421	39,691	0.8	0.7	-0.09
Russia	20,801	25,427	0.6	0.5	-0.09
Japan	30,362	38,878	0.8	0.7	-0.10
Greece	21,442	25,314	0.6	0.5	-0.11
Venezuela	14,786	11,290	0.4	0.2	-0.19
Italy	30,969	34,606	0.8	0.6	-0.20
Saudi Arabia	45,643	50,365	1.2	0.9	-0.30

It's the Economy, Stupid

What joins us all together is the reality of the economy. If the economy tanks tomorrow, Democrats and Republicans will lose jobs or find their incomes rising less than hoped. If inflation roars back, we will all complain about the higher prices we have to pay.

While Ds and Rs have their preferred recommendations for economic policy, what will matter most is not who is right but whether or not we attend to real economic problems and make improvements in our lives.

So rather than dwell on policies and policy debates, I thought it wouldn’t hurt to lay out where the health of the economy sits right now. This amounts to a description of economic challenges, or you might say for those of you on post-New Year diets, this amounts to the before-diet picture.

Dieters want the post-diet photo to show major beautiful changes relative to the before-diet photo. So where you begin is very important. But even where you begin is not completely objective when it comes to the economy. And some people might think that any description of the economy right now is tainted with politics. An Obama supporter might disagree with any remarks that show a weak economy. The Republican would bristle at the idea that the economy might look strong right now.

Furthermore the economy is pretty complicated and dynamic. Anyone who attempts to describe the current economy might be leaving something out – or might be too focused on the latest data rather than more enduring trends. I readily admit that this is no easy task. And no matter how hard I try it won’t be perfect.

But it ought to be done and those who disagree with some of the conclusions below are free to ignore them or to add their own comments.

The place to start is with the growth of national output – or what we call real GDP. Most people would agree that it is not growing as fast as it used to. While there have been some quarters of decent growth in the past eight years, the overall trend is modest. We grew at a faster pace during most of the 1990s and right before the great recession of 2008-09.

Associated with that growth has been enough employment growth to push the unemployment rate down to levels close to what we describe as “full employment.”

Despite this increase in employed persons, we also have high levels of people who have been unemployed for more than 15 weeks, high levels of people who want full-time jobs, many folks who took jobs beneath their skills, and finally a lot of people who simply quit looking for jobs.

Despite an increase in the demand by employers, many workers lack the specific skills being demanded and thus shortages of workers exist side-by-side with surpluses of workers. The net result is that wage gains are lacking, and we talk about labor market mismatches.

Looking deeper at the modest real GDP growth we find one sector particularly lacking. Consumers are pulling their own weight through spending on housing and autos purchases. But the spending by firms on plant, equipment, and software has been in the doldrums. This has two key impacts. First, near-term growth lacks punch and second, new investments by firms have not raised productivity of workers and have harmed international competitiveness of companies. This means we get slower growth today and tomorrow, and we threaten future wage growth and our ability to compete with foreign companies.

Exports of goods and services have slowed for many reasons but primarily because many of our trading partners have not recovered or remain in recessions after the global recession. These foreign purchasers are not buying goods and services at home – and they are not buying from us.  

Interest rates and the value of the dollar have been rising. This is no surprise mostly because of the relative strength of the US economy. If interest rates rise appreciably more this could dampen investment spending further; if the dollar continues strengthening this might jeopardize exports.

Lackluster economic growth has also impacted poverty. The official US poverty rate in 2015 fell to 13.5% of the population – down from 14.8% in 2014 but is still higher than in 2007 (12.5%) and 2000 (11.3%).

Debt is also of concern. The Federal government’s debt threatens to reach more than 100% of the economy. Student debt has reached new peaks with little sign of abatement or payment. Similarly, mortgage debt is getting bigger and riskier.

This “photo” of the US economy today is where we have come to in early 2017. Is it complete? I doubt it. Does it foretell a disastrous future? I don’t think so. Is it where we want it to be? I don’t think so.

But I do think it wouldn’t hurt to have this story in the back of our minds as we contemplate and debate remedial actions in the days ahead. No matter what other issues we try to solve, we should at least not make these economic trends worse. I don’t care to place blame or praise for today’s economy. I just want us to make it better. 

Joe Friday: Just the Facts M'am

As we come closer to Election Day in the USA we will hear and read a lot of things about the US economy. The blue team will brag about their victories over incomes, employment, and poverty. The red team will say the economy plods and weaves like a drunk on Kirkwood Avenue at 2 am. As you know I love data and so I decided to play around with some familiar information. It is impossible to summarize all economic data in a small space so I decided to focus on recent changes in real GDP and its components.

I stick to the facts today. I think the facts tell a clear story about slowing economic growth and one that deserves a policy discussion. But that discussion will have to wait. I already used up today's word count. 

GDP is a measure of the nation’s output of goods and services. Real GDP means that we are measuring output in constant prices –meaning that price change is not part of the change in real GDP. If real GDP increases it is totally because output or quantity produced changed. We like to analyze output because it usually has a strong association with things like employment, incomes, and sales of Jack Daniels.

GDP is output. It does not tell you about financial wealth. Of course if we are wealthier we often buy more goods and services but GDP does not directly measure wealth. It does not measure poverty and it does not measure distribution of income.

I wanted to examine near-term changes in real GDP so I did the following. For real GDP and each of its major components I looked at the annualized* percentage change over the past two quarters, past four quarters, and past eight quarters. By doing that I could get an idea as to whether things are improving, worsening, or staying the same.

For example, in the past two quarters real GDP grew by an annualized 1%. That was slower than the 1.2% it grew over the last four quarters and was less than half of the 2.1% annualized rate it grew in the last two years. These calculations suggest that things are clearly worsening. In 2016 the US economy is growing considerably slower than in the past year or two. And by the way – even the 2.1% rate two-year rate is not a strong growth rate for the USA.

Rather than speculate on a lot of causes of this slowdown, I decided to focus today on the components of real GDP. Recall that the Product Account approach to measuring real GDP focuses on the buyers of the output. The standard approach sees four buyers of US produced goods and services – domestic consumers, business firms, (federal, state, and local) governments, and foreign buyers. If real GDP is slowing it is because one or more of these buyers have slowed their purchases of US goods and services.

So I looked at consumers first. Households spent an annualized 4.5% more than two quarters ago on goods and services. Compared to the 1% overall GDP growth number for the past half-year, that’s a very strong rate. Way to go consumers! But even consumer spending has been slowing. Over the past two years it grew by an annualized 6.2%; it grew by 4.8% over the past year; and then 4.5% over the past half year.

Consumers desire for newly-built residences also flamed out. What we call Residential Construction declined by -0.2% in the past two quarters. Residential Construction grew by 5.7% in the past four quarters; by 8.5% over the past two years.

What about business spending? Business firms buy newly produced structures, equipment, and intellectual property. Here the news is ugly. Equipment spending was down by almost -7% in the last two quarters. That was a major decline from the -1.9% in the last year and the 0.7% annual rate of the past two years. Buying of new plant and other business structures shows a slightly different but dismal pattern of contraction. For example, spending on Structures was down by an annualized -4.3% in the past half year; -7.1% in four quarters; down -5.2% annualized in the past eight quarters.  The only positive story for business spending was for intellectual property purchases – growing at about 5% over the past two years.

If you like numbers instead of growth rates – business spending was up by about $30 billion dollars since the second quarter of 2014. During that same time period personal consumer spending was up $674 billion. Business spending on plant and equipment is the main way we expand both productivity and productive capacity. 

US exports are goods and services we sell to foreigners. The story there is not encouraging and falls in line with a slowdown theme -- declining by -0.2%/-1.3% in the last two/one years respectively. Exports leveled with 0.2% growth in the two past quarters.  

Let’s turn to some of the government buying numbers**. There is nothing particularly interesting coming out of federal versus state and local government spending. All government spending has slowed in the past year and past six months. More interesting is the breakdown of federal spending between defense and non-defense. In the past 6 months, defense spending slowed by -3.1% after contracting by -0.8% in the past year and by -1.5% in the past two years. Non-defense spending, in sharp contrast, grew by 2.3% over the past six months; 2.9% over the past year, and 3.3% annualized in the past two years.

I know there are a lot of things to discuss with respect to the economy and national policy. But the recent real GDP figures are very clear.

·       The economy is slowing.

·       The strongest growth sectors have been household spending on goods, services, and houses, – though even that strong growth is declining over the past two years.

·       Also contributing to positive economic growth was non-defense federal government spending on goods and services.

·       The weakest sectors showing significant contractions are business spending on plant and equipment and defense spending.

*All the figures in this post have been annualized. Whenever you compare different time periods you need to find a way to make them comparable. By annualizing, for example a half-year change, you are calculating how much real GDP would have grown in four quarters if it continued at the same pace as over the two quarters. When you annualize a two year change – you are showing how much it grew, on average, per year. 

** The government figures quoted here reflect only government purchases of goods and services. Much of what the government spends is for transfers and net interest. That information is found in the government budgeting figures but are not a direct part of the components of GDP. 

The Common Cold or Economic Anemia?

Peter has had a cold for nine consecutive weeks. He is running out of Kleenex and good cheer. That’s a long time to have a cold. Peter looked back at his precise records. In the last 67 years he has had 10 colds. The longest one lasted three weeks. Most of them lasted only one week. Nine weeks? Maybe it isn’t a cold! Maybe Peter should be worried.

In similar fashion, Real GDP in the USA has grown by less than 2.5% for nine years running (if we count 2015 which is not over yet). This “economic cold” has lasted since 2007 just before the recession turned real GDP change negative. We have been blowing our collective economic nose every year since. Below are the annual real GDP growth figures (percentage change from the year before):

            2007  1.8%

            2008 -0.3%

            2009 -2.8%

            2010  2.5%

            2011  1.6%

            2012  2.2%

            2013  1.5%

            2014  2.4%

            2015  2.0% (based on 3 quarters)

If this was your kid’s GPAs for each term at Harvard, you might call the Dean and ask what is going on when your brilliant kid has such a mediocre record. The US economy is capable and expected to do much better. For example, the average annual growth rate of real GDP since the end of WWII is about 3.2%. Before the recession started between 1990 and 2006 – the average was 3% per year.  3% is an average of many years  -- during the past we have had recessions followed by strong growth periods many times. The average is not the best we can do. It is what one might call normal.

So I chose 2.5% for my analysis this week because it is clearly below normal. It might be a good rate for Germany or France of Japan – but it is not good for the USA. Nine consecutive quarters below 2.5% growth probably indicates that something is wrong – and that something is not the common cold or an allergy attack.

When you look at my table above – forget the two recession years when real GDP fell. Look instead at the years when we might have had a rapid recovery (with rates well above 3%) and then a sustainable growth phase. We had neither. In those 6 years the best we could do was 2.5% (in 2010). Look at the pattern – a little above 2% one year followed by a little below 2% the next. Those 6 post-recession years average to about 2% per year.

Our politicians seem to agree that this is not acceptable economic performance. But what galls me is that they are not really very serious about doing anything. When is the last time you saw Hillary or Bernie or any of the 92 Republicans shouting about the need to increase economic growth. While they will each say that growth is important, the energy behind a growth remedy is surely lacking compared to the many hot button issues that generate a lot of heat and light (abortion, gays, healthcare, income distribution, immigration, and so on).

This is crazy stuff because if you get higher growth – we take care of some of these problems anyway. Consider if we had grown in the last six years by 3% per year instead of 2% per year. That means real GDP would have grown to $17.3 trillion in 2015 instead of to $16.3 trillion (it was $14.4 trillion in 2009). Just having average growth in the US economy after the recession would have netted us an extra $1 trillion in income. That equates to about $3000 per person. I won't calculate the number of extra jobs but that number would be considerable too. 

Or put another way, this means that whatever is wrong with the US economy since 2009 is robbing the average family of four of about $12,000 each year. Is that not enough to get someone’s attention? 

Government dis-function is the culprit here. The pundits tell us each night that voters are mad as hell at failure in Washington. This trillion dollars of wasted energy explains why they ought to be angry. If candidate X really wants to stand out from the crowd -- he or she might run on a platform of giving them their jobs and a trillion dollars back. Democrats and Republicans approach growth from very different platforms and ideologies. That's okay with me. But let's at least make growth the heart of the debate. Let's at least have a debate. What is causing less-than average growth? How can we address those causes? This is not quantum physics folks.