Yesterday we received the first estimates for GDP in Q2 and along with it some major revisions to the numbers for 2012-2014 and Q1 2015 went from a contraction to a bit of growth – very little bit, but still better than a contraction.  Yup, the US GDP numbers keep getting worse!

The financial press was all a twitter with this, but I’ve noticed that in mainstream, there isn’t much useful discussion. I suspect this is because most people haven’t been taught much, if any economics, and the way this material is presented is often less exciting than a symposium on medieval sewing techniques.

So let’s see what these new numbers tell us.  In the 138 years from 1870 to 2008, the US economy expanded by about an average of 3% a year.  After the revisions to GDP data from 2012-2014, we see that the U.S. economy since the financial crisis has been growing an average of 2.0% a year versus the earlier 2.3%.  The difference between 3% and 2% may not sound like much, but think of it this way:

At a 3% growth rate the economy doubles in about 24 years

At a 2% growth rate the economy doubles in about 36 years – 50% MORE time!

The chart below breaks out growth by quarter on an annualized basis.  So we can see that growth rates in the first quarter are typically the lowest, in the second quarter usually strongest, down a bit in the third and then a bit stronger to finish the year in the fourth quarter.

Looking back at data to 1990, the years 1990-2000 were the strongest on average in every quarter and we can see an overall decline in every time frame since then.  Please note I excluded the years 2007-2008 from the data below as the recession was so dire that it makes the data more difficult to interpret.  Most importantly, 2010-2014 was weaker in every quarter except the second and 2015 so far has been the worst yet!

Next we look at Private Consumption Expenditures, which is basically the stuff households buy.

Not looking good either.  That one’s been falling since the 1990-2000 period as well.  This past quarter it looks to have given a better showing, but with all the revisions we’re seeing, I have to say I’m a bit skeptical that this one may be revised downwards later. This isn’t too surprising when you think about the fact that the percentage of the population actually employed is at multi-decade lows as are household income levels. Not many people have a lot left over at the end of the day to buy fun stuff!

As a matter of fact, wages and salaries in the U.S. rose in the second quarter at the slowest pace on record! The 0.2% in Q2 was the smallest since the data began being tracked in 1982 and follows a grim 0.7% increase in Q1.  So much for the headlines touting a healthy labor market – yet one more reason to think the Fed won’t raise rates in September.

This next chart helps to explain the lack of productivity growth as this metric includes things like the construction of new offices and factories, and the purchase of machinery, computers, and any other equipment used to assist labor in the production of goods and services. Business investment counts as gross investment, which includes purchases of machinery to replace worn-out equipment; if a firm replaces one machine with another that does not increase output, then nothing is added to the nation’s economy. You’ll notice that during the 1900s, there was considerable investment in future productive capacity.  Post dot-com investments lagged, but were increased a bit again post financial crisis.  For 2015 investment by businesses has been particularly weak.  You’ve probably seen in the headlines that an unprecedented level of publicly traded firms have chosen to use their cash to buyback shares rather than invest in future growth.  This says a lot about the perception of future opportunities!

Last quarter it looks like businesses sold a lot less stuff than they’d expected, as inventories rose an unusual amount.

In the second quarter, it looks as though expectations were better established, so some of that excessive build up was able to be drawn down. This tells us that spending in the first quarter was much weaker than had been anticipated.  They were not surprised in the second quarter and were even able to draw down a little bit of that excessive built up from the first quarter.

Finally, the strong dollar is definitely having an impact on exports, with last quarter’s drop really hurting GDP.  The negative numbers mean that we are buying more stuff from the rest of the world than selling to it.

Now that we’ve looked at the highlights, talk about what makes an economy grow. After all, most people make their decisions at the polls based on either what or who they think is better economically or socially.

An economy is really just about 2 things: People and the stuff they produce.

An economy grows if

• There are more people making stuff
• The people making stuff can make more stuff
• Or both

So how many people are making stuff today in the U.S.?

What this tells us is that the portion of the population making stuff is a lot less than it used to be. That means that those who do make stuff, earning a living, have a bigger burden for support, which means there is less money left over to invest in the future.

We also have an aging population, meaning a higher percentage of the population is in or about to be in retirement, which also affects how many people can or want to work. Plus, when people are in retirement, they usually spend their savings rather than saving for the future and investing.

Like much of the rest of the developed world, US fertility rates are not quite at replacement rates, meaning that for the population to growth, we need to have immigration. Keep that in mind when you hear the politicians, (or former Reality TV characters) work themselves into a frenzy over immigration.

So how do people make more stuff?

• Better equipment (businesses investment in the tools used)
• Or improved skills (better at what you do)

The third chart from above showed that businesses have been investing less and less in their own future productivity.  Post financial crisis most have chosen to repurchase their own shares in order to improve their EPS (earnings-per-share) numbers rather than invest in future productive capabilities, so we won’t be gaining much ground with this.

The other option is to have improved skills, but the American skill set is a serious problem, which is evident in the employment data but rarely talked about as the reasons behind the problem can get pretty contentious. This problem is visible in the JOLTS Report (Job Openings and Labor Turnover Survey) from the BLS (Bureau of Labor Statistics) which shows that the rate of job openings is reaching a 15 year high, but the percentage of the population employed remains near 30+ year lows. There are jobs available, but companies can’t find the right fit.

According to the NFIB (National Association of Independent Businesses) June 2015 Small Business Optimism Report, 24% of all business owners reported job openings they could not fill in the current period, down 5 points, after reaching the highest level since April 2006 in February – another confirming data point.

Why is this such a problem? First, the housing bubble had entirely too many people develop skills in industries that were going to have a lot less jobs after the crisis. Think about all the construction jobs, mortgage-related and residential housing-related jobs that are not likely to return in our lifetime.

We also have a welfare system that punishes people for getting any kind of job by reducing their benefits by more than their newly earned income, dis-incentivizing those who are receiving aid from ever developing the skills necessary to become self-sufficient.

So there you have it in a not-so-small nutshell.  US growth continues to slow and those factors that could induce better growth in the future are giving us no reason to think things will improve.  Overall businesses are choosing to boost their share prices today through financial engineering (through share buybacks and the like) rather than by investing in future capabilities. This affects the productivity potential for Americans, who are already feeling pretty dour with income levels that have been stagnant for decades and a government that keeps telling them they need more and more help taking care of themselves.

Today there are 136 people receiving some sort of government benefit for every 100 people employed in the private sector.

American confidence is so low that the nation once built upon the sweat of immigrants risking it all for a better life, now sees those same immigrants as a threat. The nation founded on the principles of self-determination now looks to the government, preferring endless false promises of security over risks that were once inspiring, but are now viewed as insurmountable with rewards unobtainable.

America has lost its mojo. The entire world desperately needs her to get it back.