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Morning Jay: Obama's Big Economic Challenge Remains

6:00 AM, Feb 8, 2012 • By JAY COST
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The correlation between GDP and incomes is extremely tight, greater than 99 percent. GDP and employment is less close, but still comes in at nearly 70 percent. Let’s take a closer look at these three metrics since the economy began its decline in December 2007.

This is why job growth has been so ho-hum. The economy is actually not growing very much, when viewed from a per capita perspective. Ditto incomes, which are actually in negative territory for Obama’s term. This is also why the experts were so surprised by last Friday’s numbers; considering how weak the economy has performed of late, they did not think that such a big jump was in the cards.

What can we expect next?

And they were right to be skeptical about job growth. Listening to the news media, you might be under the impression that economic growth has been accelerating. But that is actually not true at all. The economy is still growing, for sure, but the pace of that growth has actually declined over the last year. 

To appreciate this, let’s take a look at the year-over-year growth rate in real GDP per capita, and its primary components. This will give us a sense of whether the economy is accelerating, decelerating, or maintaining a constant rate of improvement. GDP is comprised of four major components: personal consumption expenditures, government expenditures, fixed investments, and net exports. How have these performed recently? Answer: not great.

This is deceleration, not acceleration, and the slowdown has been centered in the two biggest components – personal consumption and government spending. In fact, the headline number that came out two weeks ago – annualized quarter-over-quarter growth of 2.8 percent – masked substantial weakness underneath the hood. Almost all of the growth in the 4th quarter of 2011 came from businesses stocking up private inventories. As we can see above, the most recent rate on all four of the major sub-components was actually down.

This, then, fills out the big picture: The economy is still growing, but not really enough to soak up the excess capacity in the labor market, at least not at an acceptable rate, it is not growing fast enough to increase real incomes whatsoever, and it has been growing at a steadily decreasing rate since the fourth quarter of 2010.

So while January’s jobs numbers was impressive, to see these numbers sustained for the rest of the year, we are going to have to see acceleration in economic growth. There are substantial challenges standing in the way of that: the slowdown in Europe is going to take a toll on net exports; rising gas prices (expected to hit $4 by Memorial Day) will take a bite out of consumer spending and confidence; and government output will continue to decline. That’s not to say we cannot work beyond these challenges, but it is to say that the growth estimates from most economistsincluding the Fed – were made for a reason, and they simply do not signal robust economic growth, and therefore job growth.

What it all means for Obama.

So, the economy remains a core challenge for the president’s reelection effort. Put simply, it is about weak growth. A good jobs report aside, the projections are for that to continue through 2012. That is something the president will have to overcome.

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