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A Statistical Review of

Current Economic Conditions

in the U.S. (October 2012)

The Performance of the U.S. Economy

in the Third Quarter of 2012

The Bureau of Economic Analysis of the U.S. Department of Commerce released its first estimate of the Gross Domestic Product (GDP) of the U.S. for the third quarter of 2012. According to those estimates the U.S. grew in real terms by $67.7 billion in the third quarter of 2012 over its second quarter level. Both GDP's are measured in 2005 prices. This is a rate of increase of 0.5 of 1% per quarter compared to the 0.3 of 1% it grew in the second quarter over its level in the first quarter. If those rates of growth continued for a full year the rates would be 1.3% and 2.0%, respectively. The Obama Administration took heart in this seeming improvement in the economy. An examination of where this seeming improvement came from indicates that there is no basis for considering the economy as improving.

Here are the statistics for the changes in the second and third quarters over their previous quarters.

The Quarterly Changes in the Components of

National Demand and Production Component Change from

2012I to 2012II

Billions $2005 Change from

2012II to 2012III

Billions $2005 Gross domestic product 42.1 67.7 Personal consumption

expenditures 35.7 47.8 Goods 2.8 36.5 Durable goods -0.8 27.6 Nondurable goods 3.1 12.6 Services 32.3 12.7 Gross private

domestic investment 3.3 2.5 Fixed investment 20 7 Nonresidential 12.9 -4.7 Structures 0.5 -3.9 Equipment and software 13.2 0 Residential 7.2 12.3 Change in private inventories -15.5 -7.3 Net exports of goods and services 8.1 -6.3 Exports 23.4 -7.5 Goods 22 -11.6 Services 1.5 4 Imports 15.4 -1.3 Goods 13.1 -6.3 Services 2.2 5.2 Government

Purchases -4.3 22.4 Federal -0.6 23.7 National defense -0.3 21.1 Nondefense -0.3 2.5 State and local -3.7 -0.4 Residual -1.8 -3

The big increase came in U.S. Federal Government purchases for national defense. Here is the graph of the time series for such expenditures.

The above table shows that private domestic investment is generally not doing well. One crucial factor for the economy is the investment by businesses in plant and equipment. This is included in the above table as structures and equipment and software.

This crucial element of demand for U.S. output is apparently headed toward a peak and thereafter will decline.

Another component of investment demand is the investment in inventory. If this figure is negative it means that businesses are selling off inventory and not replacing it. As the graph below shows this is a component of demand which is collapsing.

Another key item of demand for U.S. output is exports. Here is the time series on changes in export demand.

The table previously shown had a large increase for consumer expenditures for durable goods. This is not unusual. As the graph below shows consumer demand for durable goods typically has a substantial quarterly increase.

The increases for recent quarters have been substantial but notably lower than the increases in 2010. It is also interesting to note that according to the Bureau of Economic Analysis,

Real disposable income decreased less than 0.1 percent in September,

compared with a decrease of 0.3 percent in August.

Thus, if there had not been an extraordinary increase in Federal Defense spending, the perception of the economy would have been one of collapse; a collapse in investment in plant and equipment, a collapse of inventory investment and a collapse in export demand for U.S. products.

The Supposed Resurgence of the

American Economy

On July 27th of 2012 the Bureau of Economic Analysis released its advance estimate of the national income statistics for the second quarter of 2012. It also released revised estimates for those statistics for 2009 up to 2012. According to the advance estimates the U.S. economy grew in real terms at an annual rate of 1.5 percent in the second quarter. This is down from 2.0 percent for the first quarter.

Here is the graphical record of quarterly growth rates in real GDP from 2010 to 2012.

The Limits to the Accuracy of the Data

The advance estimate for the GDP in the second quarter of 2012 is 13,558 billion in 2005 value dollars. The actual amount produced in the second quarter is one fourth of that amount; i.e., $3,389.5 billion. The corresponding figure for the GDP in the first quarter is $3376.6 billion. The difference is $12.9 billion. This is a large quantity for an individual or a company but not for the U.S. economy. It is less than 0.4 of 1 percent of the GDP.

For a figure that small the matter of the confidence range for the estimates of GDP becomes important. Let us say the confidendence range is such that there is a 95 percent probability that it lies Suppose the GDP are accurate to ±1 percent. That would be ±$34 billion. The difference of two figures both accurate to ±$34 billion is accurate to ±√2*34 billion, which is ±$48 billion. This would mean that a difference of $12.9 billion is not statistically different from zero.

Sources of Growth

However, the important items are the decreases in the rate of growth in the last two quarters. To explain this decline it is necessary to look at the components of demand. These are shown below.

National Income Accounts

(Billions of 2005 value dollars) Component 2011q4

less 2011q3 2012q1

less 2011q4 2012q2

less 2012q1 Gross domestic product 134.10 51.60 65.40 Personal consumption expenditures 47.40 35.20 57.50 Goods 44.40 6.20 38.70 Durable goods 41.50 -3.30 36.00 Nondurable goods 9.10 8.00 8.40 Services 4.90 28.60 19.90 Gross private domestic investment 131.50 38.90 27.80 Fixed investment 41.90 27.40 41.90 Nonresidential 32.40 19.30 26.30 Structures 9.10 0.80 10.40 Equipment and software 23.30 19.70 14.80 Residential 9.40 8.30 16.10 Change in private inventories 74.80 9.40 -13.60 Net exports of goods and services -20.10 -8.80 2.50 Exports 6.40 23.70 19.40 Goods 18.50 19.00 12.70 Services -12.20 4.80 6.70 Imports 26.50 32.60 16.90 Goods 27.90 27.40 9.10 Services -1.60 5.10 8.10 Government consumption expenditures and gross investment -13.90 -8.90 -19.00 Federal -11.70 -0.90 -11.10 National defense -19.70 -0.60 -12.50 Nondefense 8.20 -0.30 1.50 State and local -2.60 -7.90 -8.00 Residual -3.90 -2.40 -9.80

Components of Aggregate Expenditures

(Billions of 2005 value dollars) Third

Quarter

2011 Fourth

Quarter

2011 Change Gross domestic product 13331.6 13429.9 Personal consumption

expenditures 9433.5 9483.7 Gross private domestic

investment 1784.2 1869.6 85.4 Exports 1785.2 1803.9 18.7 Government consumption

expenditures and gross

investment 2507.6 2479.8 Statistical

Discrepancy

(Residual) -27.7 -35.7 Total Expenditures 15510.5 15637 Imports 2187.9 2208.4 20.5 Demand for

Domestic Output 13322.6 13428.6 106.0

Components of Aggregate Expenditures

(Billions of 2005 value dollars) Fourth

Quarter

2011 First

Quarter

2012 Change Gross domestic product 13429.9 13,502.4 73.4 Personal consumption

expenditures 9,482.1 9,550.2 68.1 Gross private domestic

investment 1,875.7 1,903.0 27.3 Exports 1,797.0 1,820.7 23.7 Government consumption

expenditures and gross

investment 2,481.20 2,462.2 -19.0 Statistical

Discrepancy

(Residual) -35.7 -49.1 -11.7 Total Expenditures 15636.0 15736.1 100.1 Imports 2,207.7 2,230.9 23.2 Demand for

Domestic Output 13428.63 13505.2 76.9

These figures show that the largest component of the increase from the third quarter of 2011 to the fourth quarter was in private investment with consumer expenditures coming in second. For the increase from the fourth quarter of 2011 to the first quarter of 2012 the largest increase was in consumer expenditures with private investment being second. It is worthwhile to look at the record of the quarterly growth rates for these two components of demand.

What is seen is that the increase in consumption is not unusual but the increase in investment expenditures is quite surprising. There had been essentially no growth in investment expenditures in the third quarter and then suddenly the growth rate of this component jumps to 19 percent. Previous to the second quarter the growth rate of investment expenditures had been declining.

The sources of this surprising growth in investment demand bear looking into.

Components of Real Private Investment Expenditures

in the Third and Fourth Quarters of 2011

(Billions of 2005 value dollars) Third

Quarter Fourth

Quarter Change Structures 332.9 330.7 -2.2 Equipment and software 1,145.70 1,159.30 13.60 Residential 325.4 334.4 9.0 Change in private

inventories -2.0 54.3 56.3 Total of

Components 1802.0 1878.7 76.7 Private

Investment 1784.2 1869.6 85.4 Statistical

Discrepancy −17.8 −9.1 8.7

Thus the overwhelming proportion, 73.4%, of the increase in private investment expenditures came from the businesses building up their inventories. These are the same organizations which in the third quarter were selling off $2 billion more of inventory than they were replacing.

Components of Real Private Investment Expenditures

in the Fourth Quarter of 2011

and the First Quarter of 2012

(Billions of 2005 value dollars) Fourth

Quarter

2011 First

Quarter

2012 Change Structures 332.1 321.7 -0.5 Equipment and software 1,166.6 1,171.5 4.9 Residential 334.5 349.4 14.9 Change in private

inventories 52.2 69.5 17.3 Total of

Components 1878.7 1912.1 33.4 Private

Investment 1,875.7 1,903.0 27.3 Statistical

Discrepancy −3.0 −9.1 < −6.1

The most notable feature of the figures for the first quarter of 2012 is the very level of investment in inventories. One would think that businesses were experiencing significant increases in sales and were stocking up on the expectation of future further increases in sales. This proposition can be examined by looking at GDP with the inventory investment deducted. This quantity could be considered the level of final sales for the economy. The growth rates in this quantity are shown in the graph below.

The rate of about 1.5 percent in the last two quarters do not seem to be justification for businesses to be suddenly increasing their stocks of goods. The rate of increase in final sales were higher last year without sparking a flurry of inventory investment.

Components and Totals in the Real Value Statistics

of the Bureau of Economic Analysis

At this point it is necessary to note that in the real value statistics a figure for a total is not generally equal to the strict sum of its components. The current value dollar levels of the components of a quantity such as GDP are first estimated. For those values the sum of the components is equal to the total. The constant price level value of a quantity is estimated by applying a price index adjustment to its current dollar value. The price index adjustment is applied to the total and separately to the components. In this procedure there is no guarantee that the sum of the adjusted components will be equal to the adjusted total. Generally the sum and the total are not equal and statistical discrepancy is reported which is the difference between the total and the sum of the components.

The Sources of the Supposed Resurgence in Economic Growth

The above note indicates that one cannot say precisely how much of an increase in a total comes from each component. However it is clear that most of the net increase in real GDP between the third and fourth quarters of 2011 came from an increase in real private investment and most of this came from increases in inventory investment.

An increase in consumers' expenditures was also important and a review of what happened to the components is of interest.

Components of Real Consumption Expenditures

in the Third and Fourth Quarters of 2011

(Billions of 2005 value dollars) Third

Quarter

2011 Fourth

Quarter

2011 Change Durable goods 1,277.8 1,324.1 46.3 Nondurable goods 2,073.7 2,075.7 2.0 Services 6,096.1 6,107.4 11.3 Total 9447.6 9507.2 59.6 Consumption 9,433.50 9,483.7 50.2 Statistical Discrepancy -14.1 -23.5 -9.4

The most notable feature of the above is that most of the increase came from increases in the purchases of durable goods, an investment on the part of consumers. It is notable that consumers did not choose to increase their purchases of nondurable goods or services to any great extent increased their purchases of durable goods to such a large extent. It is also notable that a statistical discrepancy of about one fifth of the change in consumption makes it inappropriate to say precisely how much came from each of the components.

The graph of the growth rates of the components of consumers' expenditures reveals that indeed the level of consumers' purchases of durable goods is volatile.

The changes for the first quarter of 2012 show a similar pattern to that of the fourth quarter of 2011.

Components of Real Consumption Expenditures

in the Fourth Quarter of 2011

and the First Quarter of 2012 (Billions of 2005 value dollars) Fourth

Quarter

2011 First

Quarter

2012 Change Durable goods 1,326.5 1,374.5 48.0 Nondurable goods 2,077.6 2,088.5 10.9 Services 6,102.1 6,120.6 18.5 Total 9507.2 9583.6 76.4 Consumption 9,482.1 9,550.2 68.1 Statistical Discrepancy -23.5 −33.4 -9.9

Again there is a large increase in consumer durable purchases. It is 3.6 percent at an annual rate. This is exactly the same rate of increase that occurred between 2011q3 and 2011q4. One would think that consumers were experiencing a significant increase in disposable income. Such was not the case as is seen in the graph of the growth rates in disposable income in 2005 value dollars.

In fact on a percapital basis real disposable income went down in 2012q1.

If the Resurgence is Real Where Might It Have Come From?

If we accept the estimates of the BEA then we must ask what events prompted businesses that were decreasing their inventories to suddenly start increasing them by over $50 billion. Have the Obama and his 31 commissars (a.k.a. czars) inspired businesses with confidence? Take for an example the demand of Obama that Congress pass legislation involving nearly $500 billion to build infrastructure without specifying how it was to be financed. Economists pointed out that if it was to be paid for by increased taxes on consumers that the program would not likely produce much in the way of a net increase in employment but instead a transfer from employment in consumer goods industries to the construction trades. The construction trades are more heavily unionized than other industries so the program Obama was calling for appeared to be more in nature of a payoff to organized labor for its support of him than a net benefit to workers in general. Clearly policies such as that one do not inspire confidence among business leaders.

If the resurgence of the economy is real then the most likely source of the improve optimism on the part of businesses is the onset of the political campaigns for the 2012 election and the prospect that Obama will be replaced in the presidency. Thus if he is re-elected and even perceived to be on his way to reelection then the optimism on the part of businesses will disappear and the U.S. economy will once again fall into recession.

The bottom line is that the supposed resurgence of the American economy in the second half of 2011 is incredible largely in the sense that it is not credible. But if there is a resurgence it is no vindication of the policies of the Obama administration. Instead it would most likely come from a perceived end to it.

The investment in plant and equipment by businesses started to drop precipitously in the fourth quarter of 2008. This is what produced the recession of 2009. This investment continued to drop during 2009. This drop reflected declining business confidence about the future of the economy. By the fourth quarter of 2009 business investment in plant and equipment was down to $1278.3 billion ($2005). The peak of such investment was the $1603.7 billion achieved in the first quarter of 2008. In 2010 the investment in plant and equipment increased. By the fourth quarter of 2010 this investment was back up to $1403.1 billion. It is notable however that the increase from the third to the fourth quarter was only $25.9 billion compared to the $32.7 billion increase from the second to the third quarter. For the first quarter of 2011 that increase fell to $7.0 billion on an annual basis and in the second quarter of 2011 it rose by $32.8 billion.

What the Administration has failed to recognize and accept is that business investment is sensitive to uncertainty. When the Administration takes some step intended to encourage investment the fact that that step creates worry about what the next step will be can offset the positive effect of the step itself.

Below are given the economic changes that occurred in the four quarters of 2010 and the first quarter of 2011.

The Quarter-to-Quarter Changes in the

Components of Real GDP in 2010 and 2011

(Billions of $2005) Component 1st Q

to 2nd 2nd Q

to 3rd 3rd Q

to 4th 4th Q

to 1st 1st Q

to 2nd GDP 58.1 82.5 104.1 60.2 32.6 Consumption 49.7 64.6 100.6 50.6 10.0 Durables 18.9 20.8 78.9 26.7 −16.6 Nondurables 9.9 9.0 59.2 5.5 2.1 Services 23.8 37.1 25.0 22.5 20.6 Investment 101.3 53.2 −114.8 51.8 28.8 Residential

Structures 19.4 −27.0 2.7 -2.7 2.7 Nonresidential

Structures −0.4 −4.7 0.7 -14.5 11.4 Equipment

& Software 56.3 41.3 15.3 30.7 20.7 Inventory 24.7 52.6 −105.2 36.0 101.4 Net Exports −110.6 −57.7 44.5 −0.8 3.1 Exports 35.7 25.4 35.6 40.3 13.2 Imports 146.3 83.1 28.3 38.8 10.1 Government 24.7 25.2 −3.8 −33.8 −5.5 Federal 23.1 23.0 −0.4 −22.3 12.0 State & Local 2.3 2.9 −3.3 −11.9 −6.9 Residual −11.3 −4.5 −19.5 −9.0 2.4

The changes in 2010 were changes involving recovery but at a moderate rate. The change for the first two quarters of 2011 was a slowing of the recovery.

Even if the output recession has ended the unemployment rate will continue at its current high rate and may well increase.

The total change for a component of the real values cannot be derived by adding up the changes in the subcomponents because of the methodology used by the BEA. The real values for the components are separately computed using the current value figures and separate price indices. The BEA explicitly warns that the totals of the subcomponents will not necessary equal the value for the component.

Despite the fact that the changes in the subcomponents cannot be exactly related to the change in the component one can still see generally where the major part of the change in real GDP comes from.

Consumers' purchases in 2010 increased in all general categories; durables goods, nondurable goods and services. The level of personal disposable income in the fourth quarter of 2009 was $11,028.7 billion in current value dollars. In the first quarter of 2010 this had increased to $11,070.4 billion. This is an increase of 0.38 of 1 percent. The consumer price index for February of 2010 increased by 0.34 of 1 percent over its value in November of 2009. This means that real disposable income was roughly unchanged in the first quarter of 2010 over the fourth quarter of 2009. So consumers were increasing their real purchases at a rate of 3.6 percent per year out of a 0 percent increase in real disposable income.

A quick review of the current state of economy is in order at this point.

A macroeconomic review of the economy should start with real Gross Domestic Product. This is the output of final goods and services produced with the U.S. valued in the year 2005 prices. The quarterly figures are seasonally adjusted.

The picture was remarkably smooth until the downturn in 2008IV. The variations in the growth rate from quarter to quarter are barely perceptible until the decline for 2008IV. The variations are there however, as shown in the graph for quarter-to-quarter growth rates which was shown previously.

There was an identifiable source for the slowing down of the economy which is revealed below. If any macroeconomic problem is developing it should show up among the various components of aggregate demand.

Barely noticeable until 2008III is a downward trend in gross domestic investment purchases, shown in red in the above graph. Almost always if there is a macroeconomic problem it is manifested in a decline in investment purchases. Therefore the levels of investment need a closer look.

The problem is clearly the decline in residential construction investment. This is not just a recent development. Residential construction investment has been declining since the last quarter of 2005. There was also a problem with the decline in inventory investment culminating with a net sell-off of inventory in the last quarter of 2007. Net inventory investment goes through some radical fluctuations. During 2006 the upward fluctuations in inventory investment offset some of the decline in residential construction. In 2007 the downturn in inventory investment coincided with the continuing decline in residential construction.

In previous recessions the source of the problem was a decline in the investment in plant and equipment. In the 2009 recession the level of business investment in plant and equipment, shown in the graph as Equipment & Software and Nonresidential Structures, was not declining up until 2008III. It declined only after a barrage of pronouncements that the economy was in a recession and that it was going to be a long one and hence any company that continued to increase its productive capacity would be foolish. Thus the crisis in the financial markets due to the effective bankruptcy of Fannie Mae and Freddie Mac in September of 2008 induced fear in businesses that any increase in their productive capacities would be wasted. The decline in the production and purchases of automobiles and residential housing supported that fear.

It is notable that the price level declined in the fourth quarter of 2008 by about 1.0 percent or 4.1 percent on an annual basis. This raised the real rate of interest by about 4.5 percent. This means that despite the nominal rate of interest being low the real rate increased significantly. This could account for some of the decline in investment in plant and equipment, but the price deflation was probably an effect of the output recession rather than a cause of it.

Whereas between 2008II and 2009II real GDP ($2005) declined by 3.83 percent, investment in plant and equipment declined by 19.7 percent. The selling off of inventory and not replacing it (negative inventory investment) increased by $123.1 billion ($2005) over this period. This $123.1 billion decline in inventory investment along with the $569.8 billion ($2005) decrease in investment in plant and equipment accounts for 135 percent of the $513.8 billion ($2005) decline in GDP over that period.

The investment in residential structures has been steadily declining since 2006I. The problems of this sector are separate from the recent recession. However this continued decline contributes to the decline in demand for U.S. output.

The decrease in investment in residential housing over the period was $118.5 billion. This amount along with the declines in investment in plant, equipment and inventory accounted for 158 percent of the decrease in real GDP in the recession. There were other declines, such as $162 billion in consumer purchases, and some positive influences, such as an increase in net exports of $145.6 billion. (This was an increase from −$476.0 billion to −$330.4 billion.) Government purchases increased by $61.7 billion ($2005). The point is that the real economic problem is in private investment.

The one-shot gimmicks to increase demand will be accepted gladly by business but they will not encourage businesses to investment in increased capacity. Businesses realize that the temporary stimuli will not be there in the future. They may only help them sell off existing inventory. The only measures that have a chance of encouraging businesses to replace inventory and increase productive capacity are the ones which are permanent.

In the past there were decreases in investment in plant and equipment which led to recessions and the recessions were then declared. In 2008 a recession was declared and as a result of the financial chaos of September 2008 businesses accepted this declaration and began to reduce their investment in plant and equipment and sell off inventory without replacing it. Now it is necessary to unconvince businesses of there being a recession which will continue for the foreseeable future. As pointed out above the reduced value of investment in plant, equipment and structures along with the disinvestment in inventory was enough in themselves to keep the economy in serious recession.

There is a persistent worry among politicians and the general public about international trade. In particular the general public interprets the decrease in the value of the U.S. dollar with respect to other currencies as evidence of a deterioration in the U.S. economy. On the contrary the decreased value of the dollar has reduced the U.S. balance of trade deficit. Countries often devalue their currencies to stimulate their economies. China has maintained about a 400 percent undervaluation of its currency to ensure that no one in the world will be able to underprice its products.

The recent past the level of U.S. imports has exceeded its exports by about a half trillion dollars per year but since the third quarter of 2006 this deficit has been declining. The figure for 2009II indicates a decrease in the trade deficit of 55 percent compared its value in 2006I.

The levels of purchases by the Federal and the State & Local governments after having continued what seemed to be an inexorable rise declined slightly in 2009 and remained level in 2010. This was largely in purchases by state and local governments, probably due to a decline in their tax revenues. Federal defense expenditures also declined slightly, due to factors unrelated to the recession.

Consumer purchases also tended to have a steady, regular rise, until after the financial crisis of September of 2008. However, as shown below, consumer purchases of durable goods, nondurable goods and services went up slightly in 2009 up slightly in 2010.

It is very significant that the decline in demand for U.S. production is was primarily in private investment.

It must be noted that these statistics, although stated in dollar amounts, reflect the volume of consumer purchases rather than the actual expenditures on the items. There is a general concern about particular items such as gasoline. The following is a graph of the nondurable purchases shows, among other things, that purchases of energy products such as gasoline and fuel oil have been declining in recent quarters, due to higher prices, but in 2008IV and 2009I went up slightly, due to lower prices.

Generally consumer nondurable purchases, in real terms, went up in 2009I, back down in 2009II and then up in 2009III and thereafter.

Consumer durable purchases generally have been increasing but there was a significant decline in the fourth quarter of 2005 and a downward trend in 2007 which continued through the third quarter of 2008. This downward trend is primarily due to the decline in motor vehicle purchases but there has also been a slight decline the purchase of household equipment such as television sets, furniture and electronic devices but this decline was only from 2008II to 2008III, after the impact of the 2008 tax rebate was felt in the second quarter. The impact of the tax rebate will be considered in more detail later. However there was an upturn in durable goods purchases in 2009I, even in motor vehicle purchases.

This points up the fact that the current recession is now based up on the decline in businesses investment purchases which was brought about by the public promotion of pessimism about the future of the economy.

The purchase of services now involves a greater dollar amount than the purchases of durable and nondurable goods combined. The trends in the levels of some services are of special interest. Note once again that the trends are in the quantities rather than the levels of expenditures.

The nature of housing services requires some explanation. Housing services includes the expenditures for rent but also an imputed value for the owner occupied housing.

The amount of medical services consumed continues to increase at an extraordinary rate. The graph displays the trend in the quantity of medical services. This apparent trend in the quantity of medical services provided may reflect a finer and finer division of the billing of medical services. In the past medical diagnostic procedures were performed and interpreted in one office visit; now there is one office visit for the procedure and a second one to get the interpretation of the results. This would show up as a spurious increase in medical services provided. Also the trend in the cost of medical services is not shown in the above graph.

It is notable that Americans spend about one hundred and forty percent more on medical services than on food purchases and about one fourteen percent more than on housing. Clearly something is amiss in the matter of medical care in America and the public subsidy of medical care is not solving the problem but instead making it worse.

Around 1900 America allowed the medical profession to create a cartel arrangement in which the production of doctors was artificially restricted. Medical schools were bullied with a threat of the loss of their accreditation into cutting their admissions to a fraction of what they had been. The reduced supply of doctors resulted in substantially increased income for doctors. However even though the medical profession created the opportunity for economic rents those rents did not entirely stay with the doctors. Medical schools increased the prices of their services so that doctors typically begin their practice with enormous debts from their medical education.

By cutting back the supply of doctors the cartel arrangement was able to create monopoly prices. The public subsidy of medical care just meant that the monopoly prices went even higher. The inadequate supply of doctors resulted in doctors being overworked and hence having little time to mull over the conditions of their patients. For more on this topic see Medical Cartel. For material on the high cost of pharmaceuticals see Pharmaceuticals.

Up until the fourth quarter of 2008 the only major component of consumer demand that was faltering was the purchases of motor vehicles. However there were components of investment demand which are closely connected with consumer demand which were faltering. These are residential housing construction and net investment in inventories. Up until the financial crisis prompted by the bankruptcy of Fannie Mae and Freddie Mac in September 2008 there is no evidence of an output recession. Even the slight and not statistically significant decline in real GDP from the second quarter of 2008 to the third quarter is easily accounted for by the fading out of the effect of the 2008II tax rebate. There was an employment recession but that subject to different causes than an output recession. See Employment Recession.

The output recession began with the effective bankruptcy of Fannie Mae and Freddie Mac in September of 2008. That led to the collapse of some financial enterprises and the bailout of others. The collapse did not have to go beyond those firms. However because the declared bankruptcies of Fannie Mae and Freddie Mac by their managements were unexpected by the markets there ensued a widespread panic among stock market investors which led to sharp declines in stock prices. This in turn brought further panic and a loss of consumer and business confidence in the future of the U.S. economy. Business investment in increased capacity is highly volatile. If businesses perceive no need for increased capacity then their investment purchases can go to zero. When consumers become pessimistic about the economic future they may reduce their purchases a few percent; business investors faced with the same circumstances eliminate all of their purchases.

In 2008IV business investment in plant and equipment to increase productive capacity dropped 5.9 percent compared to 2008III; this is an annual rate of decrease of nearly 24 percent. In 2009I this investment dropped 10.9 percent compared to the level in 2008IV, an annual rate of 43.5percent decrease. This could be characterized as the level of investment in plant and equipment being in freefall.

In contrast, after the financial crisis of September 2008, consumer purchases decreased only 1.1 percent between 2008III and 2008IV and went up 0.5 of 1 percent in 2009I. Clearly the problem is business confidence. Politicians have focused on saving financial institutions so that they can lend funds to those who want to make investments in increased capacity. But who would want to borrow to increase capacity in a recession. The media and politicians with their proclamations of RECESSION!! in early and mid-2008 destroyed business confidence and brought about a real recession. It remains to be seen whether business confidence can be revived. Business confidence is like a balloon and it is pretty difficult to unpuncture a balloon.

For more on the global impact of the 2009 recession see Global Recession and Global Recovery.

Currently (2012) the economy is growing but not robustly and there is still weakness in the elements of business investment. Gross Private Investment is still only 84 percent of what it was in the first quarter of 2006. Investment in inventory which was fueling the recovery dropped to a negative level in the third quarter of 2011. It has returned to significant levels in the fourth quarter of 2011 but not to the level it reached in the third quarter of 2010. The Administration can very easily offset everything that it does to stimulate the growth of the economy by creating uncertainty about its future actions and policies. Uncertainty about present and future government policies strongly discourages investment in plant and equipment.