U.S. Economy Grows 2.8%, Less Than Forecast

U.S. Economy Grows 2.8%, Less Than Forecast – Bloomberg.

The data is telling the same story that I have saying for months: The basic element for growth is demand. Demand is for the economy what an amino-acid is for a protein: the Building Block. Very few economists recognized this and that is why the federal government embarked in the stimulus programs without taking the necessary steps for spurring demand – other that cheap credit. They also failed to recognize that cheap credit does not help when most consumers are maxed-out and have lost the sense of security in their jobs.

The data is also saying that most of the growth was in rebuilding inventories rather than consumption. Less than 1/3 of the growth was brought about by consumer spending. In an economy where consumer spending represents 70% of the total, the figures for 2011 are alarming indeed.

The pressure will be now to sell that inventory and businesses may have to offer extraordinary discounts to do so. This could lead to deflation – lower prices – which is a good thing for the consumer but also leads to reduction in supply and consequently more layoffs.

Even the president mentioned the other day the idea of taxing more those who outsource overseas and giving tax breaks to those who invest at home. The President did not offer any details and we do not know if there is any concrete plan in Washington. Rewarding those who invest in New Jersey is at the core of my reform plan with abundant specificity. I have introduced that proposal for one simple reason: It is indispensable. But to apply it, it must be defined.

New Jersey is a reflection of the national economic picture, perhaps a bit worse with respect to unemployment figures. The democrats in Trenton have proposed an increase in the minimum  wage and the governor has proposed a 10% tax cut which only has relevant impact on a minuscule portion of the population. Both measures are insufficient with regard to their intended purpose, and the state is hardly in the position to be able to afford them – without some other additional steps. But because the steps involve the dismantling of part of the political bureaucracy, neither party will hear of it in New Jersey.

Economists often use the term aggregate demand which simply means the sum of all demands. I have called it just demand although meaning the same. The economists term is perhaps clearer. Conditions must be created so that demand growth is universal. We can not expect  1% or 10 %, or even 25% of the population carrying the economy on their shoulders. It is not sustainable. For growth to rise, aggregate demand must behave like many Euclidean vectors – there must be a genuine general uplift of the standards of living.