Monday, May 29, 2017

Breaking Down the Global Economy

We regularly hear that China is catching up to the United States when it comes to the size of its economy, an issue that is of particular concern to the Trump Administration.  While the gap may be closing, according to recent data from the World Bank, China's GDP still lags well behind that of the United States as shown on this recent listing showing data for the 183 largest economies from 2015:

The gap of $7.029 trillion between the United States and China is still very substantial with the U.S. having 24.32 percent of the world's $74.152 trillion economy compared to 14.84 percent for China.  Formerly number two finisher, Japan, has fallen to third place and now contributes only 5.91 percent of the global GDP, well less than half of China's contribution.  It is also quite apparent how massive the output gap is between the major economies and those that contribute less. 

While looking at the data is kind of boring, the folks at have created this rather interesting graphic, showing the global economy in a Voronoi diagram as shown here:

The American economy is approximately the same size as the combined economies of the third through tenth largest economies combined; Japan ($4.38 trillion), Germany ($3.36 trillion), United Kingdom ($2.86 trillion), France ($2.42 trillion), India ($2.09 trillion), Italy ($1.82 trillion), Brazil ($1.77 trillion) and Canada ($1.55 trillion).

Looking at the global economy by continental region, we find the following:

Asia - 33.84 percent of global GDP
North America - 27.95 percent of global GDP
Europe - 21.37 percent of global GDP

That leaves the remaining regions including Africa, South America and Australia sharing 16.84 percent of the global economy.  As well, the 40 largest economies in the world produce 90.6 percent of global economic output; this leaves more than 100 nations sharing the remaining 9.4 percent of the global economy.  Even nations like India, the second-most populous nation on earth with its 1.337 billion people, contributes only 2.38 percent to the total global economy.

In closing, there is one additional way to look at the World Bank database; by national income level.  Here is a breakdown of total GDP in dollars and share of global GDP for each national income level:

Low income - $394.2 billion or 0.53 percent
Lower middle income - $5.861 trillion or 7.9 percent
Upper middle income - $20.492 trillion or 27.6 percent
High income - $47.412 trillion or 63.9 percent

Despite the perception that the emerging economies of the world are taking over the global economy, the numbers clearly show that they have a long way to go before they are a significant threat to the world's advanced economies.  

Friday, May 26, 2017

Supporting the American Defense Industry

In Donald Trump's recent speech in Saudi Arabia, he stated the following:

"King Salman, I thank you for the creation of this great moment in history, and for your massive investment in America, its industry and its jobs. I also thank you for investing in the future of this part of the world."

This speech was given after Saudi Arabia signed a deal to purchase $110 billion worth of arms effective immediately and $350 billion over ten years.  While it's interesting to see that President Trump thanked Saudi King Salman for his contribution to American industry and jobs, there is a group of people that should receive even greater thanks for their contribution to the U.S. defense industry - American taxpayers.

On the Federal Procurement Data System website, we can access an annual listing of the top 100 contractors when measured using government-wide spending data.  Looking through this data, we can see just how much the American military-industrial complex should be thanking U.S. taxpayers for their beneficence.  Let's look at who has benefited over the past three years with 2015 being the latest year for which data is available:

1.) 2015: In total, there were $238.544 billion in contracts across all federal government departments.  The top five vendors were all defence contractors and were recipients of $90.291 billion worth of contracts or 37.8 percent of federal contract spending.  Here is a bar graph showing the total size of the contracts for the top five contractors:

The biggest recipient, Lockheed Martin, received contracts worth $36.26 billion or 8.3 percent of total federal contract spending.

2.) 2014: In total, there were $235.933 billion in contracts across all federal government departments.  Again, the top five vendors were defence contractors and were recipients of $90.074 billion worth of contracts or 38.2 percent of all federal contract spending.  Here is a bar graph showing the total size of the contracts for the top five contractors:

Again, the biggest recipient was Lockheed Martin which received $32.230 billion or 7.26 percent of total federal contract spending.

3.) 2013:  In total, there were $255.638 billion in contracts across all federal government departments.  Once again, the top five vendors were defence contractors and were recipients of $102.453 billion worth of contracts or 40.1 percent of all federal contract spending.  Here is a bar graph showing the total size of the contracts for the top five contractors:

Not surprisingly, the biggest recipient was Lockheed Martin which received contracts worth $44.114 billion or 9.64 percent of total federal contract spending.

Let's drill down a bit into the 2015 data, focussing on the contracts given to Lockheed Martin by various parts of the Department of Defense showing the total size of all contracts granted as well as the percentage of spending for that category:

Navy - $15.524 billion (18.4%)
Army - $4.039 billion (5.6%)
Air Force - $7.394 billion (14%)
Defense Threat Reduction - $40.228 million (4.2%)
Defense Microelectronices - $32.472 million (6.4%)
Defense Information - $367.726 million (7.4%)
Defense Advanced Research Projects Agency - $198.726 million (19.7%)
Missile Defense - $935.529 million (19.9%)
Special Operations - $656.413 (22.5%)

Even Homeland Security jumped onto the Lockheed Martin bandwagon, granting contradicts worth $327.036 million in 2015.

As you can clearly see from the data shown in this posting, the American military-industrial complex and the President of the United States should not be thanking the Saudi Royal Family for their "investment in America, its industry and its jobs" rather, they should be thanking the taxpayers of the United States who have sunk trillions of dollars into their businesses over the decades, particularly since the endless War on Terror began in 2001.  In particular, the 97,000 employees at Lockheed Martin should be thankful that the Department of Defense has chosen the products that they manufacture to arm the U.S. military.  And, just in case you thought that I'd forgotten the company's named executive officers, here are a few more corner office dwellers from Lockheed Martin that should be thankful to U.S. taxpayers:

Thursday, May 25, 2017

America's Deteriorating Infrastructure - A Growing Problem

The American Society of Civil Engineers (ASCE) has released the 2017 version of its Infrastructure Report Card and the state of America's infrastructure continues to receive a failing grade.  Here is a summary of their findings and how decades of neglect means that the condition of key ++++

Let's start by looking at an overall summary of the shortfall in infrastructure funding.  As shown on this table, in total, the funding gap between what is required to upgrade America's deteriorating infrastructure and the estimated actual government funding totals $2.064 trillion:

To meet the infrastructure spending needs, all levels of government and the private sector will have to increase the level of infrastructure investment from 2.5 percent to 3.5 percent of U.S. GDP by 2025.  Failure to close this funding gap will result in the following economic consequences by 2025:

1.) $3.9 trillion in losses to GDP

2.) $7 trillion in lost business sales

3.) 2.5 million lost American jobs

4.) a $3400 loss in disposable income by American families

Let's look at a summary of the grades for three major types of infrastructure and what investment is required to rehabilitate the current situation:

1.) Aviation - Grade - D - America's 3,345 airports, of which 514 offer commercial services, serve more than 2.25 million passengers daily and there are roughly 7,000 aircraft in American airspace at any given time.  In 2015, there were 786 million enplanements, up from 728 million in 2011 and is projected to rise to 1.24 billion by 2036.  Congestion at major airports is becoming problematic with 24 out of 30 of the nation's largest airports projected to experience Thanksgiving-style passenger volumes at least once a week.  America's airports need $157 billion in infrastructure funding over the next decade and the funding gap is expected to range from $4.2 billion to $4.6 billion annually.  This investment shortfall is expected to cause the loss of nearly 257,000 jobs and $337 billion in lost GDP by 20205.

2.) Bridges - Grade - C+ - American has a total of 614,387 bridges with an average age of 43 years.  Of the total, 39 percent or 245,755 are 50 years or older and an additional 15 percent are between the ages of 40 and 49 years as shown here:

Most bridges are designed for a 50 year life so it is clear that the problem of bridge rehabilitation is likely to increase.  Of the total number of bridges, 9.1 percent or 56,007 were considered to be structurally deficient in 2016 down from 12. 3 percent in 2007; on average, there were 188 million crossings of structurally deficient bridges each day.  Here is a graphic showing the top and bottom states by number and percent of structurally deficient bridges:

Federal investing in bridge rehabilitation and rebuilding was boosted in 2009 and 2010 thanks to the American Recovery and Reinvestment Act with spending peaking at $18 billion in 2010.  Nonetheless, a recent federal estimate calculates that the backlog of spending on the nation's bridges totals $123 billion. 

3.) Roads - Grade - D - According to the Bureau of Transportation Statistics, in 2013, there was 4.071 million miles of roads with 2.678 million miles being paved and 1.394 million miles being unpaved; in 2015, total distance driven on these roads reached 3.13 trillion miles, up from 2.989 trillion a decade earlier.   More than 40 percent of America's urban interstate highways are congested and 20 percent of highway pavement is in poor condition with 32 percent of urban roads in poor condition compared to 14 percent of rural roads.  As we all know, driving on potholed roads can be expensive; in 2014, driving on roads in need of repair cost American motorists $112 billion in extra vehicle repairs.  Not only is increased vehicle repair costs an issue, traffic congestion is also costly as shown here:

One added benefit to improving the road infrastructure would be an increase in safety.  While road fatalities dropped over the past decade, they rose by 7 percent between 2014 and 2015 and by 8 percent in the first nine months of 2016.  This suggests that the current road infrastructure is under growing stress.

Governments, particularly the federal government, have been underfunding the American highway system for many years which has resulted in a $420 billion needed to repair existing highways, $167 billion for systems expansion and $126 billion for system enhancements including safety enhancements, operational improvements and environmental projects.  Here is a graph showing the declining level of public spending on America's highway infrastructure:

While governments seem to find endless ways to waste taxpayers' money, it is clear that they could receive a big payout from increasing investments in America's failing infrastructure, a move that will lead to greater economic strength that will benefit everyone.  Kicking the infrastructure funding "can" further down the road is only going to make it more expensive to fix in the future and result in reduced economic growth now.

Wednesday, May 24, 2017

The Biggest Fallacies of Washington's Budgets

The release of the proposed fiscal 2018 federal budget from the Trump Administration revealed, once again, why Washington's annual budgets are barely worth the paper that they are written on.  While the budget proclaims that it will help reduce the threat to American prosperity from the $20 trillion federal debt that was inherited from the Obama Administration, it makes broad economic assumptions that will be the undoing of this latest iteration of fiscal (mis)management from Washington.

Let's start by looking at the assumptions made in the budget from Table S-9 Economic Assumptions found on page 45:

You may not notice the weakness in these assumptions immediately, however, if you look at the line showing the year-over-year percent change in nominal GDP you will notice some very optimistic projections.  The budget assumes that nominal GDP will grow by between 4.3 percent and 5.1 percent between fiscal 2017 and fiscal 2027 and that real GDP will grow by between 2.3 percent and 3.0 percent over the same timeframe.

Let's look at the real world.  According to FRED, this is what has happened to nominal GDP growth rates since the end of the Great Recession:

Since the fourth quarter of 2009, nominal GDP has grown by an average of 3.4 percent over 30 quarters of economic expansion, well below the rates seen in prior expansions as shown here:

In addition, nominal GDP actually contracted by 3.1 percent and 3.2 percent on a year-over-year basis during the first and second quarters of 2009.
Here's what has happened to real GDP growth since the end of the Great Recession:

Since the first quarter of 2010, real GDP has grown by an average of 2.1 percent, again, well below the rates seen in prior expansions as shown here:

During the Great Recession, real GDP contracted by as much as 4.1 percent on a year-over-year basis during the first quarter of 2009.  

Not only is the assumption of economic growth rates used in the 2018 fiscal budget overly optimistic, there is one other assumption that is completely erroneous; the assumption that the economy will continue to expand without ceasing until fiscal 2027.  Let's look at a chart which shows the length of economic expansions (trough to peak) going back to the 1850s:

The longest trough to peak was 120 months during the expansion which began after the March 2001 to November 2001 recession. Over the period from 1854 to 2009, there were 33 economic cycles with an average trough to peak duration of 38.7 months.  As far as the latest economic cycle goes, we are now 95 months into the expansion and if the assumptions used in the fiscal 2018 budget hold, the economic expansion will be a whopping 222 months long, nearly double the longest expansion in the past century and a half.

While I'm sure that there are those who would love to blame this on yet another Trump Administration blunder, here is a screen capture from the fiscal 2017 final Obama Administration budget showing that they made similarly erroneous assumptions on Table S-12 (page 163):

You will notice that while the budget makes no allowance for any kind of economic contraction going out to fiscal 2026, it does make somewhat more realistic assumptions when it comes to both nominal and real economic growth rates.

When one reads through government budget documents, it is always key to closely examine the assumptions used.  If these assumptions do not transpire, the projections of future budgetary improvements like dropping deficit levels and improving debt accumulation rates are completely unattainable.  But then again, what did you really expect from politicians?