Friday, July 31, 2009

Economy is Bad, but GDP Report OK

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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For those who missed it, the cover of the latest issue of Newsweek has a blaring headline, "The Recession is Over". This 'just wishing makes its so' approach to economic forecasting is being pushed by the Fed and some of its compatriots. I have yet to read though of even one industry that is showing growth in the alleged economic rebound that is taking place. Nevertheless, there was a lot of fanfare for the release of today's GDP Report and how it would show things are getting better. I had no doubt that it would considering the GDP figures are probably the most manipulated and unreliable ones that the U.S. government produces.

Yesterday I checked the 2007 and 2008 GDP figures. If you look at the BEA (Bureau of Economic Analysis) website, you will see that during 2008 the U.S. GDP increased over $450 billion. This a rather eyebrow raising figure considering that the U.S. was in the worst recession since the 1930s during all of 2008 and the classic definition of a recession is declining GDP. If only our current batch of government statisticians had been around in the 1930s they could have made the GDP numbers go up and shown conclusively that there was no Depression! Then they could have used the good GDP numbers to show people that they weren't really hungry and unemployed.

The headline number in today's GDP Report was a decline of 1.0%. For the past year the economy has declined 3.9% (or at least that's the not as bad as the real story official number). It also seems that first quarter GDP was revised downward from minus 5.5% to an even worse minus 6.4%. Looking inside the report, there is little that is positive other than the current declines are less than the previous declines. The big improvement in last quarter GDP did not come from either the consumer or business sectors, but from government spending and trade.

Consumer spending which accounts for 70% of GDP can be summarized as: spending on durable goods fell 4.0%, spending on nondurable goods decreased 7.1%, and spending on services was down 2.5%. Business investments fell at an 8.9% annualized rate during the second quarter and Inventories declined by $141.1 billion. Investments in structures dropped 8.9%, and investments in equipment and software fell at a 9.0% pace. Investments in housing went down for the 14th consecutive quarter, dropping at a 29.3% annual rate. While the actual economy itself was devastated, good news came from the government sector of GDP. Federal spending rose 10.9%! Imagine how good the GDP Report could be if the federal government printed and spent even more money?

Interestingly, the GDP deflator (the inflation rate used to calculate GDP) was 2.2%. I was amazed the government admitted to so high a number. Last year for the second quarter report it was 1.2% even though this was when oil and food prices were skyrocketing. The government claimed that there was almost no inflation at that time despite the obvious. According to classic economics, inflation can't exist during a recession. Also according to classic economics money printing causes inflation. It's quite obvious which one is winning in this case.

NEXT: Critical Juncture for Dollar and Stocks

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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