Tuesday, December 22, 2009

GDP Revision Indicates Recession Isn't Over

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The final report for third quarter GDP was released on December 22nd. The numbers were revised down ... again. According to the latest government figures, GDP grew by 2.2% last quarter. Previously it was 2.8%. Before that, it was 3.5%. Do you note a pattern here? The rosy 3.5% number got the most media attention as the first release always does. Far fewer people pay attention to the final number. Even this number is likely to be revised downward in future multi-year revisions as were the numbers for all of 2008.

There were three major sources of growth in third quarter GDP. In order of importance they were: government stimulus, government stimulus and government stimulus. The Cash for Clunkers program, a government give-away to the auto industry and people who were foolish enough to buy gas guzzling vehicles, added 1.7% to the GDP total. Government backed housing initiatives, including tax credits for home buyers and FHA mortgage insurance, may have added another 1.0%. Those were only two small components of government spending however. Overall, increases in federal spending were up 7.9%. Subtract all of these components and there was negative GDP growth in the third quarter and the recession is ongoing.

While the government spending component of GDP is robust, the consumer and business components are still weak. Since they are essentially most of the real economy, this should be cause for concern. The latest revisions had consumer spending, commercial construction, and business investment (now down 5.9%) as weaker. Consumer spending, which accounted for 72% of the economy before the Credit Crisis, was still listed as up 2.8%. How this is possible with double digit unemployment, record drops in available consumer credit, and a rising savings rate is one of the mysteries of our time. There is no obvious source of money to fund this supposed increase in spending.

The sad state of the economy is evidenced by the business inventory number, if not by the headline GDP number. Inventories dropped by $139.2 billion in the third quarter compared to a drop of $160.2 billion in the second quarter. This lower drop added almost 0.7% to the 2.2% GDP total. Yes, when it comes to inventories, all it takes if for things to get less worse for GDP to go up. Keep this in mind when you see a positive GDP number. Don't assume it means that things are getting better.

Mainstream economists are now forecasting GDP growth in the strong 4% range for the 4th quarter. Meanwhile, the Fed is stating that it is keeping interest rates at zero for the foreseeable future. The Obama administration proposed a new stimulus package less than two weeks ago and the House passed an additional $100 billion in economic aid last week. While the powers that be keep telling the public everything is not just fine but getting better with the economy, their actions indicate that there is still panic on the Potomac. Perhaps they know something that they're not telling us?

Disclosure: Not applicable.

NEXT: The Santa Claus Rally and the January Effect

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.


Todd said...

hi, do you have an email address I could reach you at?



Gdp reports are off target.