UK Q2 GDP: Unblanced, Unsustainable, and Unbelievable

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 UK economy grew by 1.1% in the second quarter according to just released figures from the Office for National Statistics. The pound rallied sharply on the news, but a look inside the numbers indicates this growth is neither balanced, sustainable, nor even believable.

Even a cursory glance at the Office for National Statistics charts shows quite clearly three components of GDP had an outsized impact in creating the good headline number - Construction Spending, Business Services and Finance, and Government and Other Services.  Without these three sectors, there was no growth in the UK economy. While these sectors were growing, there were significant decreases in the Electricity, Gas, and Water and Transport, Storage, and Communication categories. It would be reasonable to assume that these categories should be showing increases in a growing economy, but they aren't. The charts can be found at: http://www.statistics.gov.uk/pdfdir/gdp0710.pdf

The UK had a bigger housing bubble than did the U.S. and they have yet to work off the excesses of too much building earlier in the decade. Nevertheless, the biggest contributor to second quarter GDP was Construction Spending, up a whopping 6.6%. Based on the numbers, a major new building boom is taking place there. People capable of logical thought may wonder how this is possible. A reasonable explanation is an obvious statistical error since the UK changed the source for its construction numbers and for the first time is basing them on a new Monthly Business Survey for Construction. Expect some major downward revisions for this figure in the future because it is something that is just not possible in the real world (government statisticians rarely question an impossible number as long as it makes the government look good).

The next best category was the one that contained financial services. The UK has propped up its big banking institutions (and has nationalized more of them than the U.S. has) with a number of government programs. Not surprisingly, after this huge transfer of money from government coffers, they are doing much better as are U.S. banks There was a 1.3% increase in the Business Services and Finance category and this contributed almost as much to the total rise in GDP as did Construction Spending. Together these are both part of the FIRE (Finance, Insurance, Real Estate) economy, where excesses led to the Credit Crisis. The UK seems to be trying to reestablish the imbalances that led to 2008 economic collapse.

Finally, government spending was up 0.9%, almost the same as the increase in total GDP. Government spending in the UK is indeed the lynchpin for making GDP look good as is the case in the U.S. The new Conservative government is planning major spending cuts and tax increases though and this will negatively impact future GDP numbers. Going forward things are not going to look rosy for the UK economy. Perhaps this is why the Bank of England was recently discussing lowering interest rates. Either they have access to other private economic data or they simply realize how misleading the current UK GDP numbers are.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

Japan Climbs Out of Recession...Again

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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Japan's second quarter GDP figures were released last night and indicated the economy grew by 3.6% on an annual basis. This was after a 14.2% decline in the first quarter. What caused the turnaround? 'Government stimulus measures' as usual were cited and a big increase in export growth. Internal demand remains incredibly weak. Japan joins Germany and France, which also climbed out of recession thanks to government stimulus measures. The United States, the king of government stimulus measures, is predicted to join them in the third quarter.

This is not the first time Japan has 'recovered' from or avoided recession thanks to government stimulus measures. This also happened in 1993, 1997, 1998, 1999, 2001, 2004 and now after the 2008/2009 recession. Japan is very good at recovering from recession. The only problem is that it is even better at falling into recession. Insolvency of the banking system - the current problem in the U.S. is almost identical - is what has caused the two-decade economic nightmare. Residential real estate in Tokyo lost 90% of its value from the bubble top. Top A level commercial properties declined 99%. So far the stock market had a 18 year sell-off there after bottoming last October (assuming it doesn't go lower again). The Nikkei fell 3.1% last night. Hong Kong was down 3.6% and Shanghai down 5.8%. Apparently the good news wasn't good enough.

Problems in the market began last Friday, when U.S. Consumer Confidence suddenly dropped. Economists had predicted it would be going up. Imagine, consumers are becoming less confident even though unemployment is likely to be a major problem for at least another year (by economists own admission) and their income is likely to continue to fall. Who could have predicted that not having a job or money would make consumers less confident? Certainly not U.S. economists. And how are consumers going to increase their spending under such circumstances? Obviously they aren't going to. So much for the 72% of the U.S. GDP (based on 2008) that consumer spending is responsible for getting better. Nevertheless, I have little doubt that U.S. GDP will be positive next quarter - although people who insist on dealing with reality will have trouble understanding how this occurred.

The stock market was buoyed when second quarter U.S. GDP was released a couple of weeks ago. It was a major surprise that the decline was only 1.0%. What caused this better performance? Nothing involved with consumer spending or industrial production (although there were claims that the auto industry was doing better - try not to laugh). Government stimulus measures were the key. Federal government expenditures were up 10.9% in the quarter and state expenditures were up 2.4%. How state expenditures were up when at least 20 states are facing major budgetary problems is not clear. Like Japan though, as long as the U.S. keeps up the government stimulus measures, it will be good at climbing out of recession. It will probably be able to do so over and over and over again in the next decade or two.

NEXT: Monday's Ugly Market Action

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.