Q2 GDP Up Only 0.7% Without Government Spending

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 Bureau of Economic Analysis revised second quarter GPD growth down from 2.4% to 1.6% today. Stimulus spending peaked in the second quarter and despite the big boost that it provided, the U.S. economy only expanded at a rate that indicates the U.S. standard of living isn't declining further.

The U.S. needs GDP growth (adjusted for inflation) at about 1.5% for the well-being of the average person to remain the same. This is because of population increases and other factors including some overstatement of the numbers. Actual growth, meaning more jobs and increased incomes for the American people, only takes place when the GDP number is above that level. The U.S. right now needs a substantial amount of actual growth just to make up for the decline from the Credit Crisis/Great Recession and to get back over eight million lost jobs. Despite $2.7 trillion in federal deficit spending in the last two years, it's just not happening.

At the bottom of the Credit Crisis/Great Recession GDP declined at a 6.8% annual rate. So far during the 'recovery' GDP growth has been:

2009 Q3  1.6%
2009 Q4  5.0%
2010 Q1  3.7%
2010 Q2  1.6%

Most of this has come from changes in inventories -in the first three quarters, approximately two-thirds of 'growth' came from this one factor. Indeed this also would have been true of the Q2 number as well if the inventory component hadn't been lowered. Inventories for Q2 were originally reported as being responsible for GDP growth of 1.05% (divided by the new 1.6% total, this would indicate inventories were 66% of Q2 GDP growth). However the inventory contribution to GDP was revised downward even though according to the BEA, "Private businesses increased inventories $63.2 billion in the second quarter, following an increase of $44.1 billion in the first quarter". The smaller increase in inventories in Q1 was responsible for GDP increasing by 2.64%. This is a peculiarity of GDP math. In 2009 Q4 inventories decreased (yes, decreased) by $36.7 billion and this created 2.83% GDP growth. A decrease in inventories also created a 1.10% increase in GDP in Q3 2009.

Government spending was supposedly responsible for 0.86% of GDP growth last quarter. Subtracting that from 1.6% leaves only a 0.74% increase in Q2 GDP. Describing this as anemic would be an understatement. The federal government however accounts for almost a quarter of the U.S. economy and its spending increased by 9.1% in Q2. This would seem to indicate that the federal government contributed a lot more to Q2 GDP growth than what the BEA claims. It also begs the question as to how good the GDP numbers will be when government spending significantly declines as it is scheduled to do in fiscal 2011.

Q2 GDP would also have also been a lot lower without big increases in 'Gross Private Domestic Investment', which was up a whopping 25%. 'Equipment and Software' was up by 24.9% between April and June. In the recently released durable goods report for July, it had a big drop, as did machinery and other components in this category.  Two years of stimulus spending is responsible for revving up the investment component of GDP in the second quarter, but economic reports from early in the third quarter indicate that its impact is already waning. We will have to wait though until just before the November election to see the first numbers for Q3 GDP.

Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Q2 GDP Report: 5 Important Things You Need to Know

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 Bureau of Economic Analysis reported today that GDP increased by 2.4% in the second quarter. First quarter GDP was revised up to 3.7%. The annual revisions for previous years indicated that the U.S economy contracted at an average annual rate of 0.2% between 2006 and 2009.

While 2.4% is in and of itself a fairly decent increase in GDP, the components that made up the increase are the key to interpreting how good it really is. To do this, it's necessary to know whether or not they are sustainable and even whether or not they are believable. Increases in some components are a negative because they ultimately lead to lower growth in the future. Inventories are the best example of this. Others, such as increased government spending are at best neutral because they don't indicate an improvement in the private economy. If spending isn't going to be increased further in the future, then this also indicates lower GDP going forward. Finally, some numbers simple don't match up with other government reports, observations of reality, or economic definitions. If they don't, they are obviously inaccurate.

So how do the GDP numbers stack up in the latest report?  Based on the official news release from the BEA, which can be found at: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm, it can be seen that:

1. Inventory increases added 1.05% to second quarter GDP. Based on the annual revision, they added 2.64% to first quarter GDP or 71% of the total increase. Inventories were also responsible for approximately two-thirds of the GDP increase in the fourth quarter of 2009. The entire economic 'recovery' has essentially been an inventory adjustment. This does not bode well for the future.

2. Government spending was up across the board in Q2. Federal spending increased by 9.2% in the second quarter versus 1.8% in the first quarter. State and local spending was up 1.3% this quarter versus a decline of 3.8% last quarter. The second quarter was when stimulus spending was at its maximum. So expect less of a contribution from government spending to future GDP and lower numbers as a result.

3. The most obvious fantasy figures in the report was the new home construction figure. This supposedly increased by a whopping 27.9%, even though the Commerce Department's New Residential Structures report (more commonly known as new home sales) indicated a 6% decline quarter to quarter and an 8% decline year over year. Nor is there any evidence of a massive increase in new home inventories or any real world evidence indicating a huge building boom. This number is impossible.

4. Somewhat suspicious is the increase in investment on business structures (commercial real estate). This was up for the first time since Q3 2008. The big increase in banks going under that is currently taking place is being caused by commercial loans going bad, yet commercial construction is now on an upswing? Perhaps work on the BP oil spill juiced up this number. Interestingly, the UK also reported a huge increase in construction spending last quarter as well, although there is little evidence of much construction going on there. BP is headquartered in the UK, but it spent its money to handle the oil spill in the U.S.

5. The most ridiculous claim of all was the revised figures for 2008 GDP. Based on original reports, GDP increased by almost 3% in 2008, a very good rate, even though it is universally acknowledge that the U.S. was experiencing the worst economic downturn since the 1930s Great Depression. GDP is supposed to decrease during a recession, not go up. In the revision in July 2009, GDP for 2008 was revised downward to plus 0.4%. In the current revision, GDP growth for 2008 is now listed as 0%. Perhaps after another 15 to 20 revisions it will get to a more reasonable number. The history of 2008 GDP indicates the U.S. can overstate its GDP by a total of 6% to 9% in its initial reporting. Keep that in mind when you read that GDP was up 2.4% last quarter.


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.

Enron Accounting and GDP; FDIC's Money Shortage

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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Second quarter GDP revisions were out this morning and they were unchanged from the down 1.0% in the first reporting. The government claims that while some components of the GDP numbers declined, increases in other components offset the losses. Components revised upward included government spending (what a surprise). State and local government spending was supposedly up 3.6% (federal spending up 11%) even though over 30 state governments are now considered to be in serious financial trouble. In a separate report, the FDIC is once again about to run out of money because of the increasing rate of bank failures that are taking place even though Fed Chair Bernanke has told us repeatedly that the financial system has been fixed.

While the state and local government spending numbers are suspicious to say the least, far more suspicious is the corporate profits component of the GDP report. Before-tax corporate profits supposedly increased $67.6 billion or by 5.7% quarterly. This was the biggest increase in four years and even larger than the 5.3% gain in the first quarter. You may be wondering how can corporate profits increase by large amounts during the worst recession since the 1930s? Quite simply, they can't. Even worse, proof of the inaccuracy of these numbers is supported by the net cash flow figures in the GDP report. These fell by $26.9 billion. Companies that are actually making money generate cash. Those who are lying about making money don't. This is what happened with Enron. It claimed to have substantial profits, but its cash flow indicated that it didn't. While this smoking gun was right there is the published figures, Wall Street and the mainstream financial media talked up the stock almost to the day that the company declared bankruptcy.

Other components from the report indicate an economy that is in extremely bad shape. Amazingly, even though corporations are making those huge profits, business investment fell 10.9% after plunging at a record depression level 39.2% annual rate in the first quarter. Another impossible statistic in the report is disposable income for consumers. The GDP report claims this went up 3.8% despite the severe recession. However, according to the report the savings rate rose 5.0%, which means that this increased fantasy income wasn't flowing into the economy. Exports, which the Fed and economists have pointed to as one of the cornerstones of the 'resurgent' economy, fell 5%. Imports fell 15.1%. Collapsing trade is a sign of a sick economy. Even though we have heard repeatedly from the media and the Fed that the U.S. real estate market has bottomed, investments in housing fell for the 14th consecutive quarter, dropping at a 22.8% annual rate -that's some recovery all right.

Also contradicting the government's 'economy is getting better' PR blitz, is the continuing failures of U.S. banks. This problem hasn't been solved, it has merely been swept under the rug. The FDIC's deposit fund will be running out of money sometime later this year. It would have run out of money last year if it had to pay off for either the Washington Mutual or Wachovia failures. Both were handled outside the system with the U.S. Treasury making guarantees for the acquiring banks. So far 81 banks have failed this year and the number of banks on the FDIC's troubled list is now 416 (up from 305 at the end of the first quarter). This is the largest number since the Savings and Loan Crisis. Banks insured by the FDIC swung to a total quarterly loss of $3.7 billion in Q2. It looks like we can expect a lot more bank failures in the future.

NEXT: Commodities, the Dollar and More Government Fantasy

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.