Anyone still operating under the illusion that Thursday’s GDP report showing an annualized growth rate of 3.5% during the third quarter is anything to get excited about, or represents anything remotely sustainable, needs to read and digest Karl Denninger’s take (or I should say takedown) at the Market Ticker (HT to previous post commenter baqueronman).
Do read the whole thing.
Denninger gets to a GDP contraction of almost 1.5% after subtracting the impact of Cash for Clunkers (-1.6%), the increase in government purchases of goods and services (-2.37%), and the inventory build-up (-0.94%).
I disagree with the direct impact of his second item, which I think is half of what he claims (Uncle Sam’s purchases of goods and services are about 15% of GDP, not 30%, even though his tax burden is 30% or more). I’m also not ready to dismiss the inventory situation as a legitimate element of growth, if it reflects taking levels back to where they have to be to serve customers; to the extent they might be based on overoptimism, that would be a problem.
If you take away what I think is the correct government effect (-1.18%) and ignore inventories, you’re left with a positive 0.66% (3.5-1.66-1.18) — and you still wouldn’t be done. From that you would have to subtract an unquantifiable amount of personal consumption supported by the $8,000 homebuyer credit and the massive increases in transfer payments we have seen, especially in Social Security, before you could begin to approximate privately-driven GDP in this going-statist economy. That effect would certainly send that version of GDP into negative territory.
Some of the Market Ticker tabulator’s concerns about data quality (remember today’s report is Uncle Sam’s “advance estimate”) indicate that we could see a bit of a reduction in today’s reported number by the time it gets finalized just before Christmas. If so, that would make GDP net of artificial stimulants even more negative.
But Denninger’s biggest and most important point is that declining incomes can’t support future growth, and in fact point in the opposite direction:
Forward the big problem is the deterioration in personal income. You can’t spend what you don’t have without credit creation, and that’s fallen off a cliff. The Fed’s credit reports continue to come in with huge contractions – this should not surprise, as demanding that banks lend to people who are seeing their income shrink is into the realm of pure idiocy.
…. You cannot have an economic recovery when on a q/o/q basis real disposable income is contracting at a 7.4% annual rate and worse, the spread between nominal and real income is widening, indicating that mandatory purchases such a(s) food, energy and health care – are increasing.
Not to mention the fact that the administration and Congress are intent on vastly increasing the cost and/or availability of the second and third items. Perhaps, if we’re lucky, we’ll still be able to eat.
UPDATE: IBD’s take —
In late July, economist J.D. Foster of the Heritage Foundation put it succinctly: “This is no longer an experiment in economic policy. The results are in: Keynesian stimulus does not work.” This GDP report doesn’t change that conclusion a bit.
If that’s so, our only hope going forward is the private economy. Though hindered by massive government intervention in housing, banking and industry, it’s still the most resilient in the world.
Businesses and households have cut spending to the proverbial bone. Now they’re reaping the first benefits of all that pain.
Yes the “pain” has been felt by businesses and business owners, but it’s been worse for those thrown out of work, and those who are working less than they want to.
The immature collection of crybabies in the Obama administration wants to keep blaming Bush 43 for why we are where we are. That’s obviously false; it’s been their POR (Pelosi-Obama-Reid) Economy since the summer of last year. Even if the administration’s “it’s Bush’s fault” lie resonates with some, it has a limited shelf life. At some point, for those whose don’t get it, it may remain Bush’s fault for causing, but it will be this administration’s fault for failing to fix, and in fact making it worse.
UPDATE 2, Nov. 3: Comprehension-impaired folks not worthy of linkage are conveniently misinterpreting the above narrative as proof that the stimulus “worked.”
ROTFLMAO — What are we going to do, go into hundreds of billion more in debt every quarter in a never-ending quest to keep GDP positive, regardless of the long-term consequences? Even if we wanted to (Paul Krugman at the New York Times is apparently among those who would do this, saying that “he stimulus was far too small given the scale of our economic problems”), it’s NOT sustainable.
The point of course is that the real, non-steroid-treated economy either barely grew or contacted a bit.