Economy Gasps for Air; A Roundup of Data and Analysis
From Megan McCardle
So GDP grew at 3.5% in the third quarter? Are we out of the woods yet?
Maybe. But I wouldn’t bet on it.
I think we have bottomed out; I don’t foresee the economy starting to contract sharply again. But I’m not overimpressed by the growth figures, for a couple of reasons. First, we had a very sharp contraction, and as the traders like to say, even a dead cat will bounce if you drop it from a sufficiently large height. Second, there’s the stimulus.
The things I think we really want to know about the economy are:
1) Is it robust enough to withstand the large sectoral shifts away from housing and related goods?
2) Are employment and compensation growing?
3) Is productive capacity improving?
4) Are people willing to invest in the future?
The answers to those questions range from “no” to a wan “I sure hope so”. So the third quarter growth numbers bring me only middling cheer.
From Bizzy Blog
Anyone still operating under the illusion that Thursday’s +3.5% GDP report 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).
Read the whole thing.
Denninger gets to a GDP contraction of almost 1.5% after subtracting the impact of Cash for Clunker (-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 buildup 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 before 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.
From the St. Louis Fed
Here are the measures of Gross Private Domestic Investment (GPDI), the amount of private investment including
Equipment and software (business)
Change in private inventories (business)
In case your math skills are rusty…Private Investment decreased $127 Billion from Q1 to Q2. Private investment increase $18 Billion from Q2 to Q3, as start but only amounting to 14% of the previous quarter’s decline.