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Explanation: The Economy Q3

October 29, 2011

GDP is made up of: Y=C+I+G+{(X-M)} …where Y=GDP.

C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports.

[PRNewswire] — The U.S. Bureau of Economic Analysis today reported 2.5% growth in real gross domestic product [GDP] – the output of goods and services produced by labor and property located in the United States – for the third quarter [Q3] of 2011 according to the “advance” estimate released by the Bureau of Economic Analysis [BEA]. In the second quarter, real GDP increased 1.3%.

The Bureau of Economic Analysis goes on to say that the acceleration in real GDP in the third quarter primarily reflected accelerations in personal consumption expenditures
[PCE] and in nonresidential fixed investment and a smaller decrease in state and local government spending that were partly offset by a larger decrease in private inventory investment.

So, Q3 GDP came in at 2.5%, nearly double the pace of the previous month, eh? And, the report projects that consumer spending increased by around 2% after rising by only 0.7% in Q2? And, a sizable increase in business fixed investment is expected to have occurred too together with roughly unchanged housing activity, while government spending declined. Something doesn’t feel quite right here. These numbers puzzle me.

Economist use bulk carload freight and transport indicators as one of the primary measures of economic activity. When you look at port traffic and rail traffic there is reason to be concerned. For port traffic, there is less traffic coming in for September but more outgoing. Port traffic and cargo order piles are down. In fact, the five busiest container ports in the U.S. said that imports in August 2011 were lower than or even with 2010 volumes.

It’s not just port traffic that is down. Rail traffic has been ticking up all year until towards the end of September when it too went flat. Burlington Northern Santa Fe Corp., which moves more containers between ships, rail and trucks than any other U.S. railroad, didn’t experience a traditional holiday peak in volumes this year. Normally you would expect port and rail traffic to pick up with the Holiday season coming.

On the consumer side, where spending is reported to have picked up; disposable personal income increased $17 billion [0.6%] in Q3 and the personal saving rate — saving as a percentage of disposable personal income — was 4.1% in the third quarter, compared with 5.1% in the second. This points to consumers spending their savings. That is not a good indicator for future consumption. And, PCE is often revised from the advance report as receipts and reports are collected.

And, where better to go to observe consumer-spending indicators than the world’s largest consumer-products company. So I went and glanced at Proctor & Gambles earnings. From Bloomberg: P&G “reported a 1.9% drop in their quarterly net income as higher costs for raw materials countered price increases and sales gains in emerging markets.” So lets see:

A. “Price increases across all divisions and regions… boosted sales by 4% in the quarter.”

B. “Total sales at P&G, which last year generated two-thirds of its revenue from outside the U.S., advanced 8.9%…” and;

C. “The cost of doing business has gone up.”

So, a simple translation: (a) price increases [inflation] (b) non-US sales (c) escalated cost in raw materials [inflation] (d) currency depreciation – all seem like factors. The price of goods is the reason GDP grew as food and energy prices rose even though food and energy are not calculated in Obama’s inflation index. We’re just kicking the can down the inflation highway. Who you gonna believe – the government or your lyin’ eyes?

What does all this mean?

Consumers are tapping their savings and levering up again. Increased consumer spending came from cuts in the savings rate rather than from gains in income. People are tapping into their savings and retirement funds. Equity outflows are occurring [401k’s]. It’s phantom growth. Most of the GDP growth is from inflation, pushing up PCE. It’s not real growth. This is under-reported inflation and over-reported GDP. Inflation spread over the GDP deflator; oldest trick in the Keynesian book.

And, continued woes in the housing market are overshadowed by consumer concern over the anemic labor market; highlighted by the decline in consumer sentiment back to 2008-09 levels. This weak sentiment will limit the rise in consumption through the holiday season and right into winter. Sustained economic growth above 2.0% is simply unlikely. Growth will slow down again in the Q4 and throughout 2012.

Withheld employment taxes by the Treasury are on a downward trend meaning that employment is failing to grow. Slow employment growth means slow labor income growth which bodes poorly for more robust consumer spending which itself makes up 70% of the US economy. Business investment, inventory, and exporting hold the other key to how much growth can be anticipated through the first half of 2012.

That 2.5% number will be revised down as usual…to about half of what they claim now…there is no double dip, because we never left the last recession and are still spiraling downward. Most business leaders see contraction in their sectors not expansion. And, Goldman’s own proprietary Goldman Sachs Analyst Index, a survey of Goldman’s equity analysts across a range of sectors, reported on Oct. 29th, ‘the economy is weak and got worse in October.’

Given inflation is running away at above 4% per annum the words “1% growth” are also statistically adjusted to meaningless [ie. 3% short]. There is a problem with how quarterly GDP reports are presented by the media in isolation from dependent issues such as national debt, government spending and unemployment. When we say the GPD ‘grew’ by 2.5%; in terms of dollars and cents, it means the economy has grown by ‘just’ $443 billion (2011 Q1-Q3) so far.

If you layer that over our catastrophic national debt, devaluation of our currency
through ‘stimulus’, pervasive unemployment rate and Obama’s 2011 existing $4.0 trillion expenditure… the NET growth of 2.5% just evaporated. But when you’re going over the precipice you’ll grab on to anything. Economists say it typically takes growth of 3% or better to prompt businesses to start hiring again to meet stronger demand for their products.

2.5% GDP, my ass… This is beyond Orwellian. A new category must be made: Obamwellian.

2 Comments leave one →
  1. October 30, 2011 12:23 pm

    Bravo @klsouth God Blessed Intelligence at work!


  1. @KLSouth: 2.5% GDP… Think Again « The Teen Conservative

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