Thursday, October 30, 2008

The economy is weaker than it seems

A weak report...
The GDP report was weak. The report was weaker than the headline, as we warned. Only a HUGE drop in Q2 inventory made a large drop in Q3 inventories look STIMULATIVE to GDP (been down so long, looks like up to me…). Such is the way of GDP accounting.

Accounting for growth when weakness is EVERYWHERE...
Exports added about 0.8% to GDP growth and imports fell adding to growth as well. Trade adds about one percentage point overall. Another percentage point was added by the (small?) government sector where spending is ramping up (surprise surprise!!!) heading into the election. And of course the drop in inventories added to growth - I know, I know it seems illogical but any Vulcan could understand it. The drop in Q3 was a smaller drop than in Q2 so it subtracted less from the LEVEL of GDP and that adds to growth… see how it works? It’s sort of like the enemy of my enemy is my friend. It’s not a double negative. Its just that sometimes ‘bad’ is better than ‘worse’, even though it is still not ‘good.’.

Moving on…

The crumbling pillars of growth...
But the main pillars of GDP growth are crumbling. The consumer subtracted two percentage points from growth and business spending subtracted from growth as did the residential construction sector. It’s a miracle that GDP did not fall by more… an artifact of GDP accounting.

Growth prospects are extremely limited
Inventories and exports plus less importing cannot sustain growth any more than anorexia can be considered a good weight loss program. This is no lasting stimulus program

Government JUICES GDP
Government can’t continue to spend faster than private sector growth (this quarter the private sector SHRANK as government spending spurted) or the budge deficit simply balloons – (Would you like to fly in my beautiful balloon? Why not? You are paying for it…). This is not even part of the automatic stabilizers since unemployment has not yet YET gone hog wild. So far it's a spurt in military spending. Wow I didn't see that coming in Q3 did you? I guess if you are compiling the GDP numbers and they start to look too weak you can advance some that military spending to muffle the sound of the economy dropping and breaking.

There is a sense of unreality to a benign -0.3% headline in the GDP report and devastations that lies inside it - especially as regards the consumer.

This is the SPARTAN GDP report.

It swallowed its teeth rather than show you a headline that was as bad as it felt. Look at the details and see for yourself. What basis is there in the report to be optimistic about the future?


Thought so.

Assessment and outlook
It’s weak. So is the banking sector. House prices are still falling. Foreign growth is getting weaker – the overnight EMU economic sentiment index made a record drop. So US exports are about to end their strong run. GDP is bound to get worse than this…

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