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Q3 GDP: Proceed At Risk
By Jeff Harding
The Daily Capitalist
The Commerce Department announced Thursday that GDP grew 3.5% in Q3 2009. This is the "Third Quarter Bump" I had been expecting.
Economists and the news media are jumping on the "It's Over!" bandwagon. Their conclusion is based on the premise that government spending ("stimulus") will actually create real economic growth. It won't and never has.
The numbers on their face look pretty good. "Real GDP" (i.e., adjusted for inflation) grew for the first time in 4 quarters. Here's how the government played the news in the BEA release:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent. ...
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment. ...
(Emphasis added)
There are some significant "buts" in their report.
The Clunkers program was responsible for most of the increase in PCE:
... vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change. ... Real personal consumption expenditures increased 3.4 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. Durable goods increased 22.3 percent, in contrast to a decrease of 5.6 percent. The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, “Cash for Clunkers” Program).
This is not real economic growth. As many observers have pointed out, Cash for Clunkers just borrowed sales from the future, so that we can expect that Q4 will show a substantial decline in car sales unless the government renews the Clunker program. Without auto related activity, GDP was up only 1.9%. The Clunker program increased sales from $306 billion in Q2 to $342 billion in Q3, I would assume some of those sales were real economic transactions, but my guess is that we'll end up in Q4 closer to Q2 results. Which would lop off about 1.5 points from Q4 GDP.
Today's report showed personal consumption expenditures (PCE) increasing 3.4%. If most of the 3.4% PCE was from the Clunkers program, then PCE was essentially flat, unless you believe that the Clunkers program will actually work to create future growth in the Keynesian manner. I don't believe that.
It was also reported that real residential fixed investment increased 23.4%, in contrast to a decrease of 23.3%. You can ignore the impact of this since most of the real estate activity has been spurred by the $8,000 federal tax rebate. While the housing market is starting to find a bottom because of declining prices, this current flurry of activity will stop when the tax credit disappears. Re-inflating the housing market is not a cure for our economic ills.
The next interesting item is federal spending as a component of GDP. This item increased 7.9% in the third quarter, compared with an increase of 11.4% in the second. Defense spending as a component of this actually went down in Q3. These expenditures do not add to economic growth in the sense that the government never creates wealth, it only spends it. Since the money comes from us, you may well ask what you would have done with that money. You can argue that it serves a purpose, roads, defense and the like, but that doesn't create wealth necessary to grow the economy.
Then there are inventories:
The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change. Private businesses decreased inventories $130.8 billion in the third quarter, following decreases of $160.2 billion in the second quarter and $113.9 billion in the first.
Inventories are shrinking because retailers are dumping goods to avoid being stuck with unsold goods. Retailers have been very cautious in ordering new inventory. If they perceive consumers are actually increasing their spending they will order more goods and production will ramp up, which would be a good thing. But if the PCE numbers are a Cash for Clunker mirage, will there be a surge in production?
It depends. Some new production will occur because it is not as if the economy is completely nonfunctioning; people still buy things they need, and, as inventories shrink, retailers will still have to meet basic demand. But, will inventory growth fuel 6 points of GDP growth over the next two quarters as some economists believe? It depends on what you believe about consumer spending.
Let's dig further into the numbers from the BEA report:
- Current-dollar personal income decreased $15.5 billion (0.5 percent) in Q3, in contrast to an increase of $19.1 billion (0.6 percent) in Q2.
- Disposable personal income decreased $20.4 billion (0.7 percent) in Q3, in contrast to an increase of $138.2 billion (5.2 percent) in Q2. Real disposable personal income decreased 3.4 percent, in contrast to a Q2 increase of 3.8 percent.
- Personal saving -- disposable personal income less personal outlays -- was $364.6 billion in Q3, compared with $533.1 billion in Q2.
- The personal saving rate -- saving as a percentage of disposable personal income -- was 3.3 percent in Q3, compared with 4.9 percent in Q2.
- The Conference Board, a private research group, said its index of consumer confidence fell to 47.7 this month, from 53.4 in September. The percentage of those who think jobs are hard to get rose. Their pessimism of future earnings could restrain holiday spending. (From WSJ)
- In today's report from the BEA, the Commerce Department announced that consumer spending declined 0.5% in September.
What all this means is that consumers are still cautious, if not frightened, and it is more likely that PCE will revert to the rate seen before Cash for Clunkers, which is to say, flat to maybe a little higher. It is disconcerting to see personal income and disposable personal income decline. While consumer savings are down from the high of Q1, it is still well above the average savings rate in recent times.
It comes back to the underlying trends that are driving the economy. These fundamental megatrends have been discussed before by me and I see nothing in this report that w0uld change them. Recall Megatrend No. 1: "The culture of consumption is broken and won’t return to former levels. This is the key to everything." And Megatrend No. 2: "Consumers will continue to increase savings to prepare for retirement." It's a different playing field for consumers.
These megatrends will impact consumer spending and I don't expect it to recover to its former conspicuous level. This has negative implications for the future of the economy and growth.
This leads me to conclude that we'll have a sluggish economy, propped up by stimulus spending. Like most government projects, the impact of the $787 billion stimulus spending will not have a lasting effect, and will leave us with high debt, high taxes, and a lackluster economy. I would expect Q4 GDP to show positive, but close to flat, growth, most of it will be from government stimulus.
After that it will depend on the state of our personal, bank, and institutional balance sheets. If toxic debt is wiped out from bankruptcy, write off, foreclosure, or recapitalization, then we'll see real growth and recovery, although it will be subdued. If the government continues to discourage its liquidation, then credit will remain scarce and the economy will stagnate.
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"Opportunity cost" is a concept that neither Bernanke, Geithner, Summers or Obama have any understanding of.
the only hope for indebted Europe and the US is innovation led growth. It is a David Growth vs. Goliath Debt situation but it is all we have. China's throwing $1.3billion at 20 China government VC funds across their country to boost their tech companies. That little $1.3billion will create more real jobs and real growth than the trillions of dollars of US "stimulus" thrown out the window to date.
http://www.chinadaily.com.cn/bizchina/2009-10/31/content_8876356.htm
If stimulus doesn't work here, and it never worked in Japan, why would it work in China. They are just creating debt and when the money is spent, there won't be growth.
There may be another worry on the horizon in that the chinese dollar peg is unlikely to hold indefinately. Despite the US being one of china's main markets it is not the only one. Of big concern to china will be the increase in value of the Australian and Brazilian currencies where China gets a lot of their raw materials. Their competative edge not only relies on pricing due to customer currency valuation but also import pricing and supplier currency valuation.
Since china is one of the main supports for the dollar and it would make sense for them to peg to supplier currencies rather than customer currencies, any shift however gradual will have a big impact on the US and its financing of its deficit.
most people have never owned a car or truck and still ride around on scooters. what happens if the dollar falls and their money has much more buying power? (I'm talking about the 'real world' where most people live, not the USA and other places where everyone lives like a King and still compalins abot how 'tough' it is)...
not the USA and other places where everyone lives like a King and still compalins abot how 'tough' it is)...
Leave Sarah out of this!
you're right, defense spending doesn't help the economy nor create wealth. I'll go along with that. 100%.
Nice analysis but...
Where is the terror?
-$5T of securitized debt to be written down???
-60 quarters of $10B writeoffs just to deal with the market price of CITI's SIV's (75% of $800B)
-BCA--Countrywide and Merrill?
-Wells Fargo's CRE paper?
What about the $360B of PE securitized bank loans from 2007? What about the avalanche of resetting, underwater- ARM's coming in 2010 and 2011? What about the CRE refinance crush between now and 2012? Add it all up and WTF? Why so much complacency? It's worldwide!!! The Fed is already buying all of Fan/FRD's paper. Three more years of this? A $10 T Fed balance sheet? This movie has just started and people are parsing the latest gimmick giveaway by Uncle, and batch of statistics--as if they matter. We are all f$%**#$. Extend and pretend my butt. I live in SW Fla. and drive by two year old malls that have NEVER had a tenant. Nothing opens when something closes. The classifieds have 30 job openings on a Sunday. The process servers are just starting to work on the over $750,000 homes. (An $8,000 tax credit won't be helping much here in that price range). I read elsewhere that the banks in Nevada(?) are holding back REO from the auctions instead of flooding the market. Real world declining assets to go with the "make-believe never marked to market" paper losses.
Sometime this winter I suspect the public at large will catch on that this time it really is different; that its really much worse than they've been led to believe; and there is not much TPTB can do about it. Then they will be really, really, afraid and really, REALLY PISSED!! We have no living experience--public or government or Fed--in dealing with an asset driven, downward spiral, leveraged, black hole like this. Everyone's just faking it and keeping their fingers crossed--and so far it looks like amateur hour. Altogether...say KEYNES. Ain't working so good. DC is so out of touch they want to cripple health care and energy as well. "How's that Hope and Change working out for you?" Same bunch of squid behind the curtain as 15 years ago. They all only know one game and Mr Market doesn't want to play anymore.
The only people who want to borrow are the one's you'd be a fool to lend to. There are no operating multipliers. The inverse of the "wealth effect" is the fear driven poverty effect. Save, scrimp, stockpile, buy gold, repeat...Sell it while you can. Work while you have a job. We are walking towards the edge of the cliff and it is dark out. That hissing you hear is the leaking credit bubble fantasyland that we've been living in for 25 years.
I'm in my late 50's and misspent about a decade of my youth in various jobs in the retail brokerage business. Stocks, unit trusts, futures, listed options including trying to manage naked put/call portfolios--all listed. (The bond business was literally too boring.-HAH!) Saw the Three mile Island meltdown in real time; the Hunts get screwed; and the rush from paper--any paper currency--into gold. I appreciate--on some level--risk. So I have just a few simple questions for my fellow, more 'current' zeroheads:
1) Who believes either Bernanke or Geithner have actually had any experience selling naked listed puts on equity?
2) Who actually trusts that the big five have "really" offset/spread off/fully hedged $650TRILLION dollars worth of -XXXXnaked puts, I mean credit default swaps, I mean insurance on the bond, secutized debt and loan and currency markets?
3) Why hasn't this been really--really fixed?
4) who believes we won't have more bankruptcies or higher (long) interest rates in the next three years?
Euclid
Euclid, I've written so much about this stuff that I can't say it over and over. But you make excellent points. My take is that the real problem right now is the CRE debt load. I am concerned about the toxic debt on the books of financial institutions and discussed it in this piece. It's too big for the Fed to handle, at least in the way they believe. Thanks for the excellent comment. PS Loved your geometry. But I really like Mandelbrot.
+1
wow nice piece. you should write more!
my take (i'm an engineer, not a finance person):
The losses are in the trillions with more coming, but the coming inflation will eat it all. so on some level it doesnt matter. might as well borrow as much as you can.
in the real world, there are plenty of houses, plenty of cars, probably enough fossil fuel energy to last another 40 years. its just that the system for distributing it is broken (finance world). no need to panic. if you have positive wealth, 50/50 cash gold, and pick up bargains now and then along the way. If you have negative wealth, just try to hold out until the next disaster episode when the government will bail you out.
-pete
Euclid, I enjoyed reading that. Do post more often.
And in 3 month's time, they can revise this quarter's fictitious 3.5% down to, say 2.9%, so that they can add that 0.6% to their latest fictitious number.
It's MAGIC! Everybody wins, don't they?
Don't they?
Megatrend 3: The number of "consumers" either spending or saving is declining.
Megatrend 4: Nobody (relatively speaking) grows enough of their own food to escape a calorie deficit in the event of a currency collapse.
There will be blood.
Copy/Pasting my own comment from different post:
This 3.5% GDP growth is a debt-financed fiasco. The detriment is not only that this GDP growth is unnatural and likely temporary, but that future (natural) growth in GDP will be gutted by the Gov/Fed so that they can service the outstanding debt responsible for this current 'growth'.