Back from the North Woods

August 15, 2009

I just returned from almost two weeks in the north woods of Wisconsin, where internet access is virtually nil.  So I have a lot of catching up to do.  Thanks to all for all of the very thoughtful comments, which I will reply to in the next couple of days.  Also, I found a couple of comments that were “pending.”  Please be aware that if you provide more than a couple of links in your comment, it gets bounced into a “pending” category, which prevents it from actually appearing until I’ve had a chance to review it.  It’s a spam-prevention feature.  (I do get plenty of spam.)

There’s lots to catch up on, including the ridiculous July unemployment report, the latest release of trade figures from this past week, and the retail and consumer sentiment data that gave all of those celebrating the end of the recession a little dose of reality. 

Stay tuned.


Stimulus Spending Masks Huge Decline in 2nd Qtr. GDP

August 1, 2009

On Friday, the Commerce Department announced that real 2nd quarter GDP (gross domestic product) declined at an annual rate of only 1.0%, much better than the 1st quarter decline of 6.4%.  Analysts proclaim this as evidence that the free fall in the economy has been halted. 

But has it really?  How much of this is real improvement in the economy and how much is artificial economic activity generated by the government’s economic stimulus plan, sure to vanish once the allocation has been spent?  Of course, the whole purpose of the $787 billion economic stimulus plan is to be “stimulative,” like priming a pump.  Pour a little in and you can get a whole lot more out.  It’s seed money, intended to generate self-perpetuating growth in the economy.

So the critical question is whether it’s working.  Did the underlying economy perform better in the 2nd quarter as a result of this spending?  If so, that would be evidence that the stimulus plan is working.  If not, then the deterioration in the underlying economy may actually be accelerating. 

Through the end of the 2nd quarter, slightly more than $60 billion of the $787 billion has been spent. (See http://money.cnn.com/2009/07/31/news/economy/stimulus_GDP/?postversion=2009073115)  Assuming that virtually all of this was spent in the 2nd quarter (since the plan wasn’t authorized until mid-February), then this spending contributed to GDP at an annual rate of about $240 billion.  1st quarter GDP was reported as an annual rate of $12,925.4 billion (expressed in 2005 dollars).  2nd quarter GDP was reported as $12,892.4 billion, for a quarterly decline of 0.25% or an annual rate of decline of 1.0%.  (Thus the euphoria on Wall Street about the big “improvement” over a 1st quarter decline in GDP of 6.4%.) 

But if you take away the $240 billion in stimulus spending (annual rate at current pace), then 2nd quarter GDP would fall to $12,652.4 billion, for an annual rate of decline of 8.2%!  So we can conclude that, so far, the stimulus plan is failing to halt the slide in the underlying economy.  In fact, the rate of decline has accelerated, from 6.4% in the 1st quarter to 8.2% in the 2nd quarter.  Unless things change dramatically, while the stimulus spending may produce some artificial growth in the economy, once it’s spent we will surely slide back into a deep recession.  Why?  Because absolutely nothing has been done to fix the underlying problems in the economy, particularly our broken trade policy that has given away most of the entire manufacturing sector of our economy to overpopulated nations.  Six million manufacturing jobs sacrificed on the altar of crude, 18th century trade theories.

President Obama had better get busy on fixing the trade situation to restore a balance of trade, as he promised during his election campaign, or he’ll go down in history as another in the long line of caretaker presidents who kept the seat warm in the west wing for four years.


2nd Quarter Real Per Capita GDP Falls 1.7%

August 1, 2009

The Commerce Department announced on Friday that real (adjusted for inflation) U.S. GDP (gross domestic product) fell at an annual rate of 1.0%.  However, since the U.S. population is growing, a more meaningful way to look at GDP is in per capita terms.  After all, what matters to individual Americans is not the size of the whole pie, but the size of their slice. 

Measured in those terms, real per capita GDP fell at an annual rate of 1.7%.  This is the fourth consecutive quarter of declines in GDP, the longest since the Great Depression of the ’30s.  Worse yet, the string of quarterly declines would now be six consecutive quarters if the recession had not been interrupted by a tiny rise in GDP in the 2nd quarter of ’08, thanks to the first economic stimulus plan implemented at that time by President Bush. 

In the 2nd quarter, the U.S. population grew by approximately 520,000 people.  (As an aside, it should be noted that this has contributed another quarter million workers to the labor force at a time when the economy is losing jobs at a frightening pace, thus adding to the downward pressure on wages and benefits.)  Thus, when expressed in per capita terms, the 1.0% decline in GDP reported by the Commerce Department swells to 1.7%.  In other words, contrary to economists’ belief that population growth is a critical component of economic growth, population growth has actually contributed to the decline in the financial picture of individual Americans.

Expressed in constant 2005 dollars (which is to say, adjusted for inflation), real per capita GDP fell from $42,167 in the first quarter to $41,988 in the 2nd quarter.  This is 5% below the record of $44,166 set in the 4th quarter of 2007 and is the lowest figure since the 4th quarter of 2004. 

But, who knows if the Commerce Department is even being honest about GDP?  Could the decline in 2nd quarter GDP actually have been worse?  Consider the 1st quarter.  The 1st quarter decline in GDP was originally reported on April 30th as 6.1%.  Each month after the original release, GDP is further refined.  By the end of June, that 1st quarter figure had been revised downward to a decline of 5.5%, and the government eagerly hyped the number as evidence that our economic decline wasn’t as bad as first thought.

Well, guess what?  Buried in the report of 2nd quarter GDP is a final revision of 1st quarter GDP.  By this time, no one cares about the 1st quarter any more and so virtually no one reports it.  But the final 1st quarter GDP figure was revised upward (from the most recent estimate) almost a full percentage point, to 6.4% – higher than the initial report on April 30th of 6.1%.  Is the government playing games with economic data to provide a psychological boost to the economy?  Is it possible that the 2nd quarter was actually worse than reported and, to avoid negative publicity about the state of the economy, they decided to load some of the decline back onto the 1st quarter?  You be the judge. 

Pundits applaud this smaller 2nd quarter decline in GDP as evidence of improvement in the economy.  Some even call it “less negative growth.”  Baloney.  It’s not “improvement” or “less negative growth.”  A decline is still a decline.  And how much worse would it have been without the economic stimulus plan that was enacted in February?  Has that spending really been “stimulative,” or is it holding back an even worse decline?  More on that subject in a subsequent post.  (Stay tuned.  You’ll be shocked at the numbers!)  But there’s also a bit of good news on population, which I’ll cover in yet another subsequent post.

The important take-away here is that population growth is contributing significantly to Americans’ economic decline.