There has been some good economic news lately. Weekly jobless claims, which are volatile, fell to "only" 405,000 last week. The BEA's advance estimate for GDP showed that the economy grew 2.0% in real terms during the third quarter. More than once, I said that I expected the GDP estimate to be revised downward, for that's what the BEA almost invariably does. But, no! The estimate was revised upward instead.
The U.S. economy expanded at a faster clip than initially forecast in the third quarter, helped by more robust consumer spending and by stronger exports, the Commerce Department estimated Tuesday.
The economy grew at a 2.5% annualized pace in the quarter, revised up from the initial estimate of 2.0%, the government said in its second estimate of quarterly gross domestic product. GDP growth was 1.7% during the second quarter.
Perhaps you did not notice an increase in your general economic happiness. Most likely, you did not notice that increase because it did not occur. And yet here is the government telling us that the economy is expanding at a pretty good clip. In fact, real GDP is now only 0.65% less than it was in the 4th quarter of 2007, which was its pre-recession peak. The "size" of our economy is basically the same as it was before the downturn. Now you must ask yourself some critical questions—
- How can the economy be about the same size now as it was in late 2007 when U5 unemployment is over 11%. as opposed to about 5% then? When the housing market is only a pale semblance of its former self? When America's public debt has grown by trillions of dollars beyond its 2007 level? When the trade deficit has once again widened to pre-recession levels?
If you're having trouble seeing how GDP could be what it is, you are not alone. The fact that population grew while the economy didn't over the last three years could not possibly explain it. The only reasonable explanation is that the GDP number is almost worthless. Before I demonstrate that, I'd like to quote Bob Herbert as I did in Hiding From Reality—Retail Sales And Inflation.
We don’t even seem to realize how deep a hole we’re in. If student test scores jumped a couple of points or the jobless rate fell by a point and half, the politicians and the news media would crow as if something great had been achieved. That’s how people behave when they’re in denial.
When GDP is said to grow at a 2.5% annual rate, "politicians and the news media crow as if something great had been achieved," but nothing has been achieved. Actually, the official story is that GDP growth is moderate, and not yet robust enough to create more jobs, boost the sagging housing market, etc. Thus the same number of people are out of work, the public debt is larger, and the ghostly housing market still struggles toward its inevitable bottom. The official story is nonsense. The only possible "real world" conclusion is that GDP is a misleading form of government propaganda.
Looking At Personal Consumption Expenditures
The BEA data shows that Personal Consumption Expenditues (PCE) make up 70.35% of GDP (as of the end of October). The graph below shows the PCE component of GDP.
From Calculated Risk
Even though GDP as a whole remains slightly below its end-2007 level, PCE is at its highest level ever! Media types who tell us that "consumption" is 70% of GDP are also implying that "consumer spending" drives the economy. If GDP goes up, PCE goes up, and thus "consumers" must be consuming more than ever before. That's the official story on NPR or in the New York Times or anywhere else you care to look.
Economist Michael Mandel takes a closer look at PCE spending in his Where Americans Are Spending More (August 9, 2010). His blog is called Mandel On Innovation and Growth, so that gives you an idea of where he's coming from.
Since the recession started in the fourth quarter of 2007, the common theme has been about Americans cutting back on their spending. But the latest numbers from the BEA show aggregate personal consumption expenditures are up 2.9%, or $285 billion. So we must be spending more on something!
We sure are! Mandel breaks down the BEA GDP data for us.
You can see that we have dramatically increased our spending (in absolute terms) in three four areas—healthcare, housing, education and alcoholic (beer, wine and the hard stuff). But wait! There's a problem with this data, excluding our need to drink heavily—
... the data also shows a big gain in spending on education, healthcare, and housing, but it’s impossible to know how much of that increase is actually coming out of the pockets of households. Education spending includes government tuition aid and spending by private nonprofits out of their endowments and contributions; healthcare spending including Medicare, Medicaid, and employer-paid insurance; and housing includes a huge imputation for owner-occupied housing, which may or may not correspond to an actual increase or decrease in out-of-pocket spending.
Once we take those three huge categories out of the data, the remaining PCE has actually gone down by 0.6% since the recession started.
Well! So much for the notion that PCE implies ever-increasing "consumer" spending by households. Healthcare spending, which makes up the bulk of the spending increase, consists of government entitlement payments (Medicare and Medicaid) for the most part. So as onerous healthcare expenditures rise (in real terms), so do personal income expenditures, and so does GDP.
But aren't Medicare and Medicaid payments on track to bankrupt —or make even more bankrupt, if that's possible—the federal government and the state governments? I will admit that our ever-expanding healthcare industry does create some jobs—I assume you've seen the movie The Blob—but how many jobs does the huge imputation for owner-occupied housing create?
Remarkably, Mandel manages to make hay out of the $1.5 billion increase in spending on telephone equipment.
Right there up at the top is America’s love affair with mobile devices, where spending has soared almost 17% since the recession started. Also supporting my thesis of a communications boom–spending on wired, wireless, and cable services have risen by 5%.
Even if increased spending by households is non-existent very dubious at this point, there is little doubt that Americans have also cut back on spending in other areas. Mandel also gives us that data.
Whereas Americans have spent $1.5 billion more on smart phones or whatever, they have also spent $3.8 billion less on clothing and footware. And apparently (minus $64.2 billion) they have stopped repairing their cars. Most of the other items we have curtailed spending on are luxuries. Let's hope few people are going without shoes or a working motor vehicle they need to get to work as GDP grows and grows.
This GDP nonsense is beyond depressing. It's not the propaganda per se—I expect the government to lie or actively mislead us—it's the fact that Americans would rather accept the illusion of growth than admit that our economy is going to hell in a handbasket. As Bob Herbert said, that's how people behave when they're in denial.
If you're interested in how the economy is doing, and almost all Americans are, then you should understand that GDP is almost worthless as an indicator of where we stand. As for denial, there is no general solution to this problem, which means that the economy will have to sink beneath the waves again before there's any real possibility of Americans acknowledging how far gone we really are. But by then, it will be too late to do anything about it.