In The Coming Economic Propaganda Blitz, I warned you about a future disinformation campaign designed to convince you that Happy Days are here again.
Let this post serve as your first warning. The Bureau of Economic Analysis (BEA) within the Commerce Department is going release the advance estimate for 2010 4th quarter Gross Domestic Product (GDP) on January 28, 2011. This estimate is likely to show the economy growing at a 4% (or better) annual rate. But that won't be the end of it—not by a long shot. Due to the Fed's bond buying (QE2) and the massive tax cuts just enacted by Congress, growth in subsequent quarters is also going to be considerably higher than it would have been.
Well, you might say, isn't that a good thing? Doesn't that indicate that "The Economy" is finally kicking into gear? That's certainly what the Powers That Be want you to believe. The problem is that there are two economies, not one. See my post "The Economy" — America's Great Lie. There's the economy where the well-off and the rich folks dwell, and there's the other one where ordinary Americans live. If the former is thriving, and it is, and the official statistics lump the two together, it will appear that everybody is better off.
I missed my bet on GDP growth. Last Friday's advance release by the BEA said the economy grew at "only" a 3.2% annual rate in the 4th quarter of 2010. Mea culpa! However, the number was easily high enough to get the propaganda campaign off the ground.
The Statistical Recovery. The graph is from Tim Iacono, who notes that "for all of 2010, the economy expanded 2.9 percent, up from a 2.6 percent contraction in 2009, and the best performance since 2005 when growth registered 3.2 percent."
Various analysts went through the numbers that contributed to or substracted from GDP. Discerning readers of DOTE thus have an opportunity to identify which analysts are honest brokers, and which are eager, willing servants of the propaganda machine. In a recent (very small) survey I conducted, it turned out independent analyst John Mauldin is an honest broker, while Bloomberg's Caroline Baum and Salon's Andrew Leonard are merely tools. Here are excerpts from the propagandists. First, Andrew Leonard—
Let's give a big shout out to the American consumer, who is flexing muscles that haven't been seen in these parts since before the financial crash. On Friday, the Bureau of Economic Analysis released its first guess as to the GDP growth rate for the fourth quarter of 2010, and the numbers are pretty good: A respectable 3.2 percent -- underneath the consensus expectation of economists, but better than the 2.6 percent registered in the third quarter...
But there's a number inside the number that has the economic data crunching geeks very excited... registering economic growth while inventories are falling is a very encouraging predictor of future economic growth, because it implies that businesses will have to restock again...
Consumers came out to play in the fourth quarter, and they were buying some big ticket items. The Journal's Phil Izzo tweets that a third of the increase in spending was accounted for by auto sales. Good thing the U.S. still has an auto industry around to take advantage of that! (Hmm, wonder who gets credit for that?)
But for now, the report is pretty good news, and suggests even stronger growth at the outset of 2011. Now, if only the U.S. labor market would get the hint, and start popping.
And now Caroline Baum—
The pieces just don’t add up. Credit card debt outstanding has fallen 27 straight months for a total decline of $177.2 billion. The unemployment rate has been stuck above 9 percent for 20 months. Average hourly earnings rose 1.9 percent in 2010. Personal income rose less than 4 percent in the 12 months ended November. About 23 percent of homes with mortgages are worth less than the amount of the loan.
Faced with these not insignificant hurdles, what did the U.S. consumer do? Why, he spent like there was no tomorrow.
Retail sales jumped an annualized 14 percent in the fourth quarter, a spending pace that’s been equaled only once in the last 18 years. (The Census Bureau changed the methodology for calculating retail sales in 1992 and says the data aren’t comparable to earlier measures.) For the year, retail sales rose 7.9 percent, matching the 2004 increase and the biggest since 1999...
Is the American consumer back to his old shop-’til-he-drops ways? It sure looks that way on the surface.
And who can blame him? All the incentives are urging him to spend, spend, spend. The interest earned on checking and savings accounts is so minute it’s hard to find on the monthly bank statement. Economic theory teaches that high real interest rates are an inducement to defer consumption. Low real rates encourage consumers to spend today...
[But] there’s another possibility that would better explain the inconsistency between weak job and income growth on the one hand and robust spending on the other.
“I think a credible case can be made that income and employment are being understated,” says Joe Carson, director of economic research at AllianceBernstein.
Exhibit 1 is Treasury data showing that fourth-quarter withheld income tax receipts rose 17 percent from a year earlier, according to Carson. “How can personal income be up 4 percent” when withholding rose more than four times that rate? Even wealthy liberals aren’t rushing to pay taxes on money they didn’t earn. For that reason, tax data are considered the most reliable source of information.
Exhibit 2 is the tendency for spending data to provide a more accurate reading on the economy than statistics on income and employment, according to Carson...
Yes, you read that last part correctly. Caroline quotes Joe Carson as saying that the government is understating income and employment! That must be the case because "consumers" are spending like there's no tomorrow. And tax receipts are up, so the real unemployment rate is probably lower than government data indicates. And incomes must surely be higher.
Wow. I'm almost speechless here. This would be a good time to remind you that America has two economies, one where the well-off and rich folks dwell, and the "other" one where you live. It's people in the rich economy who are doing all the spending, and according to John Mauldin, many Americans are withdrawing money from low yield investments (e.g. money market accounts). See my post Only 35% Of Americans Have Emergency Savings.
At the risk of going on and on, let's quote skeptic John Mauldin at some length. Here is Mauldin on what he calls the "real statistical recovery"—
You remember our old friendly equation:GDP = Consumption + Investments + Government Expenditures + (Net Exports)
Now to get Real GDP (actual GDP after inflation) you have to take away the effects of inflation / deflation. This is done by the use of a deflator built in for each category. But the deflator for exports / imports is a little tricky at times.
Moody’s correctly noted that “private inventories were an enormous drag on growth” and concluded that this was a good thing, in that they assumed that meant inventories went down and thus inventory rebuilding in future quarters will add to GDP growth. And that is where you have to look at the numbers, and there we find our anomaly. There really wasn’t that big a drop in inventories. It was in large part in the statistics, not in the warehouse.
Oil in the 4th quarter rose from roughly $81 to $89, or about 10%. On an annualized basis, this is 40%. Inventory investment is equal to the change in book value of the inventories, minus what is known as the IVA, or inventory valuation adjustment, which is used to correct for prices going up or down. Because the value of oil rose and thus cost more to acquire, the accounting requires that you reduce the value of the current inventories. Thus “real” imports fell at a 13% annual rate. Why? Because the deflator rose by 19%, largely because of the rise in the price of oil.
I know, I know, I just wrote that because the price of oil went up, the “real” value of imports went down, as well as inventories. Some of you are getting economic whiplash right about now.
If oil were to go back down this quarter by the same amount, that “growth” could be wiped out. There is no conspiracy here. It is just a statistical necessity... How much did it change things? Lacy Hunt thinks by anywhere from 0.5% to 1%. That means GDP is still a positive number, but there is not a “3” handle at the beginning of it. In the grand scheme of things, no big deal, as it will balance out over the coming quarters and years. But I just wanted to point out (once again) that you have to take some of the numbers we get from our government with a few grains of salt.
From James Hamilton's A modestly brighter GDP report. Hamilton: "There's a clear pattern in the recent data that when one of these [inventories or imports] makes a positive contribution to GDP growth, the other makes an offsetting negative contribution."
Essentially, if you do the math, the quarterly rise in the price of oil (from $81 to $89) reduced the value of current inventories and thus real (inflation-adjusted) imports fell at an annualized rate of 13%. If Mauldin and Hunt's analysis is correct, more expensive oil raised the GDP growth rate somewhere between 0.5% and 1%. And now here's Mauldin on the large increase in "consumer" spending—
The really surprising number you saw the talking heads on TV mention was the growth of consumer spending, at 4.4%. Is the US consumer back? After all, real final sales rose by 7.1%, a number not seen since 1984 and Ronald Reagan. But real income rose a paltry 1.7%. Where did the money that was spent come from? Savings dropped a rather large 0.5% for the quarter. That was part of it.
And I can’t find the link, but there was an unusual drawdown of money market and investment accounts last quarter, somewhere around 1.5%, if I remember correctly. (David Walker remembered that article as well.)
That would just about cover it. But that is not a good thing and is certainly not sustainable.
For additional details, consult Mauldin's A Bubble In Complacency: How Much Longer Can This Last? For example, he also quotes Dave Rosenberg, who says—
There is no doubt that there will be rejoicing in Mudville because real GDP did manage to finally hit a new all-time high in Q4. The recession losses in output have been reversed (though what that means for the 7 million jobs that have to be recouped is another matter). But, before you uncork the champagne, just consider what it has taken just to get the economy back to where it was three years ago...
I've included a lot of quotes here, which has made this post overly long. However, I wanted to drive home the point that the economic propaganda blitzkrieg has begun—I believe I have done just that. To demonstrate this simple but critical point, I had to quote some propaganda and contrast it with actual critical thinking.
What do we have? Nothing has changed. We still have the best statistical recovery money can buy.
Bonus Video — Same as it ever was.