Whenever I take a long, hard look at the U.S. economic data, I usually shake my head in wonder and move on to something else. I consider "the recovery" we've allegedly had since early 2009 to be a massive fraud. In late 2009 and 2010, the economy "grew" due to the massive stimulus program passed during the first Obama administration. And now, if we look at the household debt data, there is nothing positive to report. In so far as most Americans are cash-poor and struggling to make ends meet, or penurious, policymakers are attempting to reflate the debt-fueled economic "growth" of the Housing Bubble years. I consider that fraudulent, not to mention devoid of substance.
Consider the suspect preliminary estimate for 3rd quarter GDP growth we received last week from the Bureau of Economic Analysis. Rick Davis of the Consumer Metrics Institute gives us some insight into the new GDP number (e-mail). The graph below shows ECRI's coincident economic indicators. ECRI's Lakshman Achuthan believes the U.S. went into recession in July, 2012 (red line). The GDP number was 2.7%, which contradicts his view.
In their second estimate of the US GDP for the third quarter of 2012 the Bureau of Economic Analysis (BEA) found that the economy was growing at a 2.67% annualized rate, an upward revision of +0.65% from the previously published first estimate for the quarter.
The improved headline number came exclusively from two sources: substantial upward revisions to inventories and exports. All other components of the growth rate actually weakened — particularly those associated with consumers. The happy changes to the headline masked the fact that the BEA's bottom line "real final sales of domestic product" fell by nearly a quarter of a percent to 1.90%. Excluding the impact of a huge surge in Federal governmental spending, rising inventories and increasing exports the headline number would have been a mere 1.03%.
The impact of the rise in Federal spending was nontrivial: nominal spending on salaries, materiel and construction grew at an annualized 10.5% rate during the quarter, with nominal defense spending alone growing at an astounding annualized 13.9% rate.
Yes, you read that correctly about defense spending. Rick's brief analysis of this surge is cogent and correct.
This surge in public spending could have been either an organic attempt by the defense establishment to stockpile materiel prior to the "fiscal cliff" or a more politically motivated "stealth stimulus" by the Administration. In either case the stimulus was accomplished without much in the way of public debate or fiscal transparency.
And then there's the usual deflator nonsense.
For this set of revisions the BEA assumed annualized net aggregate inflation of 2.80%. In contrast, during the third quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a substantially higher 4.98% annualized inflation rate.
As a reminder: an understatement of assumed inflation improves the reported headline number — and in this case the BEA's low "deflater" (more than 2% below the CPI-U) significantly boosted the published headline rate. If the CPI-U had been used to convert the "nominal" GDP numbers into "real" numbers, the reported headline growth rate would have been an anemic 0.57%.
We are thus entitled to conclude that the only "good" thing about the upwardly-revised GDP number was the headline. Everything else was as phony as a 3-dollar bill.
In fact, those who track GDP for the 4th quarter (now) are making early estimates of very weak (annualized) 1-2% GDP growth. Against this, we must consider the "official" (BLS) changes in employment, which have some credibility because Gallup tracking is showing a similar trend. Although jobs growth is still pretty weak, and those new jobs don't pay diddly-squat, the trend is still positive. That's the "good news" here.
Graph from Tim Iacono
It is easy to see that it doesn't matter much if the economy is "officially" in recession or not. Either way, the U.S. economy sucks. ECRI's Lakshman Achuthan believes the U.S. still experiences the traditional "business cycle". But any in-depth analysis of GDP numbers from quarter to quarter indicates a "fraudulent cycle" of changes in government spending, selective use of favorable deflators, inventory builds in the absence of real growth in final demand, and so forth.
Achuthan also wants to defend the integrity of his company's data and analysis (video below). That's perfectly understandable, but his recession call appears to be based on fundamental misconceptions about what's actually going on in the U.S. economy. For example, personal income in the graph above is aggregate income, and therefore does not take into account the great disparity between the earnings of those at the top and the rest of us. Aggregate income is thus misleading, and fails to give a true picture of the financial condition of most Americans, just as it failed to indicate what was really going during the years before the meltdown in 2008.
The most useful insight I can offer at this juncture is that the divergence between standard economic indicators and what's really happening "on the ground" in America is now so great that these indicators should be taken with a big grain of salt, or perhaps ignored altogether. We either have misleading measurements for measurement's sake, or measurements which serve the purposes of this country's political leaders.
In short, the economy is what is it—and that's not good—and the measurements of its performance have either acquired or been given a life of their own.