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.
At economicpopulist.org, Robert Oak took a tour through the BEA's personal income and outlays report for November, 2010. Before I present some of the data, let me jump to Robert's conclusion, which I have edited slightly for clarity—
For the first two months of the three which make up Q4 GDP, or October, November and December, it's looking like at least 4% growth in the Q4 GDP report for PCE (Personal Consumption Expenditures). PCE was 2.4% in Q3 2010 GDP.
I calculate that if there is no PCE growth for December, PCE would still show 3.97% growth in Q4 2010 GDP.
The only good news in this report is PCE, once again, but in reality, the middle class is getting squeezed so one must wonder where the money is coming from to increase PCE.
[My note: PCE accounted for 71% of GDP in the last (3rd quarter) report.]
Let's look at some data. First, the personal savings rate is going the wrong way. The graph and quote below are from Doug Carey's The Savings Rate Is On The Decline.
Lost in all the hype over stronger consumer spending and GDP numbers is the fact that the U.S. personal savings rate, which had been on the rise, is now falling. The Commerce Department reported today that consumers saved 5.3% of their disposable income in November, down from 5.4% the previous month and down from 6.3% in June of this year. The savings rate had hit a recession high of 8.2% in May of 2009...
... Many thought that the savings rate would blow through 7% and stay there for several years. But they underestimated what the Federal Reserve can entice people to do.
Part of the Fed’s goal in pushing down short-term interest rates was to goad people into stopping their new-found frugality and begin spending again. It is much tougher for people to save money when their money market and checking accounts pay them 0%. Therefore, instead of rebuilding their balance sheets, consumers appear to have taken a break and begun their spending ways again. Ben Bernanke is a Keynesian through and through and he believes that real economic growth can come from consumers overextending themselves and spending more. So far his plan seems to be working, at least in terms of the mathematics of GDP.
The drop in the savings rate from 8.2% to 5.6% has added over $30 billion to the consumer spending side of the GDP accounts, which results in an extra 2.5% of GDP growth over one year.
Whether or not this can or will last is yet to be seen...
[My note: Disposable income is income less taxes.]
I think we can safely assume that the 77% of American workers living paycheck-to-paycheck have virtually no savings, and they certainly aren't socking away some money every week. However, those among the other 23% who have substantial checking or money market accounts paying 0% interest have indeed picked up their spending, having been goaded into abandoning the new frugality by the wily chairman of the Federal Reserve. The rising stock market has helped in this regard. Here again, clever Ben has helped push stock prices higher. At least on paper, many among those who had some savings feel richer than they did a year ago.
Now let's look at Oak's personal income graphs based on data from the St. Louis Fed (FRED).
The first graph shows nominal personal income (PI, in billions of dollars). The second shows real (inflation-adjusted) PI minus transfer payments (in billions of chained 2005 dollars).
If you look at only the first graph showing total personal income, as most people do, you could claim that income has been soaring since the recession officially ended at the end of the 2nd quarter in 2009. However, if you take a look at the second graph showing personal income excluding transfer payments, you get a different story. Transfer payments include social security, unemployment insurance, welfare, veterans benefits, Medicaid, Medicare, food stamps and so on. Once transfer payments are taken out of the equation, personal income is flat at a level well-below what it was in 2008.
The great thing about transfer payments from the government's point of view is that people receiving them spend them, thus boosting Personal Consumption Expenditures. The government simply prints or borrows some money, passes it along to you, and you spend every penny. It's a Wonderful Life! Needless to say, the income data does not paint a picture of a economy that can stand on its own two feet. See my post GDP Is Almost Worthless for some background on these issues.
I could go on and on, but that's enough for today. Throughout the coming year, the government and its media lapdogs are going to tell you that the economy is growing, that the nation is saved, that we went through a bit of a rough patch but everything is OK now. I wish it were so, but for those living in the "lesser" of our two economies, this propaganda blitzkrieg will be a Big Lie easily contradicted by everyday experience.
I will return to this theme repeatedly in the future because it's important. Nothing has fundamentally changed in America's economy. All of the deep structural flaws that plagued the economy before it blew up still exist. If you take away the various stimulus programs, the huge increase in transfer payments, and the abnormal financial conditions put in place by the Fed, the economy you live in would suck even more than it does. Even with them, the economy you live in still sucks big time.
The "official" unemployment rate will likely be over 9% at the end of 2011, despite the miraculous GDP growth we are about to see. If they can't spur a real economic recovery, the government will settle for a statistical recovery instead. And then they will try to convince you that it's the real thing.
As I said at the top, this is your first warning.
When I started reading your post I was planning to make the following comment, which as it turns out, substantiates what you later stated.
My personal spending has increased recently, I actually have discretionary income now. The reason being, I recently went on food stamps and stopped paying my credit cards and mortgage.
As a small business owner, this year was significantly worse than last year. The bottom fell out in June. Back in January, I thought I had survived the Great Recession, but I was wrong.
Other business owners report the same. Consumer Metrics Institute would appear to indicate there were many of us, at least for those selling online.
http://www.consumerindexes.com/
There are a lot of jobs out there, I know this, because I keep meeting people with 2-3 of them. Some have primary jobs that should more than cover their expenses, but they don't.
Some claim the spike in gas prices triggered the last recession, what will the current spike do?
Posted by: BJ | 12/27/2010 at 12:51 PM