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Even Worse Than It Looks

by John Rubino on April 30, 2014 · 7 comments

No US GDP report is complete without an explanation from the Consumer Metrics Institute of how Washington is fooling us. The latest one is even scarier than usual:

There are a number of disturbing items in this report:

— Even at first glance this is not a good report. Although the headline number itself says “stagnation,” in the context of earlier reports it shows an economy in dynamic transition from lackluster growth towards outright contraction. The overall headline number is down 2.5% from the prior quarter and down 4% from the next earlier quarter. These are significant changes, with the prior quarter’s trend extended and the downward slope intensifying.

— Private commercial investment dropped substantially, led by reduced outlays for residential construction, transportation equipment and IT infrastructure.

— The year-long 2013 cycle of inventory building has come to an end. Over an extended time period inventories are mostly a cyclical zero-sum game, with excessive growth or contraction over any period being corrected (i.e., reversed) during a subsequent period. Moving forward we should expect that inventories will continue their cyclical contraction, with negative consequences to the headline number.

— Collapsing exports are likely confirming a weakening global economy. If so, exports are unlikely to provide the same kind of growth boost that they have provided during 2013, when they grew at about twice their historic rate.

— A positive contribution to the headline growth rate from imports is historically an inverse growth indicator, since it is usually a consequence of reduced domestic demand (e.g., positive import contributions were particularly notable during 2008 and early 2009, and again during the overall weak 4Q-2012).

— The Federal government’s “shutdown” subtracted roughly 1% from the fourth quarter’s reported growth rate. Since it is likely that some part of the reduced spending was actually only deferred (rather than foregone), we had expected a sharp “bounce-back” in Federal spending in 1Q-2014. While that did occur to some extent in the non-defense portions of the Federal budget, it was offset by ongoing cutbacks in defense spending and shrinking state and local expenditures on infrastructure.

— Although real household income improved somewhat (at a respectable real 1.22% annualized rate), it is still below levels seen in the fourth quarter of 2012. It bears repeating that total aggregate real per-capita income growth since the second quarter of 2008 has been just 1.04% — an average annualized growth rate of just 0.19% during the entire “recovery.” The household savings rate is down over 2.5% since the fourth quarter of 2012, and it remains well below the historical long term savings rate.

— The growth in consumer spending was caused by increased household costs for non-discretionary services — healthcare, housing, utilities and financial services (e.g., rising interest rates). Spending on goods remained essentially flat, with the “growth” in consumer services spending coming once again mostly out of savings — which is unsustainable over the long haul.

— Most of the increasing spending on services was channeled/transferred to large-cap corporate America. Discretionary spending at shops on “Main Street” America — the quickest source of economic growth or new jobs — is under renewed (and probably unrelenting) pressure.

— The headline growth rate is likely enhanced by an understatement of inflation. Even using BLS data to “deflate” the nominal data results in a contracting headline number, while using data from the BPP to deflate the data results in an eye-opening -2.5% contraction rate.

Enjoy this (barely) positive headline number while it lasts. Even if it survives the next two months of revisions, the economic momentum signaled by the past two quarters will likely carry the headline number into the red in the very near future.

Wow, that’s a lot of bad news under the surface of what was already a disappointing headline. Especially interesting is the size of the drop in GDP the US would have seen if it was using honest inflation numbers. Which is no doubt why we don’t use honest numbers.

Now the question is how much of this multi-faceted weakness was weather-related and destined to be reversed when the Spring sun brings out all the latent shoppers and home buyers. Time will tell. But for now, the contrast between a stalling economy and soaring stock prices is pretty striking.

  • Bruce C

    The problem is that most normal people don’t think like economists. Unfortunately most stock investors – at least the professionals – do, which is probably why the market was up nicely today.

    First of all, the “Consumer Metrics Institute”, economists would say, isn’t a reliable source of information because they don’t produce the data, they simply analyze it. (I’m not kidding.)

    Consider how an economist would explain the “disturbing items” in the report, as they appeared:

    Even at first glance it is obvious that the CMI report is unserious. Numbers don’t speak and this quarter’s headline number quite certainly didn’t literally say “stagnation.” However, “stagflation” – which is entirely different – can’t happen if inflation is stagnant, so a winter slow down is normal.

    – Define “substantially.”

    All things are cyclical. What goes down should go up again at some point in the future.

    “Collapsing” exports implies sharply greater domestic consumption. There’s not enough product left to ship overseas, and fortunately foreign countries didn’t want it or else prices would have risen which is why GDP didn’t increase as much as it will going into 2015.

    A positive contribution to the headline growth rate is a positive for the headline growth rate. We expect it be even more positive going forward. (Also, remember that after 2008 and early ’09 the stock market took off.)

    That lousy, stupid government shut down is what slowed GDP growth. That won’t happen again.

    Some people just aren’t happy no mater what. Real household income IMPROVED a “respectable” 1.22%, and that’s a heck of a lot higher than the average recovery rate of 0.19% since 2008.

    There is nothing wrong with a little inflation. In fact it is a good thing. When prices rise for necessities then consumers have to spend more and that adds to GDP. Besides, US consumers have always been lousy savers. At least now they’re taking advantage of low interest rates and borrowing money instead of foolishly trying to save it and earning nothing. (As the Lord Keynes said, ‘In the long run we’ll all be dead,’ so don’t fall for those false arguments of “unsustainability”. Can you still buy a Toyota? ‘Nough said.)

    There’s a reason some corporations are called “Large Caps”: They are the successful ones that grew out of their proverbial diapers as some shop on “Main Street” and now get most of the market share. That’s capitalism, and THAT is growth!

    Inflation may well be understated, which is why GDP will begin to pick up as more inflation kicks in and everyone has to spend more, thus growing the economy.

    • Brittany

      “The problem is that most normal people don’t think like economists…

      There is nothing wrong with a little inflation. In fact it is a good thing. When prices rise for necessities then consumers have to spend more and that adds to GDP. Besides, US consumers have always been lousy savers. At least now they’re taking advantage of low interest rates and borrowing money instead of foolishly trying to save it and earning nothing. (As the Lord Keynes said, ‘In the long run we’ll all be dead,’ so don’t fall for those false arguments of “unsustainability”…

      Inflation may well be understated, which is why GDP will begin to pick up as more inflation kicks in and everyone has to spend more, thus growing the economy.”


      I am glad most people don’t think like (Keynesian) economists.

      I find this Keynesian line of reasoning to be offensive to humanity, and I teach AP Macroeconomics. I am so glad to be able to expose students to alternative points of view because this pro-debt, pro-inflation argument is just absurd. All of banking is a magical sleight of hand that screws the people while the few at the top reap all the rewards. Before the 2008 crisis, our central bank leaders professed that all was fine and dandy. The idea that these incompetent and corrupt idiots actually know how to pull the correct economic levers to “fix” the economy is ridiculous. Anyone who still believes central bankers are here to help the people must be suffering from Stockholm syndrome.

      While Keynes is correct that in the long run we are all dead, that does not mean we should spend our short precious time on this planet slaving away to profit the bankers.

      You say Americans are lousy savers and that those who do save are foolish. Perhaps savings are so low because wages are not increasing with the oh so beneficial rise in prices and interest rates are kept so low for the common man to benefit from the interest on his savings. The average person has to enslave him/herself to debt because the purchasing power of the dollar is being destroyed by the banking system. How dare one justify the theft of another’s labor through inflation as some kind of economic panacea.

      Really,you think there is nothing wrong with inflation because it forces consumers to spend more and thus contribute to an increase in GDP? Since when does paying a higher percentage of your income for basic necessities equate to a better standard of living for the nation? Theoretically, rising food prices forces people into food stamps, thus increasing government expenditures, thus boosting GDP. However, it would be foolish to see an increase of people on the government dole and say that our economy is improving. Business as usual in the USSA.

      Go tell the poor people in America that the rising food costs are good for their economic well being.Tell my grandparents on a fixed income that their increased health care costs are benefiting them. Go tell my students that the ridiculously high tuition they are about to pay is good for them. Sure, most of them will graduate without a job and will be servicing high debt loads that can’t be discharged in bankruptcy but they’re helping to juice the economy- they’ll be dead someday so why not let them spend their life slaving away sacrificing their time and energy to fuel an unsustainable economic system.

      Inflation is theft and the people are waking up to this. These Krugman-esque arguments are offensive to the people and I look forward to the day economic sanity is restored. The markets will correct (as they ALWAYS do) and the people who refused to see the writing on the wall will be historical road kill.

      • Bruce C

        I had a feeling this comment was going to be misunderstood, and I sort of regretted it right after posting it. Evidently, this was an unsuccessful attempt at satire. If you’ll notice I tried to put the looney econo-speak in quotation marks similar to the way the CMI report was presented in the JR’s piece. Sorry.

        I am not an economist and I was trying to point out the absurd viewpoints that many people in the financial industry and the government have. Basically, the CMI report applies basic logic, common sense, history and “Austrian” economic principles whereas most appointed and influential “economists” think in terms of “Keynesian” ideas that support central banking/planning and the fiat-based fractional reserve monetary system we have now, as you know.

        I’m sorry I upset you. I don’t blame you. In fact, I’m impressed and heartened that you spoke up and wrote so passionately. And, I agree that sanity/reality will ultimately prevail, I just hope I live to see it and the financial elites be the road kill and not just the “sheeple”.

        • Brittany

          Oh thank goodness I misunderstood the sarcasm. I figured someone delivering those kinds of arguments on this website had to be either a paid government troll or a professor at Yale. I apologize- it is getting close to AP exam week and I am so tired of the brainwashing Keynes curriculum.

          So sorry for the intensity for which I directed my rage at the banking system. I am a young public high school educator and get so angry at “the system”. Being a gov/econ teacher woke me up to how bad everything really is (yet somehow I am the only only econ teacher who acknowledges these problems at these AP teacher meetings I go to).

          I just want the kids to pass the AP exam so they can relieve themselves of some of that terrible tuition debt while understanding that this monetary system is on its way out.

          I received the coolest email from a student yesterday who had an interesting encounter with her bank. She gave me permission to share her story- the video she refers to is “Mike Maloney’s Hidden Secrets of Money part 4” which I showed to all my econ students.

          “Hi Mrs.Y,

          I just got out of a meeting with my bank agent because I had deposited about $300 in my checking account and for some reason it didn’t show up on my account anymore and it showed that a second account was opened in my name so I figured
          my account had been compromised so I made an appointment to find out what was going on. Yesturday I made sure I read over all of my mail from Bank of America to make sure I wasn’t the one making the mistake.

          So I went to the bank and I explained what was going on and that I wanted my money back and they tried to come up with some BULL that my dad had opened it and I got my dad on the phone all pissed saying that he didn’t and then the bank agent apologized saying “oh no sorry ma’am I believe something that you bought from a store was possibly compromised and that’s why your account has been frozen.” (Yet I haven’t used my account for anything in months) so he starts pulling a bunch of crap and I finally just say “I know how the bank system works…” and I went on explaining to him how the video said it worked and his eyes got wide and he asked me how I old I was and I told him 18.

          He started smiling and giggling saying that he was at work, but if he were anywhere else he would have laughed his ass off in amazement. So he immediately returned my money (+ the money from the past month of paychecks) and cancelled that second account and gave me a new temporary card.

          New found respect for my (super limited) Econ knowledge. I just wanted to share my experience with you!

          Have a nice day!”

          • Bruce C

            Congratulations on being a public high school educator, and an AP course instructor at that.

            You should be very proud of your student too.

            And, again, thank you for your feedback and caring.

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