The GDP Report Shows a Consumer on the Ropes
Posted by Michael A. Kamperman on August 1, 2009
The happy talk President and media have declared that the second quarter GDP report contained “good news” and the contraction in the economy was less than expected. They are both signaling an expectation that slow growth will soon resume in the second half of the year. But are they reading the right tea leaves? Yes, the preliminary GDP report showed the overall economy contracted at minus 1%, which was a much better performance that the previous couple of quarters. However, they ignored the fact that there were downward revisions going back to the fourth quarter of 2007 that added an additional decline of 2% to GDP. Hence, the 1% decline was off of a smaller than expected base. But that is all looking back in time. What is the second quarter GDP report telling us about where we are now and where we are going? The real picture not in the headlines is not pretty.
For starters, the headline number is based on a statistical quirk in the way GDP is calculated that needs to be revised. According to the second quarter GDP report, “net exports” rose and added a positive contribution to overall GDP of 1.38%. In reality actual exports fell 7% and actual imports fell by a larger 15%. Now who really believes an economy that exported less in the second quarter achieved significant export driven growth? Economists should revise the GDP net export calculation and base it on whether or not combined imports and exports were growing or shrinking. Based on a combined calculation imports and exports would have subtracted 1.5% from growth and not added to it. This would have made the reported GDP figure minus 4% rather than minus 1%. Next, federal government spending rose 11% overall. But this figure was juiced by a 13% increase in defense spending as President Obama expands the war in Afghanistan. Fighting in Afghanistan is not going to revive the domestic economy now or in the future.
The real problem in the GDP report is consumer spending, which accounts for 70% of GDP, shrank at a rate of 1.2%. Even in the 6.4% revised first quarter downturn consumer spending was positive. The consumer has finally thrown in the towel and is hunkering down. If this behavior continues we will only see further economic erosion and not positive growth. What economists are missing in their models is that credit is so tight to qualify for a mortgage or an auto-loan that consumers are being forced to forego spending. With a rising unemployment rate it is hard to see where the predictions of renewed consumer spending vigor are coming from. The other thing most economists are missing, because of a false faith in their econometric models that are based on a post World War II inflationary cyclical economy, is that inventory reductions are due to semi-permanent decreased demand. These economists expect a re-stocking of inventories to drive positive GDP growth going forward. But, if the consumer spends even less in the third quarter than in the second quarter, then why would companies add to their inventories? What we need President Obama is an economic prescription that does not include the currently preferred method of watchful waiting to get us out of the depression.
