GDP & the Economy

[unlawflcombatnt]

Today's final 4th quarter 2005 GDP report came in showing a 1.7% annualized growth rate for the quarter. Though this decline is concerning, the actual breakdown of contributions is even more concerning. The total increase in GDP during the 4th quarter was only $46 billion in chained 2000 dollars. (i.e., it was adjusted for inflation using the government-controlled BEA's own secret formula.)

Normally, consumer spending is 2/3rds of economic activity. This was not the case in the 4th quarter, however. In fact, personal consumption expenditures accounted for only $17.5 billion of that growth, or only 38%. The biggest contribution came from capital investment (overinvestment?) The total gross private domestic investment was $72.5 billion, or over 4 times as much as consumer spending. Of this investment, $51.2 billion is accounted for as increase in private inventories. In other words, $51.2 billion of the contribution to that $46 billion came from unsold goods (surplus.) With a GDP growth as low as it was, and an increase in unsold goods greater than the GDP increase, there are no signs that this is an economy that is "strong, and getting stronger." Producing 4 times more goods than Americans can purchase is a recipe for disaster. Since American consumers account for 80-90% of the purchase of American goods, this is especially concerning.

To complete the picture, the subtractions from the total GDP should be mentioned. Our 4th quarter trade balance was -$37.7 billion. Government spending declined $4-6 billion. (I'm giving a range, since the published numbers don't add up perfectly.)

Below is a modified copy of a chart showing this information from the U.S. Bureau of Economic Analysis:



The above chart can be found in its entire (unreadable) form at: BEA-GDP

Our economy is in MAJOR trouble if we continue to prop up our GDP with unsold inventories and overinvestment, instead of consumer spending. Our economy cannot continue to devote only a 38% fraction of GDP to consumer spending. Unsold inventories are worth nothing if they aren't sold. This is not a sustainable course.

unlawflcombatnt

EconomicPopulistCommentary

Economic Patriots' Forum

___________
The economy needs balance between the "means of production" & "means of consumption."

[Sammy Pepys]

1. One thing to keep in mind about GDP

It doesn't consider things like R&D or training/employee development and investments made in those areas.

[unlawflcombatnt]

2. R & D

Regardless of Research and Development expenditures, companies still need to sell their production in order to survive. Unless, of course, they are receiving government handouts to pay for the research.

[Inland]

3. So the figure that alarms you is

"Change in private inventories"? Particularly in light of the drop in durable purchases?

That sounds like how recesssions begin, old school. The conventional wisdom is that not every increase in inventories is followed by a recesssion, but most recessions are preceded by an increase in inventories.

[unlawflcombatnt]

4. Inventories

Inventories are what concern me the most. It indicates production in excess of consumption. And if production is in excess of consumer demand, then ultimately demand for labor to provide production declines as well. In other words, demand for labor will decline if the production exceeds demand. Hiring won't increase if the production by labor is not sold to consumers.

In summary, increased inventories indicate decreased consumer demand for goods. Decreased demand for goods leads to decreased demand for labor to produce those goods. Decreased labor demand not only reduces employment, it reduces wages as well.

With real wages declining for 2 straight years, this is not a good sign.

[unblock]

14. add to that the flat and briefly inverted yield curve

as another harbinger of recession.

again, not a sure sign, but another clear warning sign.

[Inland]

17. Which I understand to be

a consensus that interest rates are going to drop in the future due to a recession, right? I wasn't aware that the curve was flat now.

Gee, on Fox Saturdays, they say the success of the war is boosting the economy.

[unblock]

19. that's the traditional explanation, however

the current explanation of why "this time it's different" is that china is buying the long bond bigtime which drives rates down on the long end.

i don't care for this explanation because it presumes that china is too stupid to buy treasuries across the entire curve.

[Inland]

20. I don't see how even that makes it different.

Then all it means is China isn't interested in hedging on risk by buying varied maturities, just like any other time one big buyer is entirely certain or many smaller buyers are entirely certain. It might be crazy like a fox. We won't know for a decade. Either way, "the market", which is that faceless aggregate of opinion backed by money, is still betting on recession, according to the CW.

[unblock]

21. it's not that they should by across the curve to hedge risk

it's that if they are buying enough long bond to distort the market, they're increasingly bidding up the long bond, which works against their interests. shorter debt becomes increasingly attractive as the curve inverts.

[Cassandra]

23. War is our main export these days.

[TrogL]

5. Unsold inventory is expensive

• Storage costs money (don't forget heat, security, etc.)
  
• nobody wants last year's model
  
• batteries go stale
  
• you want to spend your money on next year's product, not flogging this year's stale inventory
  

[unlawflcombatnt]

7. Inventories

Yes, inventories do cost money. And anything unsold is a waste. And there's no incentive to hire more workers if you already have an excess amount of product.

[PsycheCC]

6. Thanks for taking the time to include the chart. So if unsold

inventories more than account for all of the meager growth in GDP last quarter, that means (as you mentioned) that consumers spent far less than usual. To me, that spells impending recession since consumer spending is usually the biggest driver of the economy, right?

[unlawflcombatnt]

8. Exactly Right

You're absolutely right. Consumer spending is the engine that drives our economy. If it declines, everything else will follow.

Also of interest is that, even with this meager consumer spending, much of it was paid for with borrowed money, especially from home equity loans. Without the spending funded by borrowing, the number would have been even lower.

[Neil Lisst]

9. another sound analysis, Professor

thanks

[kineneb]

10. unscientific personal observations

1. Consumer spending seemed to be low during holiday season (4th qtr. 2005)
2. lots more housing stock now available, and housing is moving much slower than in 04
3. higher interest rates mean fewer loans
4. still lots of news of mass layoffs by large corporations
5. national debt is unsustainable...I now owe more (30K) as an individual citizen than we take in (14K)

something ugly is on its way here...the piper must be paid.

(Hi U.C., glad to see your commentary again.)

[unlawflcombatnt]

11. Observations

Thanks for your observations, kineneb. I certainly agree that something ugly is on its way.

Home equity extraction, and the spending it finances, has nowhere to go but down. Real wages have declined 2 years in a row. There's no reason to think consumer spending won't decline even further.

Iraq may cost $2 trillion according to economist Joseph Stiglitz. Our national debt has increased over $300 billion in the 1st 6 months of the current fiscal year.

It's amazing to hear Right-Wingers get on television and talk about how good the economy is. What are they basing their statements on? Where's the "good" news to support this?

[Neil Lisst]

12. first everyone ran their credit cards up, then got home equity loans

This has been going on for the past five years, as consumers mimic the federal government's practice under Bush of buying now and charging it to the future. Unlike the federal government, which has no loan officer, no bank examiner to regulate lending, there IS an end to the borrowing for consumers.

The next good economic ripple could set off significant foreclosures.

[PsycheCC]

13. Great role models, the Bush administration.

"The next good economic ripple could set off significant foreclosures." Well, to be honest, I hope you're right. The housing market is so crazy hot that I can't afford a home in my area. I'd be nuts to buy in with home values so inflated. I'll feel a bit sad for those who get caught in the drop, but the way people are living above their means on their imaginary home equity, I guess I won't feel too sorry.

[mbee]

25. Definitely have noticed store items that don't look in good shape -

sort of like they've been around a while. So this is the reason why and as time goes on no one will want these items.

[welshTerrier2]

15. here's what America's Auditor-in-Chief had to say

this is a bit more than very disturbing: http://www.bbc.co.uk/newsa/n5ctrl/progs/06/hardtalk/walker27mar.ram

[unlawflcombatnt]

16. Repost of Image

My previous image link for the GDP from the BEA crashed. Here's an updated version:

[AX10]

18. KICK and recomended!

Also, see Keneneb's post:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x2543400#2543750

[Fabio]

22. Sort of disgree

While building inventories is a concern on any balance sheet, this information suggests only that there are accelerated inventory purchasing, which can be seen as a sign of increasing business confidence in the future. Meanwhile, I am not a fan of increased consumer spending being a leading indicator of health in the economy.

Frankly, I think an increase in the consumer savings rate (quite the opposite of increased consumer spending), would be a better sign of long term economic health.

Either way, I think the most critical indicators are the real wage indicators, which are definately going in the wrong direction for the middle and lower class.

Just an opinion, but one learned through 10 years in finance and a harvard business school education....oh wait, shrub went there too, much to my chagrin.

[unlawflcombatnt]

26. Spending & Saving

I understand your point about consumer spending. But consumer spending is necessary to drive the economy. However, when an increase in consumer spending is financed by savings expenditure, instead of wage increases, it's certainly not a good sign. Furthermore, even with the meager increase in consumer spending during the 4th quarter, savings declined. We're definitely financing much of current consumer spending with either borrowed money or savings expenditure. I completely agree that this is not the way to strengthen an economy.

However, it is necessary to increase consumer spending over the long run if GDP growth is to occur. Goods can't be produced indefinitely in excess of what consumers purchase. Surplus inventory will increase if this continues. And this excess production will decrease demand for labor, thus decreasing employment and putting downward pressure on wages. The result of prolonged surplus production is lower employment, lower wages, and lower aggregate worker/consumer income. Lower aggregate consumer income reduces consumer spending and demand for production, which converts even more of a given amount of production into a "surplus."

Consumer demand and spending need to rise in tandem with increased production. Again, I completely agree with you that real wage indicators are more important. Real wages are the true limit of
long-term consumer spending and the production demand created.


Unlike Bush, I suspect your Harvard business education served you well. Do you suppose Bush actually attended any classes at the Harvard business school, or was it like his Reserve duty where nobody actually witnessed his presence?

[APPLE314]

24. Subtract out the monies spent on Iraq goods and services.

We have poured 300 Billion into this war and have nothing to show for it but a bump in GDP.