Real GDP Grows 3.5% in the Third Quarter – A Path to Prosperity Perhaps?

Not so fast. Estimations for positive GDP growth began early this summer; however, a closer look at how this was achieved will reveal a bleak outlook in the future.

The key contributions to growth in the third quarter are listed below:*

• Real personal consumption expenditures increased 3.4 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second.
• Durable goods increased 22.3 percent, in contrast to a decrease of 5.6 percent.
• Real residential fixed investment increased 23.4 percent, in contrast to a decrease of 23.3 percent.

The Economic Recovery Act of 2009 had very little impact on the numbers as the federal government's contribution to GDP growth was up just 2.3 percent.* In addition, the money spent thus far has exceeded total output from quarter to quarter. However, much of the growth is attributed to the government’s “Cash for Clunkers Program” and the $8,000 first-time home buyer credit.

The costs of these government programs have well exceeded $1 trillion. Was this exorbitant cost worth 3.5 percent “growth?” More to the point, there wasn’t any REAL growth! The government has essentially printed money it doesn’t have to BUY growth. This is similar to individuals borrowing money on their credit line, going out and buying goods and claiming that their personal wealth has increased. Money shifting hands is not growth. Speaking of money shifting hands, how many people borrowed more than they can afford to take advantage of these programs betting on the fact a strong recovery is in sight? Does the word “bubble” come to mind?

Now, let’s have a look at the more discerning part of this report.

“Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter, in contrast to an increase of $19.1 billion (0.6 percent) in the second.”*

This is a cause for concern. 4.1 million jobs have been lost in 2009, and unemployment currently stands at 9.8 percent. People who still have jobs have been reduced to four-day work weeks in many cases. With personal income declining and no change in the high unemployment status, it’s time to look beyond the textbook term for an end to a recession.

“Personal current taxes increased $4.8 billion in the third quarter, in contrast to a decrease of $119.1 billion in the second.”*

Current-dollar personal income has declined, but personal current taxes have increased. Many individual states have raised sales taxes, property taxes and income taxes to cope with very large budget deficits. If people’s personal income increased, an increase in tax liability would have made sense.

“Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.”*

Translation – people are barely getting by. Households and businesses have cut down expenses as far as possible. This is not a good situation for a consumption-driven economy.

Finally… “Personal saving -- disposable personal income less personal outlays -- was $364.6 billion in the third quarter, compared with $533.1 billion in the second.” “The personal saving rate -- saving as a percentage of disposable personal income -- was 3.3 percent in the third quarter, compared with 4.9 percent in the second.”*

A key indicator of real recovery is an increase in the personal savings rate for obvious reasons. An increase in personal savings is indicative of job growth and an increase in personal income. People then have dollars to invest to strengthen the markets.

In the end, what does all of this sum up? It reveals how just how effective government intrusion in the economy really is. What do we have in exchange for 3.5 percent GDP growth?

• A very weak U.S. dollar (Take no notice of the short-term bounce it has received from the GDP news, as it will be temporary.)
• A real possibility of a V-shaped recovery, inflation and stagflation if the government does not reverse course soon
• Personal income and savings declining and taxes rising
• A jobless recovery thus far
• An economy currently reliant on excessive government spending to produce positive growth with government spending exceeding the rate of growth

Considering how fast and how much the U.S. economy has declined, growth should have been much higher – possibly 6 or 7 percent. Perhaps that would have been possible with less government intervention and a focus on a strong U.S. dollar. For those naysayers who still believe that a weak dollar is critical to recovery, it is important to state that the U.S economy is not one that relies on exports. In addition, do people really think the U.S. will ever outdo China in terms of labor cost?

I’ll save my celebrating until the United States’ government looks backward in time and remembers the effects of Keynesian “stimulus.”

* http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm