Hope Despite the New Normal in U.S. Economic Growth



Given the scare over China’s possibly contracting economy earlier this week, the news is good but some of that has to do with the feds indicating it might not be the time to raise interest rates. It renewed investor confidence.

CNBC reported that the gross domestic product expanded at a 3.7 percent annual pace instead of the 2.3 percent rate reported last month, the Commerce Department said on Thursday in its second GDP estimate.

It is being led by business investment, inventories, government and consumer spending

The inventories are huge.

The upward revisions to second-quarter growth also reflected the accumulation of $121.1 billion worth of inventories, up from the previous estimate of $110 billion. That meant inventories contributed 0.22 percentage point to GDP instead of subtracting 0.08 percentage point as reported last month.

While the huge inventory build will likely weigh on growth in the third quarter, the blow could be softened by rebounding business investment on capital goods.

Consumer spending is up – great.

Richard Moody reported that the inventories are setting up a weak third quarter.

setting up a weak 3rd quarter


The next statement from CNBC isn’t totally honest. The real unemployment rate is 9% and 110 million Americans aren’t working.

A strong labor market, cheaper gasoline and relatively higher house prices, which are boosting household wealth, are helping to support consumer spending.

Construction and consumer spending are up, energy and mining are down.

There is underlying strength in the economy but many economists say it will not get better than the new normal of 2% annual growth.

Capitalism is so effective a system that it can survive even Barack Obama but it won’t prosper as it should.

From Moody’s August 27th report:

One question we’ve already heard is how much today’s GDP report will impact the FOMC as they gather in September to discuss the course of monetary policy. We think not a lot – the GDP data are by nature backward looking and the current quarter high frequency data will carry much more weight. Still, between the details of today’s report and the flow of higher frequency data for Q3 to date we have a fairly good idea what the contours of Q3 growth will look like. First, it is highly unlikely we will see a repeat of the 4.3 percent (annualized) growth in state and local government spending in Q3, so government will likely be a drag on growth. More significantly, the magnitude of the inventory build seen over 1H 2015 suggests there will be payback in Q3, and as the chart below indicates, that payback could be severe. Based on past episodes of rapid inventory builds, it is not unreasonable to expect a slower pace of inventory accumulation in Q3 will take well over a percentage point from top-line growth. Moreover, with the trade data free of the strike related distortions, weak global growth will weigh on exports of U.S. goods and trade will be a drag on top-line growth.

As we often do, we’ll note the underlying trends are more meaningful than any given headline number. As such, we aren’t getting too high over today’s headline GDP growth number just as we won’t get too down over what we expect to be much slower Q3 growth. The reality is, even with today’s data, since the end of the 2007-09 recession the U.S. economy has grown at an average rate of 2.2 percent which, to be sure, is more familiar than it is comforting. Despite some sharp swings in the quarterly growth rates we don’t look for this to change much.

The growth rate follows the same pattern of last year, when a negative Q1 led to a robust Q2 — but that ended in stagnation-level growth the rest of the year, and another wan economic annum overall. The Commerce Department credits the bump to a better mix on exports and imports and continued consumer confidence.

The report cites government spending as a growth area, but that only applies at the state and local level, which went up 4.3%. Federal spending was flat overall, and declined 0.4% on non-defense spending in Q2.

The Wall Street Journal however sees this as a positive report with the same caveat about the inventories.

In general, orders are up, backlogs are increasing, and inventories are shrinking — all positive signs. Capital investment is increasing as well, which signals that businesses think the future looks bright enough to build up. It’s only one quarter removed from a goose egg, though, and we have seen this pattern before.

Economists traditionally use Gross Domestic Product (GDP) to measure economic progress. If GDP is rising, the economy is good and the nation is moving forward. If GDP is falling, the economy is in trouble and the nation is losing ground.

The way a citizen is living with the day-to-day realities of life, GDP can be rather misleading.

The U.S. had a depressed first-quarter so our government decided to change the way it reports the GDP for a second time. It will be a complete lie based on a fraudulent accounting scheme.

In May of this year, the Bureau of Economic Analysis (BEA) announced they were altering the seasonally adjusted data that is used to calculate economic growth for the second-quarter GDP.

Zerohedge also reported in May that the government was doubling down with a “second seasonal adjustment: one which will take all the bad data, and replace it with nice and sparkly, if totally fake and goalseeked, GDP numbers.”

The new numbers were released and the GDP increased 2.3% according to Reuters but it’s not real as zerohedge reported.

Reuters wrote: “Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.9 percent rate from a 1.8 percent pace in the first quarter.”

They’re including spending that has nothing to do with real investment dollars. Data manipulation is based on misuse of the concept of “residual seasonality.” The weather for one could be a source of “residual seasonality”.

A study by Federal Reserve Board economists in Washington found no convincing evidence of residual seasonality in recent years.

The Bureau of Economic Analysis (BEA) claims it’s identifying and mitigating potential sources of “residual seasonality” when they adjust the numbers.

In 2013, they adjusted the gross investment number, adding research and development (R&D) spending which shouldn’t be included in the GDP because it’s not an investment worth real dollars and they included art, music, film royalties, books, theatre.

They are using dormant, non-productive activities in the production numbers so people reading books are equivalent to new factories being built. Instead of simply including the Apple iPads for example, they will also include the R&D to make them.

Instead of including pension payouts, it becomes “the promise to pay” in their new accounting scheme.

All of these numbers are arbitrary of course.

Commissions, legal bills and expenditures on real estate transactions are included in GDP as “investment” even though they are obviously not contributing to the GDP and do not translate into real production.

Intangibles are being added to the supposedly real numbers.

No one else in this world is doing this so the U.S. can no longer honestly compare themselves to other countries, the keyword here being “honestly”.

The Financial Times reported that starting from July 2013, U.S. GDP would become 3% bigger due to a change in statistics.

It’s an imaginary 3% increase.

As seeking alpha reported in 2013, “Each dollar of increase in debt doesn’t contribute anymore to an equal amount in GDP growth.”

With all this lying, the growth is still only 2.3% and last quarter it was -.1%.

Now the government can spend even more and continue their habit of lying to the American people and the world.

If Republicans win the presidency in 2016, they immediately need to change this, preferably on the first week in office, and let the world know what this administration has done.

In any case, GDP growth since the recession has come from the Feds creating money.


Rationale at the Bureau of Economic Analysis

Definition of seasonality:  A characteristic of a time series in which the data experiences regular and predictable changes which recur every calendar year. Any predictable change or pattern in a time series that recurs or repeats over a one-year period can be said to be seasonal.


Source of Moody’s predictions: Better Q2 GDP Headline, But Q3 Not Looking Great – Real Clear Markets…

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