Third quarter data for 2009 suggests a 2.8 percent increase in real gross domestic product (GDP). This is a significant improvement over the 0.7 percent decrease of the second quarter. Admittedly, it was originally released that GDP growth was 3.5 percent, but at this point we should already be used to the government publishing false statistics (just look at the statistics published on how many jobs the stimulus package saved—many of the jobs which is purportedly “saved” did not even exist before the stimulus package was put into effect!). In any case, it can safely be assumed that there was an increase in real (adjusted for inflation) GDP of some number greater than 0.7 percent. Are these green shoots? Are we seeing light at the end of the tunnel? All the while, bank loans continue to decline and unemployment has officially risen to 10.2 percent (some economists consider the true rate of unemployment to be much higher, although Doctor Robert Higgs dispels these claims). Certainly, some trends do not fit evenly with others, and so at best the rise in GDP growth is a mixed signal. Many economists have been suggesting a “jobless recovery”. But, is there even such a thing? Before we start to make predictions, perhaps we should take an objective look at what constitutes this supposed rise in GDP.
The official government press release gives an interesting overview on what catalyzed this growth in gross domestic product:
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment that were partly offset by a negative contribution from nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
From the sound of it, there was a large increase in personal consumption and investment. But, the government press release later explains that this is not so:
Motor vehicle output added 1.45 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.
Does everybody remember “cash for clunkers”? So, we come to find out that the majority of the growth came about thanks to a massive government subsidy program. There should be a few things to take into consideration in the coming months. First, how many new car buyers who planned to purchase a new car within, say, the next six to twelve months will no longer buy a new car? That is, how many automobile buyers simply shifted their time preference a few months in advance? How many automobile drivers, who will see their insurance premiums go up, and how many of them will see themselves take on new debt? Surely, to a large degree, the effects of the cash for clunkers program is only temporary, and even has a large chance of reversing itself over the coming months.
While private consumption expenditure grew by 2.9 percentage points, government spending rose 8.3 percent (down from a second quarter figure of 11.4 percent). It’s also remarkable that where GDP figures were revised the most were in personal and business consumption expenditures. According to CNN:
The GDP report had other downward revisions too. Specifically, it contained lower estimates for spending by both consumers and by businesses, and also less investment in both homes and nonresidential buildings.
It becomes more and more obvious that the main driver of GDP growth is Federal expenditure. What does this mean? Does this still represent an expansion of wealth? Currently, the government is financing its programs through deficit spending. It is piling debt. It does this because otherwise there would have to be a dramatic increase in taxes, and if the average tax rate increased dramatically there would probably be an equally dramatic increase in the amount of opposition to all this federal spending. So, the government takes on debt by selling securities to the Federal Reserve, to private domestic investors and to foreign investors and governments. What do you think will happen when the government has to pay this debt? What will happen to GDP when the money that could have otherwise gone to investment or consumption has to go to paying back the amount of the original debt, plus the interest on the security? This GDP figure no longer looks so great, right?
Industrial production, furthermore, went down by 7.1% in October. This was worse than September, where industrial production fell by 5.9%. Admittedly, this was an improvement over the previous months, but right now it seems that November will be worse than October. The government can spend all the money it wants, but unless production increases any recovery is illusionist.
Data is from: http://www.tradingeconomics.com/Economics/Industrial-Production.aspx?Symbol=USD
Future GDP data will probably depend heavily on how much the banks lend. Obviously, the more lending that takes place, the higher the rate of inflation and the wider the new capital-good bubble.