US Q4 2009 GDP: Should Growth Numbers Be Believed???

31 January 2009.

31 January 2009. By David Caploe PhD, Chief Political Economist.  It was big news when the US Commerce Department’s Bureau of Economic Analysis announced the US economy supposedly grew at a robust 5.7% during the fourth quarter – October through December –  2009. [br]

31 January 2009.

31 January 2009. By David Caploe PhD, Chief Political Economist.  It was big news when the US Commerce Department’s Bureau of Economic Analysis announced the US economy supposedly grew at a robust 5.7% during the fourth quarter – October through December –  2009. [br]

However, there are real reasons – both immediate and structural – to be wary of this alleged good news.

Broadly speaking, there are at least seven reasons to hold off on breaking out the Champagne to celebrate the “end” of the recession.

Low Baseline

Whether you are measuring year over year, or from quarter to quarter, the baseline for this figure is extremely low. [br]

The last quarter of 2008, in the wake of Black September, was a nightmare, as anyone who lived through it can easily attest. And the third quarter of 2009 wasn’t so great either.

So no matter which baseline you want to use, at least part of the 5.7% annual growth rate is a result of starting from a very low measuring point.

“Revised Figures Indicate”

As any long-time observer of both the economy itself AND the way it’s “reported” by an ever-complaint media well know, initial figures are just that – the first broad-brush stroke of on-going conditions.

At the same time, such numbers are almost always “revised” several weeks or months later.

While the initial figures get the headlines, it’s the revised figures that are much more accurate indicators of real economic activity – and these RARELY get the media attention accorded the initial numbers.

Take, oh, say the THIRD quarter of 2009 – the one just preceding the seeming “good news.” Originally announced at 3.5%, it had to be revised – downward – not once, but TWICE, to 2.2%.

In this sense, not just economic growth figures – but ALL initial economic statistics – should be considered “rumors”, while the revised figures are a lot closer to the “news” – the timing of whose announcement, as so often in this economediatic © world, is highly subject to manipulation and interference.

Holiday Shopping Season

Let’s also remember the fourth quarter is SUPPOSED to show the largest amount of growth, due to the extended holiday shopping season, which now begins right after Halloween on October 31, and goes through the increasingly popular post-Christmas sales.

After all, why is the day after Thanksgiving – traditionally considered the single highest-volume shopping day of the year, due to the fact that many people are taking a four-day weekend, and want to take advantage of pre-Christmas sales – called Black Friday ???

It’s obviously not because it’s a bad day, but, rather, because it’s the day when most retailers go “into the black” – ie, move into profit [traditionally recorded in black ink] from the loss position [recorded in red ink] they have sustained the entire year to that point.

So it’s hardly a surprise if and when fourth quarter figures do look better than the previous three – depending, of course on the baseline chosen.

But so much for the general factors that make Q4 figures not quite reliable indicators of anything going on in the larger economy.

This time around, there are also several specific reasons to be highly suspect of this alleged figure – which even if accurate, as several people have pointed out, would hardly indicate a wave of economic growth capable of undoing the horrific damage the economy has sustained since the start of the millennium.

Inventory Bounce

What is this ???

Very simply, it’s a figure that indicates that manufacturers and retailers who have been slowly working through their existing inventories – clearing the storeroom, as it were – finally begin to feel the need to start re-stocking, as preparation for any business that might pop up in the next several quarters.

Now this can happen during ANY quarter – it simply depends on when companies think they need to get ready for any future sales that could come their way.

Because the economy was in such bad shape for so long, the so-called “inventory bounce” just happened to come during the fourth quarter – which is not a great sign anyway, since it indicates they were GENERALLY drawing down throughout the year.

And while I shudder at the term “most economists”, this is one case where it’s actually valid, as “most economists” calculate that a good two-thirds, if not more, of the supposed “big growth” is due precisely to this year’s “inventory bounce”.

Short-Term Effects of Soon-to-Disappear Stimulus

But that’s not the only short-term factor that makes the 5.7% figure a little less heartening than administration spokespeople would have us believe.

Again, according to “most economists” –

the very phrase makes my skin crawl, because part of the LARGER problem is the “groupthink” that so dominates conventional academia in general, and economics in particular —

but sometimes, that “consensus” actually DOES represent something more than the CYA activities of the MOST fraudulent branch of mainstream academia –

“things, e.g. motor vehicles, that were subsidized did well. The bad news is that things that weren’t subsidized, e.g. computers, contracted.”

So while this indicates that – contrary to the bleats of Republicans and their right-wing think tank and media echo chambers – the stimulus actually IS having a positive effect.

But their political opposition to any further stimulus – to which Obama is, as Paul Krugman keeps pointing out, paying an inordinate amount of unjustified attention – means it will soon disappear, which is almost certain to slow whatever economic activity it HAS been promoting.

What Does GDP “Mean” Anyway ???

In a larger sense, some more un-conventional – read marginalized and ridiculed – economists, like our candidate for Treasury Secretary Joseph Stiglitz, have been pointing out some of the more ludicrous, yet structural, elements of what goes into the calculation of Gross Domestic Product, aka GDP.

His classic example is that a car sitting in a traffic jam, burning gasoline while going nowhere, actually INCREASES the GDP because it means the driver will have to buy more gas, which will increase sales for both the filling station AND the global mega-corporation of which it is most likely a division.

This is obviously crazy on at least two levels:

In what possible way can the waste of scarce resources – in this case, the commuter’s time and the gasoline being burned – be considered a POSITIVE element of economic growth?

And from the point of view of society as a whole, what does it mean that we worship so ardently an abstract statistic that is composed almost completely of bizarre and clearly non-productive activities like sitting in a traffic jam ???

As my colleague Juan Abdul Nasser made clear in a link to an article outlining Stiglitz’ views, there have to be not just more ethical and productive, but more REALISTIC ways to measure economic activity than the current methodology for calculating GDP.

Jobs Scene Still Nightmare

And last but not least, as we noted in one of the many enlightening articles “buried in plain sight” during the not-so-festive holiday season, the key economic indicator during the current situation is neither statistical economic growth nor GDP, however bizarrely measured, but JOBS.

As Megan McArdle points out in the Atlantic, in the fabulously titled, “Dude, Where’s My Job?”,

[quote]

… [M]an cannot live by GDP alone …

… the better measure of whether the economy has returned to health is employment–at least, that’s when the improvement starts to translate into improvements in peoples’ real lives. 

Prolonged unemployment is one of the most crippling things that can afflict people in the modern world.

Yet despite a second consecutive quarter of growth [sic –we’re obviously dubious about that], prolonged unemployment is what we’re stuck with.

[/quote]

And she notes that, even with a much more serious commitment from Obama to promote sustained job-creation, the nature of the new economy makes that a MUCH more difficult task:

[quote]

As jobs have gotten more skilled, more human capital is specific to firms, industry, and job classifications.

That means it’s going to take longer to transfer those workers into other areas of the economy. 

Either they need to search harder to find a job that meets their skill set, or they need to get new skills.

Either way, that high unemployment number is probably going to be very stubbornly persistent well into next year.

 

 

 

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Given all these factors, this seeming bit of economic news is a lot less cheery than its promoters would have us believe.

As the song says, “don’t believe the hype” – ESPECIALLY when it comes to economic growth.

David Caploe PhD

Chief Political Economist

EconomyWatch.com