Should we be skeptical of economic growth?

by | Jan 29, 2010 | Headline News, Karl Denninger | 5 comments

Do you LOVE America?


    As was expected, the economy grew in the fourth quarter of 2009, with the Gross Domestic Product showing an an increase of 5.7%. Technically speaking, the recession could now be considered over because the economy experienced growth over two successive quarters:

    From Associated Press:

    The economy grew faster than expected at the end of last year, though the engine of that growth — companies replenishing stockpiles — is likely to weaken as consumers keep a lid on spending.

    The 5.7 percent annual growth rate in the fourth quarter was the fastest pace since 2003. The Commerce Department report Friday is the strongest evidence to date that the worst recession since the 1930s ended last year, though an academic panel that dates recessions has yet to declare an end to it.

    The two straight quarters of growth followed a record four quarters of decline. Still, the expansion in the fourth quarter was fueled by companies refilling depleted stockpiles, a trend that will eventually fade. Some economists worry that when that happens, the recovery could

    Small businesses, this author’s included, helped push the economy along as they refilled stockpiles of inventory in the 4th quarter. Theoretically, this makes sense. In the midst of the recession in late 2008/early 2009, small businesses pulled back on purchasing excess inventory. As those inventories depleted throughout 2009, business owners began re-ordering goods from their distributors and manufacturers. As a personal example, our company re-ordered enough inventory at depressed manufacturing and transportation prices to provide inventory for almost all of 2010. This was double the amount of inventory we normally stock, but price discounts coupled with attractive credit terms from struggling manufacturers gave us an edge at the end of 2009.

    So, from this standpoint, it is easy to see how GDP could have grown, though the 5.7% number does seem a bit high. It is important to note that the GDP reported for the 3rd quarter of 2009 was originally 3.6%. After two subsequent revisions by the government, the official number is now 2.2%. This was a downard adjustment of 38% !

    A similar revision now would take the GDP growth from 5.7% to 3.5%. Not bad, but not good either, especially if we consider the way GDP is “officially” calculated, resulting in artificially boosted the numbers.

    Karl Denninger at Market Ticker opines about the GDP Inventory Bounce and personal income vs. government handouts:

    The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE).

    The first two are not a big surprise.  The latter, however, is dangerous to rely on.

    As I have repeatedly pointed out we have over the last 18 months added about $500 billion (annually) in transfer payments to the federal budget.  This counts in the GDP report as PCE, but is not actual output any more than I am richer if I go to the bank and borrow $20,000 on my credit card.

    If one was doing GDP as a “balance sheet” you’d have to subtract the addition in liabilities (debt) from the money spent, but of course GDP isn’t computed that way.  This results in a nutty overstatement of GDP when it is used as a measurement of economic health, which of course is how all the so-called “economists” use it.


    The amusing part of the report is found in the personal income and outlays section:

    Current-dollar personal income increased $119.2 billion (4.0 percent) in the fourth quarter, compared with an increase of $35.1 billion (1.2 percent) in the third.

    Personal current taxes decreased $11.7 billion in the fourth quarter, in contrast to an increase of $3.5 billion in the third.

    Got it?  People aren’t earning the money, the government is handing it out. You don’t pay taxes on government handouts, for the most part.  There was a potential “improvement” signal in the third quarter related to tax liabilities increasing, but that has now reversed – hard – which throws a big fat rock at the concept of employment turning in any meaningful way.  Instead the “current dollar income” is being borrowed and given away by the government through unemployment extensions and other forms of handout.


    Bottom line: The market liked it (although the net change after thinking about it for a while was pretty much a non-event – we’re up a whole two S&P points a half-hour after release) but most of the improvement was due to inventory build and transfer payments from the government (and the government borrowed the money), not actual earned personal income.

    As much as we’d like to believe President Obama that we have avoided a depression and that we are in a recovery, something about the GDP number just doesn’t seem right. Though not available as of this writing, we’re almost positive that John Williams’ Shadowstats will calculate GDP growth at a significantly lower rate than the official government number.

    To be perfectly frank, there is not a whole lot of statistical information coming out of government institutions that we can believe anymore. When we look at commercial/residential bank lending declines, job losses, the looming wave two real estate disaster, and excessive easing of the quantitative variety, we remain skeptical of this recovery.


    It Took 22 Years to Get to This Point

    Gold has been the right asset with which to save your funds in this millennium that began 23 years ago.

    Free Exclusive Report
    The inevitable Breakout – The two w’s

      Related Articles


      Join the conversation!

      It’s 100% free and your personal information will never be sold or shared online.


      1. I’m with Karl on this. You can’t believe any of these numbers anymore, and if you do believe them then you must at least realize what a farce the GDP calculation truly is. Just as a ridiculous example, there is a massive earthquake in LA, and it costs $100 billion to clean up and repair all the roads and buildings. Even though that city’s infrastructure is gutted and they’ll be rebuilding for years (not to mention all the people who will lose jobs because their place of employment is gone), the effect will be a net plus to the calculation of GDP because of all the money spent, not necessarily all the wealth lost. The GDP is a deeply flawed metric. I like the misery index much better, which measures how well or poor the people at the bottom of society are doing.

      2. Regarding the author’s statement: ” Instead the “current dollar income” is being borrowed and given away by the government through unemployment extensions and other forms of handout.”
        I thought it ridiculous and ignorant. If there aren’t jobs out there available for the unemployed, how are they going to put food on their table or keep the roof over their heads? Breaking into other people’s house to find food or money? Let’s be rational, this is not the people/entities the government “hands-out” money, it’s to all of those “too BIG to fail”, who really caused the mess that it is in our country now. Our money is being handed-out to big banks and corporations who are paying their CEO’s big money in salaries and bonuses so that they can buy $10,000 dollars shower curtains and make an about $100,000 dollars office decorations, not mentioning a lot of more absurdities, while the little guy out there is sttrugling to put the bread on the table for his children.

      3. Paul, I don’t think Denninger meant “handouts” in a negative way or tried to suggest the unemployed are stray animals like some Lieutenant Governors recently did. I think he is just trying to point out that GDP growth occurred as a direct result of government intervention and is not indicative of an economic recovery, because to provide those handouts, we had to borrow more money, etc etc.

        Chris, I actually originally titled this piece “Economic Growth or Farce?” and then switched it at the last minute. It’s funny that you mention it. 🙂

      4. Thanks Mac, for the clarification.

      5. ITS called , “Cooking the Books ” Or as a friend put it “Figures don’t lie , But liers can Figure !! Anything comming out of the USA Govt. reports on the economy are sause for the goose if you are gullable to beleave them , and I don’t .

      Commenting Policy:

      Some comments on this web site are automatically moderated through our Spam protection systems. Please be patient if your comment isn’t immediately available. We’re not trying to censor you, the system just wants to make sure you’re not a robot posting random spam.

      This website thrives because of its community. While we support lively debates and understand that people get excited, frustrated or angry at times, we ask that the conversation remain civil. Racism, to include any religious affiliation, will not be tolerated on this site, including the disparagement of people in the comments section.