Signs of the Times

David Altig writes:

macroblog: The GDP Report: We, Apparently, Are Not Pleased: I'm not sure I had ever contemplated what the day would look like when 3.1 percent growth was considered bad news, but now I know for sure...

So much have our estimates of the potential growth rate of the American economy increased in this, our age of technological revolutions.

Comments

[chris]

Well, shouldn't we be applying a reality inflator/deflator operation to any U.S. Fed govt. econ statisitic? Like simply double the officially announced CPI to reach true CPI?

From today's NYPost:

"You might remember back a little more than a week ago when the very same government that's putting out today's GDP release said that its consumer price index jumped a shocking 0.6 percent in March to a 3.1 percent annual rate.

The markets shuddered. The headline writers smiled: stagflation was back.

Even with all its nips and tucks, and all its New Age theories, Washington hasn't been able to make inflation fears disappear.

Today a different arm of that very same government will accomplish that feat.

Look deep inside today's GDP report (table 4, to be exact) and you will see an inflation number that will be less than the fear-inspiring 3.1 percent reported in the CPI.

In fact, the pros think the inflation calculation that's used in the GDP will actually drop from 2.3 percent in the last year's fourth quarter to 2.1 percent in the newest period.

So why should we care about all this at 8:30 in the morning — or at whatever time you happen to pick up The Post?

Because the government isn't supposed to make magic with its numbers.

For instance, if the inflation in the GDP report were only as large as that in the CPI, economic growth would be reduced by 0.8 of a percentage point. And 2.7 percent growth in the economy wouldn't make anyone happy."

GDP RABBIT'S OUT OF THE HAT, By JOHN CRUDELE, www.nypost.com/business/23509.htm.

Now I like Crudele and Byron but I liked them more when they were at the NYObserver. Sometimes they write what looks like overt political line of the day for the Fox news media. Still they write some preconception popping stuff often.

[Ottnott]

3.1% not enough for expectations?

That's nothing. Try this on for size:
"a recent survey of buyers in Los Angeles indicated that they expected their homes to increase in value by a whopping 22% a year over the next decade"
http://www.economist.com/agenda/PrinterFriendly.cfm?Story_ID=3886356

A recent San Diego Union Tribune article on Social Security indicates that Bush has his touch at instilling fear. 20- and 30-somethings, even a 40-something indicated that they aren't counting at all on Social Security. Naturally, they see real estate as their ticket to retirement security.

[George]

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=42561

The Great Wealth Deception
April 27, 2005

Dr. Kurt Richebächer's articles appear regularly in The Wall Street Journal, Barron's, the U.S. edition of The Fleet Street Letter. This piece was orginally published in the The Daily Reckoning, a free daily e-mail offering commentary on the days stock news.

This is the most important economic question in and for the world: Has the U.S. economy's rebound since 2001 been aborted, or is it only delayed? Our rigorous disagreement with the global optimistic consensus over this question begins with four observations that we regard as crucial:

1. In the past four years, the U.S. economy has received the most prodigious monetary and fiscal stimulus in history. Yet by any measure, its rebound from the 2001 recession is by far the weakest on record in the post-World War II period.

2. Record-low interest rates boosted asset prices and, in their wake, an unprecedented debt-and-spending binge on the part of the consumer.

3. What resulted was a badly structured economic recovery, which - due to grossly lacking growth in capital investment, employment and wage and salary income - never gained the necessary traction to become self-sustainable.

4. Sustained and sufficiently strong economic growth implicitly requires a return to strong business fixed capital spending. We see no chance of this happening. Above all, the outlook for business profits is dismal from the macro perspective.

This takes us to the enormous structural changes that the Fed's new monetary "bubble policy" has imparted to the U.S. economy over the years. While consumption, residential building and government spending soared, unprecedented imbalances developed in the economy - record-low saving; a record-high trade deficit; a vertical surge of household indebtedness; anemic employment and income growth from wages and salaries; outsized government deficits; and protracted, unusual weakness in business fixed investment.

None of these shortfalls is a typical feature of the business cycle. Instead, they are all of unusual structural nature. Yet the bullish U.S. consensus simply ignores them, bragging instead about the U.S. economy's resilience and its ability to outperform most industrialized countries.

To be sure, all these structural deformations tend to impede economic growth. Some, like the trade deficit and slumping investment, do so with immediate effect; others become repressive only gradually and in the longer run. Budget deficits stimulate demand as long as they rise. An existing budget deficit, however large, loses this effect. Rather, it tends to become a drag on the economy. In the past few years, clearly, the massive monetary and fiscal pump-priming policies have more than offset all these growth-impairing influences.

Assessing the U.S. economy's future performance, it is necessary to distinguish between two opposite macro forces: One is the drag on the economy exerted by the various structural distortions; the other is the enormous demand-pull fostered by the housing bubble and the associated rampant credit creation.

Measured by real GDP growth, the demand-pull driven by the housing bubble has, so far, overpowered the structural drags, provided you believe in the accuracy of the GDP numbers. We do not. Yet even by this measure, as repeatedly explained, it is actually by far the U.S. economy's weakest recovery on record in the postwar period. In fact, measuring the growth of employment and wage and salary income, there has been no recovery at all.

Our stance has always been and remains simple. Asset bubbles and their demand effects invariably fade over time; structural effects invariably worsen over time if not attended to. It is our strong assumption that the negative structural effects are overtaking the positive bubble effects.

We come to another feature of economic recoveries that American policymakers and economists flatly ignore. That is its pattern or composition.

Past cyclical recoveries were spearheaded by three demand components: durable consumer goods, residential building and business fixed investment, regularly following prior sharp downturns caused by tight money during the recession. Importantly, the tight money had always created pent-up demand in these three categories, which promptly catapulted the economy upward when monetary policy eased. For sure, the pent-up demand played a key role in the recovery dynamics.

With its rapid and drastic rate cuts, the Fed rewrote the rules of the traditional business cycle and related policies. It managed a seamless transition from equity bubble to housing bubble. Consumer spending on durable goods continued to forge ahead during the 2001 recession at an annual rate of 4.3%. Residential building never retreated, while business fixed investment took an unusual plunge.

From 2000-04, consumer spending soared by 27.3% on durable goods and 25.4% on residential building. Government spending, too, rose sharply, by 13.9%. Together, the three components accounted for 123% of real GDP growth.

But in the rest of the economy, it was all misery. Despite a modest rebound, business nonfinancial fixed investment in 2004 was still down 0.2% from 2000. Exports of goods posted a minimal gain of 0.1%, whereas imports of goods shot up by 16.5%.

Thanks to the sharp decline in interest rates over the last few years, sharply inflating house prices have been a rather common feature around the world. Still, there is one crucial difference among the countries concerned. There are countries in which the rising house prices have fueled borrowing-and-spending binges by private households, and there are others where these binges are completely absent. Typical for the first pattern are all Anglo-Saxon countries; typical for the latter are most eurozone countries.

Even among the Anglo-Saxon bubble economies - meaning countries where the house-price inflation led to borrowing-and-spending sprees - the United States is a unique case. It concerns the official and public attitude to such bubble-driven economic growth.

The United States is the one and only country in the world where monetary policy was systematically designed toward the goal of inflating the market value of assets - stocks, houses and bonds - virtually making wealth creation through inflating asset prices their explicit goal.

In Britain and Australia, the associated borrowing-and-spending binges are even worse than in the United States. Yet there is a general apparent reluctance to embrace this growth model as an unmixed blessing. Central bankers who celebrate this as "wealth creation" and even explicitly animate people to exploit the possibilities of easy credit to lift their spending on consumption are unique to America.

For generations of economists, it used to be a truism that "wealth creation" implies capital formation in terms of generating income-creating tangible assets. The emphasis was on capital formation and the associated income creation. To indiscriminately put this label of "wealth creation" on rising asset prices in the absence of any income creation is plainly a novel usurpation of this concept. It is in essence wealth creation through a stroke of the pen.

Measured by their net worth (market value of household assets minus debts), American households have amassed unprecedented riches in the past few years, despite spending in excess of their current income as never before.

The first question springing to mind in the face of this "wealth miracle" is its cause or causes, leading immediately to the next question: whether or not this drastic increase of house prices relative to the consumer price index has to be seen as a "bubble," which sooner or later have the habit of bursting.

In old textbooks, you would read that higher saving increases capital value. But in the U.S. case, capital values have soared while personal and national saving has collapsed. What else, then, has the power to lift asset prices?

Everybody knows the answer, but few want to admit it: Lured by artificially low interest rates and easily available credit, private households have stampeded as never before into the purchase of homes, boosting their prices. Artificially low interest rates and easily available credit are, actually, the key features that specifically qualify an asset bubble.

The growth of home mortgages exploded from an annual rate of $368.3 billion in 2000 to an annual rate of $884.9 billion in 2004, compared with a simultaneous increase in residential building from $446.9 billion to $662.3 billion. Altogether, the United States experienced a credit expansion of close to $10 trillion during these four years. This equates with simultaneous nominal GDP growth of $1.9 trillion. America's financial system is really one gigantic credit-and-debt bubble.

Our general misgivings about "wealth creation" simply through rising house prices has still another reason, however, and that is the way housing values are calculated. The conventional practice in America is to treat the whole existing housing stock as being worth the last trade. We do not think this makes sense, considering that current sales are always marginal to the whole capital stock.

This way of calculating wealth creation naturally explains the extraordinary rapidity with which it can deluge an economy, creating trillions of dollars of such wealth in no time. For sure, this contrasts wondrously with the tedious process of generating prosperity through saving, investment and production.

In earlier studies published by the International Monetary Fund about asset bubbles in general, and Japan's bubble economy in particular, the authors repeatedly asked why policymakers failed to recognize the rising prices in the asset markets as asset inflation. Their general answer was that the absence of conventional inflation in consumer and producer prices confused most people, traditionally accustomed to taking rises in the CPI as the decisive token for inflation.

It seems to us that today this very same confusion is blinding policymakers and citizens in the United States and other bubble economies, like England and Australia, to the unmistakable circumstance of existing rampant housing bubbles in their countries.

Thinking about inflation, it is necessary to separate its cause and its effects or symptoms. There is always one and the same cause, and that is credit creation in excess of current saving leading to demand growth in excess of output. But this common cause may produce an extremely different pattern of effects in the economy and its financial system. This pattern of effects is entirely contingent upon the use of the credit excess - whether it primarily finances consumption, investment, imports or asset purchases.

A credit expansion in the United States of close to $10 trillion - in relation to nominal GDP growth of barely $2 trillion over the last four years since 2000 - definitely represents more than the usual dose of inflationary credit excess. This is really hyperinflation in terms of credit creation.

In other words, there is tremendous inflationary pressure at work, but it has impacted the economy and the price system very unevenly. The credit deluge has three obvious main outlets: imports, housing and the carry trade in bonds. On the other hand, the absence of strong consumer price inflation is taken as evidence that inflationary pressures are generally absent. Everybody feels comfortable with this (mis)judgment.

[Movie Guy]

One only needs to track gasoline prices and retail sales.

This is how American citizens are making their household decisions. Period.

(21 words)

[Walker]

interesting perspective on the relevence of the GDP metric...

"The related Gross National Product (GNP) is the broadest U.S. economic measure and includes the GDP plus the balance of international flows of interest and dividend payments. For net debtor nations such as Guinea-Bissau and the United States, GDP usually will show the stronger growth than GNP, since the outflow of interest payments does not get charged against economic activity. For this reason, the United States switched its primary reporting from the GNP to the GDP in 1991. Put in perspective as of the "final" estimate of second-quarter 2004, annualized real GDP growth was 3.3%, down from 4.5% in the first quarter, while GNP growth for the same period was 1.9%, down from 3.9%.

I respect the intellect and creativity of those who have anchored their careers in academia. Frankly, though, most economic theories have little practical use in the real world. Concepts such as free trade being a boon to the world's economy [5], a weak currency helping turn a nation's trade deficit[6], or personal income including what the average homeowner would receive from himself in rental income if he charged himself to live in his own house, fall in to the "not in the real world" category.[7]

Varied academic theories, often with strong political biases, have been used to alter the GDP model over the years, resulting in Pollyanna Creep, where changes made to the series invariably have had the effect of upping near-term economic growth. Whether the change was to deflate GDP using "chain-weighted" instead of "fixed-weighted" inflation measures, to capitalize rather than expense computer software purchases, or to smooth away the economic impact of the September 11th terrorist attacks, upside growth biases have been built into reported GDP with increasing regularity since the mid-1980s.

...
...

The NIPA effectively is a double-entry bookkeeping system, where an item on the consumption side of the ledger, in the GNP/GDP accounts, is offset on the income side of the ledger, in Gross Domestic Income (GDI) accounts. In theory, the GNP and the GDI should be identical. In practice they rarely are, with the latest "statistical discrepancy" showing GNP to be $67 billion, or 0.6% higher than the GDI. This is due to the BEA's inability to reconcile the two series.

Part of the problem is that source data often are estimated without regard to actual numbers otherwise available. As an example of how far from reality the GNP/GDP/GDI reporting has gone, consider data from a high quality and unbiased resource: the Internal Revenue Service (IRS).

Based on its analysis of income tax returns, the IRS reports that, "For the second consecutive year, Adjusted Gross Income (AGI) fell, decreasing by 2.3% to $6.0 trillion for 2002. This represents the first time since prior to 1950 that total AGI reported on individual tax returns has fallen for two successive years."[9]

While one might expect to see some parallel income reporting in the GDI, it only happens by coincidence. Although the BEA considers the IRS data, it never has been able to reconcile the differences between GDI assumptions and IRS reality. Of course, the BEA sticks with the GDI assumptions, which have income rising in 2001 and 2002. The following table shows some of the specifics of comparable income components. Where wages and salaries are the single largest component in the GDI, they grew by 6.8% in 2002, according to the BEA, but the IRS reports a 0.4% contraction.

"

http://www.gillespieresearch.com/cgi-bin/bgn/article/id=344

[Kimmitt]

When 3.1% GDP growth delivers stagnant job numbers and declining real wages, then, yeah, it's not enough.

[anne]

Notice also in the report on slowing economic growth the further decline in saving, much below 1%. The bond market did not respond to the prospect of increasing prices, but the interest rate on the long term Treasury fell to 4.17%. This was not an encouraging report, and in a period of high technology growth offers far too little support for the labor market. No; 3.1% economic growth and slowing is not enough.

[anne]

The decline in household saving is especially worrisome on a long term basis for an aging country. We are sacrificing future income to immediate consumption.

[Frank]

Anne- I don't think so. An individual can save for retirement, a nation can not. (Not to say that Americans shouldn't save for retirement, but saving for retirement will not be able to compensate for an aging population as the Japanese could tell us.)

[anne]

Frank

Forgive the argument, but a nation can indeed save as can households and corporations and governments. We have corporate savings, almost no household savings, and fierce and growing goverment deficits. There is the reason for what should be concern with future income and investment resources. There too is the reason for our worsening trade deficit.

[knut wicksell]

A little more on Frank's comment. This holds in spades for home prices. There is a huge fallacy of composition in believing that you can retire on the expected capital gain from your (recently) acquired piece of real estate. Unless you expect to flip it before the money pump malfunctions, that piece of real estate will have to be financed out of somebody else's future saving. What is the aggregate saving rate that validates the current life-cycle expenditure pattern?

We are talking about intergenerational transfers here. Either the stuff gets transferred at high prices (which means a high effective demand for them by the coming generation), or it gets transferred at low prices. I find it hard to believe that the current Ponzi strategy can get transferred Barro-like generation unto generation to the infinite future.

[anne]

Knut Wicksell

There you have an interesting puzzle, an interesting perspective, to consider. This year we will finally be paying more in investment income abroad, than we will gain from our international investments. The trade deficit we have assures this invesment income deficit will continue to grow. There is much to consider, but we are saving astonishingly little. Once again, this day, the monthly personal income gain shows a larger gain in consumption.

[Movie Guy]

We're in more trouble that we think we are.

When you operate the national government and economy as a casino, you can have a good run of luck by stacking the deck over and over. But at some point, the odds will turn against you through a combination of errors or just one major error. Or better play by others at the table.

We're at that economic and financial table. It's being run like a casino game. Fast and loose. Both sides of the U.S. political isle have few difficulties with extending credit to themselves in order to stay in the game. And that credit is being backed up by the other players in the form of holdings in U.S. dollars and U.S. securities.

If the U.S. team players have another bad night, they're going to leave the game owing a lot of money. Big bucks debt. The choices, thereafter, are simple. Either they (1) figure out a way to borrow more money and return to the table, (2) stick us with the tab (taxes, tight credit, weaker economy, unemployment), or (3) rob one or more of the other players in the parking lot, recovering their debt chits. The last option, of course, means all out war with one of the players.

Stated differently,

The Great Collapse

Phase I: Trade Policy, Income Extraction, and Wages

Phase II: Social Security, Medicare, Medicaid, private healthcare insurance costs

Phase III: Massive Debts and Trading Wars

Phase IV: Major Military War

Bill Cara offers a glimpse into Trading Wars, which is quite different from the trade war as most understand it.

http://www.billcara.com/archives/2005/04/trading_wars_th.html#comments

[John D. Miller]

As President what would you do if you had an Agenda that brings in a New World Order in late 2012?

The answer is to cause chaos in all departments so the people want a New World Order.

Sad, but then some Americans are too clever and patriotic to work out that America is going down, for death brings life, and 1,000,000,000 dead brings in a better life style.

Sad