Friday, July 31, 2009

Ah, the Smoke and Mirrors Begins

GDP contracted at only 1% annualized. And the reason for the slow down in the "slow down?"

"Less drastic spending cuts by businesses, a resumption of spending by federal and local governments and an improved trade picture were key forces behind the better performance. Consumers, though, pulled back. Rising unemployment, shrunken nest eggs and lower home values have weighed down their spending."

In other words, everything still sucks, except for the government spending money which makes the numbers look better than what things really are.

And given the worthless programs the government is spending money on, I'm going to guess if we took that out, GDP would have contracted by the 1.5, if not 2.5% economists were predicting.


Hot Sam said...

You are correct.

The identity for GDP is:

Y = C + I + G + NX


C = Consumption
I = Investment
G = Government expenditures
NX = Net exports

C and I are both in the gutter. G is through the roof so it is artificially pumped up. Production is production so it isn't illusory; however, by funding G with debt we are mortgaging future production to get more production today.

Net exports is the difference between our exports and imports. Imports are a function of Y, so when our economy slows, we buy fewer foreign goods. While this reduces the impact on GDP, remember that GDP is only our best approximation for economic transactions and societal welfare.

Our exports have declined too by quite a large degree but not as fast as our imports, hence NX is positive.

But with trade declining, social welfare is lost. People are not as "happy" as they would be in the presence of more vigorous trade.

I know there are still people stuck in the mercantilist mindset that a positive trade balance is good. I suggest they read (or re-read) Adam Smith. This issue was resolved over 200 years ago. Trade is, by every measure, good for an economy. It may not make particular workers better off when they lose their jobs to foreign workers, but it makes the country better off. It is the job of workers not to whine about losing low-skill factory jobs with wages pumped up by unions. It is their job to gain the human capital necessary to function in our changing economy. Workers have to be flexible and always be learning.

Ryan Fuller said...

What the fuck? "Improved trade picture?" - Oh hey, we're not buying as much stuff! - Or selling as much.

Apparently these morons think "improved trade picture" means "Not trading as much."

Dr. Bob said...

Cap'n - keep in mind that this is the preliminary report and such early reports are often on the high side.

Wait for the adjusted amounts to be released. I'm thinking - 2.5%

Even if the recession may be technically slowing, it isn't yet over. When it is over, there will be a few years to the better half of a decade of recovery to get the economy back to the pre-recession "normal".

Ryan said...

We spent 10% of GDP to prevent a contraction of no more than several percent?

Mike Kelley said...

Imagine how our idiot media would spin this news if the government was controlled by the Republicans. Even 4% growth was called a "jobless recovery" under Bush. Now we have "only" a 1% drop in GDP with runaway government spending and we are supposed to find it encouraging. Pathetic.