For individual Americans, economic “growth” means the opposite.
That the economy grew at a “faster than expected” annual rate of 3.5% in the third quarter has been touted as a sign that now – finally, after years of false promises – it is reaching that ever elusive “escape velocity.” But instantly, people with keen eyes began to quibble with it.
One big factor was military spending, which spiked 16%, the fasted since Q2 2009. This rate is based on the increase from the second quarter that is then annualized, assuming that spending wound continue at this rate for a year. This type of quarter-to-quarter annualized rate is volatile. For example, it plunged 20% in Q4 2012, jumped 17% in Q2 2009, and 18% in Q3 2008. Spikes and plunges often run in sequence (chart).
In reality…. According to data from the US Treasury, the Department of Defense spent $149 billion in Q3, which was actually down a smidgen from the $150 billion it spent in Q3 2013. This lets out a lot of hot air. That spike was likely a fluke, much like other spikes and plunges before it, and much of it may well be undone in Q4.
The other two big factors in that “faster than expected” growth of GDP were inventories, which ballooned and will eventually have to be whittled back down, and exports.
The surges in these three categories caused JPMorgan to cut its Q4 GDP growth forecast to 2.5% from 3.0%. “All three of these categories tend to be associated with payback the following quarter,” explained chief US economist Michael Feroli. And the crux of the economy, the consumer? “Still plodding along in a steady, but unspectacular, manner….”
Whether or not that annualized quarterly rate of 3.5% was a mirage – year over year, the economy grew by just 2.3%.
A growth rate barely above 2% is exactly where the US economy has been for the last five years! Nothing has changed. For a recovery by US standards, it’s a very crummy growth rate, and far from the escape velocity that Wall Street hype artists have predicted for years in their justification for the ceaselessly skyrocketing stock market.
But it gets worse. The population in the US has been growing too. And the economic pie has to be divvied up among more people. So the pie has to grow faster than the population or else, on an individual basis, that growing overall economy, gets cut into smaller slices of the pie.
GDP adjusted for inflation as well as population growth produces real per-capita GDP. It is the sort of economic growth that people actually experience. Doug Short at Advisor Perspectives has been tracking this measure for years (here is his update and methodology). And it paints a gloomier picture.
Before the financial crisis, real per-capita GDP peaked in Q4 2007. Then it fell 5.5% to bottom out in Q2 2009. Since then, it has been working its way back up. In 2013, it surpassed its pre-crisis peak. Now, it is up a measly 2.3% from where it was nearly seven years ago! And it remains far below the long-term trend (red line).
On this per-capita basis, the economy grew only 1.7% from Q3 last year. That’s less than half the annualized quarterly rate that has been bandied about all day.
It doesn’t even include the fact that the fruits of this economy have been very unequally distributed over those seven years, with the gains concentrated at the very tippy-top of the heap of humanity that makes up America. For the rest, this economy has been a tough slog.
And then, of course, it gets even worse.
The deflator used in the GDP calculations to come up with an inflation-adjusted growth rate is the Personal Consumption Expenditure (PCE) index. But the PCE index is usually lower than the already dubious CPI. The only time since the financial crisis when PCE was higher than CPI was in 2010. In the latest reading, core PCE (without food and energy) was 1.47%, while core CPI came in at 1.73%. Same inflation, different numbers.
The difference each month may not be huge, but it’s cumulative, and over the years, it adds up. This chart by Doug Short (here is his latest update) shows the diverging paths of PCE (blue line) and CPI (red line) – and the game that those who’re using PCE are playing with us
Since PCE is used to adjust GDP for inflation, “real” economic growth has been systematically overstated by understating inflation. If GDP had been deflated over the years with CPI, instead of PCE, that measly 2.3% growth of per-capita GDP since 2007, as crummy as it may appear, would likely be negative. And that explains why so many people – struggling with soaring rents, medical expenses, college costs, etc. – find that their slice of the economic pie has been shrinking since the financial crisis.
And this is the economy that has been stimulated since 2008 by the Fed’s relentless zero-interest-rate policy and $3.5 trillion in QE, on top of an additional $8.8 trillion in federal government debt. More “stimulus” can hardly be imagined. It makes otherwise sane people walk off in an uncertain direction, muttering to themselves and shaking their heads uncontrollably.
So, right in line, the essential ingredient in a thriving housing market is skidding inexorably in America. Read… The American Dream Going Bust – in One Chart
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World economy is moving up, but with too slight steps. We expect the pre-crisis levels to be reached after 1-2 years, but actually it is not possible. The confidence is the customers is lost, so the business and politics should do more to get it back.
Finweek Journal wrote: “The confidence is the customers is lost, so the business and politics should do more to get it back.”
The problem is that a number of people–rightly or wrongly–believe the political process and government are broken, so have little faith that anything good will come out of it. The same applies to business–a lot of people are still struggling and aren’t going to buy anything beyond bare necessities, without the disposable income to do so. The flip side of this is that business aren’t going to hire beyond what they already have, until demand requires them to do so.
I guess the bottom line for me is, how are politics are business supposed to bring “confidence back?”
Confidence.. what a joke… What the consumer needed was a bail out of their own huge pile of debts but instead the stupid selfish idiots in charge took money on the credit card and gave themselves raises and bonuses.
Good luck trying to get any of us to buy back into this twisted crony system to benefit those who seem to think we are nothing more than sheep to be sheared!
There is nothing a business can do to entice an overly extended or under paid consumer to buy what they can not afford. Government could send us all free money each month like the are doing for the elite but you and I know that isn’t going to happen. So what’s next? I imagine a crash of the system because all these huge piles of debt need to be serviced and right now it is only being serviced by more borrowing.. Look for QE4+ coming soon or a total crash.
I was in a Salvation Army Thrift Store yesterday and the place was packed. Mostly white middle class looking customers of all ages, young to retirees. From what I can see this is where the middle and low end customer has gone. Even their prices have gone up some in the last year.
Unlike many other things Halloween, this scare is real.
The reason we’ve had such a massive expansion of Emperor Obola’s welfare state is that we have a Potemkin economy that runs on nonstop fraud. At the behest of Wall Street criminals, millions of good paying jobs have been exported overseas. Millions more jobs have simply been abolished due to technological innovation.
The economy under Emperor Obola looks good only because of ongoing fraud in reported economic statistics (e.g., employment, inflation and GDP), massive governmental borrowing to support the unprecedented expansion of the welfare/warfare state, and massive money-printing by the Federal Reserve to monetize the portion of Federal borrowing that could not be absorbed honestly by real private sector savings.
Corporate earnings look good primarily because of massive stock buybacks, and massive refinancing of higher rate corporate debt into lower rate debt, courtesy of the Federal Reserve’s zero interest rate policy.
Meanwhile, the Federal Reserve, through its zero interest rate policy (ZIRP), has effectively stolen hundreds of billions or possibly several trillion dollars in interest income from honest hard-working savers over the past six years to reflate insolvent banks. While the Fed has ended its money-printing operations, probably just temporarily, the ongoing theft of interest income from savers via ZIRP continues.
To call any of this an “economic recovery” is the ultimate travesty.
I suppose life is great for the already-wealthy who have first access to the counterfeit trillion$ printed up by the Fed. They’ve gotten even richer. And life isn’t bad for the sycophants and apparatchiks who service the whims of the already-wealthy.
For the 90% who are not in one of those groups, well, we’re just the collateral damage.
Even a massive Republican victory in Tuesday’s election will probably not be enough to make significant changes to the direction this country is going.
Welcome to h-e-l-l on earth.
On the same day headlines claim consumer confidence is up, I read that consumer spending is down.
Yesterday I bought a bag of groceries and the bill was $40. There was no meat at all and most of what I bougt was on sale. I’ve read that food is only 15% of our budget. I don’t believe those numbers either….
Great article, Wolf!
I wrote this one before I saw yours.
http://wolfstreet.com/2014/10/30/the-wrath-of-draghi-first-german-bank-hits-savers-with-negative-interest-rate/
Make sure to speak to the Too-Big-to-Fail- Bank manager, and tell him, as you are about to transfer your account to a credit union, “The lack of interest is mutual.”