US GDP Growth: The REAL Story

By Shlomo  Maital   

             inventory             

Inventory of unsold automobiles

   New estimates for U.S. economic growth in the 3rd quarter of 2013 have just been published by the Bureau of Economic Statistics, Dept. of Commerce.  They reveal two key facts.

   * First, never ever just read the headline and lead paragraph, which is what most of us do.  The lead is:  the annualized GDP growth rate in Q3 2013 was a torrid 3.6 per cent!  This is an adjustment of the initial estimate, which was only 2.8 per cent, and a big jump from Q2 2013,  2.5 per cent.

   But if you dig down to around the 12th paragraph of the BEA release, you find this:   “The change in real private inventories added 1.68 percentage points to the third-quarter change in real GDP, after adding 0.41 percentage point to the second-quarter change.  Private businesses increased inventories $116.5 billion in the third quarter, following increases of $56.6 billion in the second quarter and $42.2 billion in the first.”

    What does this mean?  It means that  the increase in GDP, the stuff PRODUCED in Q3, was far bigger than the increase in final sales, the stuff people actually BOUGHT in Q3.  Final sales rose by only 2.1 per cent.  This is because businesses were overly optimistic about the ‘recovery’, produced too many cars, refrigerators, TV’s and cell phones, and ended up dumping them into the warehouse instead of selling them.  This has happened now for three straight quarters.

     This is bad news. It means that in Q4 and next year, 2014, businesses will cut production to sell off their inventories. That will reduce GDP growth, reduce job growth and weaken the recovery.  Always ALWAYS check the inventory numbers, not just the GDP numbers.

    * Second,  short term business cycles are alive and well. And they are always caused by human emotion.  We become overly optimistic, produce too much, fail to sell it, then have to cut back because inventories are expensive and stored goods soon become unsellable.  So the boom-bust cycle is permanently with us, because economies are driven by human beings and human beings jump from excessive hope to excessive despair and back again. 

     Prof. Robert Lucas’ statement in 1995 that the business cycle had been forever smoothed was simply, like Mark Twain’s description of his death,  “premature”.

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