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US GDP Growth: NOT What It Seems!

By   Shlomo Maital

I recently wrote a column titled: Why Can’t Economists Talk Straight?, in the Jerusalem Report. It was a book review of a book by a friend, an expert on behavioral economics. It explains why economists befuddle, use impenetrable jargon, and in general confuse and obfuscate.

     Here is a recent example.   US First Quarter GDP figures were headlined as: US economy growth surprises!   3.2% growth. Way above what was expected. It was predicted that a recession was on the way. But it’s not!   Yeeayyy!    This is what journalists wrote. I can understand that. They are not trained to read the economic X-Ray data. But economists?   Where ARE they?   Nowhere.

     The first quarter GDP news is BAD BAD BAD! Not good.   Here is why.

       A large part of that 3.2%   growth was “inventories”. Nearly a quarter. Without that, growth would have been 2.5%. Much worse ….. But what IS that inventory thing???

        Here is the straight talk.   GDP growth reflects what is PRODUCED   — not what is SOLD.   Some of GDP is sold. Some is NOT. So it is put into warehouses. This is then called ‘inventories’ or ‘inventory change’.  

       A whole lot of stuff was produced in the first quarter – but companies couldn’t sell it.   So cars, fridges, computers, motorcycles, appliances, etc. went into warehouses.  

       That is bad news. Because in the 2nd quarter, companies will sell off that inventory rather than produce new stuff. That will greatly reduce GDP growth rate.   In 2nd quarter, we will see numbers that begin to herald a recession. Trust me.   Set aside some money – we ARE heading for a slowdown.

      Now, is that bad news? Or good?     As we head toward elections in November 2020, a recession will help defeat Donald Trump.   People DO vote their pockets, to some degree. And the likely Democratic candidate Joe Biden is running a campaign to enlist support of working people.   Trump has not even begun to deliver on his promises to them. And they are beginning to get it. Moreover, Biden has pulled Trump’s chain, and got Trump to attack unions (dues-sucking!).  

       So bottom line:   NOT 3.2% growth, but 2.5% growth (subtracting inventories), to reflect what people actually BOUGHT. They are buying less. This is a slowdown signal.   I can find nowhere where this is widely and clearly reported. A great shame.

 

 

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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”.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
June 2019
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