Does the GDP Lie?

The Commerce Department reported last Wednesday, July 30th, that its second quarter preliminary (first of three estimates) Gross Domestic Product (GDP) figure was 4.0 percent.  To be sure, an annual rate of economic expansion of 4.0 percent is excellent news, especially as the final calculation of first quarter GDP came in at – 2.1 percent. Yes, that’s a negative sign in front of that “2”.

That means that from first quarter 2014 to second quarter 2014, the economy improved by 6.1 percent. Is this possible? Yes. Is this probable? We’re skeptical. (Correction below).

Let’s take a deeper dive to find out. First, economists polled by Reuters forecasted a GPD rate for second quarter of 3 percent. Therefore, their data suggested a 25 percent slower rate of economic expansion, or 1 percent, than what was reported.

The largest contributor, about 2/3, to the GDP number is said to have been consumer spending, which increased by 2.5 percent. Most of this spending was on durable goods and some on services. Despite spending more, consumers were reported to have saved more, by 5.3 percent. This is up from 4.9 percent in the first quarter. Business investment (capital spending), government spending, investment in home building, inventories (especially inventories) are also said to have contributed to the increased GDP.

A day prior to the GDP release, The Conference Board reported that its Consumer Sentiment Index reached 90.9 in July, up from 86.4 in June, its highest increase in seven years and close to a euphoric number. Do you feel economic euphoria?

Both these reports suggest that consumers feel better about their current and future prospects and the economy is benefiting. Despite the job market improvements, where are most of the jobs being created? Many new jobs are part-time employment, not full-time employment. Most part-time jobs are in the service sector, and not the sectors for which workers typically need a college degree and their salaries are much lower. Finally, due to technological advancement, employers can use part-time workers more efficiently. Employers schedule them only during the most critical hours, requiring them to be on call when the need is in doubt. This makes it more difficult for part-time workers to hold two or more part-time jobs to generate enough income to support themselves and their families.

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Additionally, food and energy is eating up more of worker’s incomes, leaving less on which to spend their stagnant wages. The Federal Reserve reported second quarter inflation, as a whole, was up 2.3 percent annually, and although wage growth is on the rise, it is not at or above 2.3 percent. Where is the extra money coming from? Curious, isn’t it?

With all these forces fighting the consumer/worker, what supports the second quarter economic expansion? The only conclusions we come up with are that consumer spending is occurring mostly by those that have been sitting on money for a while; the upper 5 percent, consumers are back on credit again or the data is skewed. In either case, the data, taken as a whole, doesn’t suggest brighter days ahead for Middle America. We will wait until the second and third revisions come through, but we have our doubts of the accuracy of this GDP number.

What are you personally experiencing? Are you making more and spending more?

Correction: We poorly stated our point above by saying the economy improved by 6.1 percent. The start of the second quarter set a new floor and from that floor the Commerce Department says the economy improved 4 percent. For such a drastic change in economic direction, both a catalyst and time are required. We don’t see a strong enough catalyst in the Q2 economic data and don’t believe one quarter was enough time to create such a significant change in economic direction that would not be apparent to everyday Americans.

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Comment List

  • Unless I’m mistaken, the GDP growth is due to larger investments in business capital. In other words, the stock market is hoisting it up, along with government spending. (GDP = C+I+G+[X-M] after all!) So I don’t think the numbers are out-and-out lies. The stagnant wages are a reflection of where the growth is GOING, rather than its existence. At least, that’s this mildly educated hobby economist’s view!

    • John Schneider 09 / 08 / 2014 Reply

      You are correct, much of the Q2 DPG growth is being attributed to business capital spending, i.e., increased inventories. That’s usually a reflection of businesses’ future economic outlook. Our concern is that the transaction isn’t complete because consumers have yet to buy up businesses’ increased inventories. Time will tell. With stagnant wages, we’re concerned consumers will increase credit card spending and many consumers (almost half of Americans not being about to afford a $400 emergency and 31% of Americans without retirement savings)can’t afford to buy up those inventories. We could be wrong. We have been in the past. We expect the next two Q2 GDP revisions will be downward. We hope that we’re missing something. True, state and local government spending is up. Federal spending (the bigger driver of the government spending category) has been dropping for years.

  • Kevin Z 05 / 08 / 2014 Reply

    I think you are mostly right guys. I think the growth is in a lot of ways split. Rises in energy cost, as an example are part of what is contributing to record corporate profits, but not driving economic growth. A fair chunk of that capital is sitting in banks offshore and appears only as higher EBIDTA on the income statement, but little more as corporations stockpile cash. Stock prices and corporate valuation are steadily strengthening over the last year, but that also does not translate to consumer spending which would stimulate demand – again capital sitting on the sidelines and not driving the real economy. Meanwhile unskilled employment expansion is doing little to drive economic growth – as you said using part time labor is highly efficient for business, again driving corporate profitability as small businesses are disappearing in favor of corporate replication, but is not fueling a rise in the spending power of the lower-middle and middle class. Due to stagnating wages over the recent past, low-income earner spending power is being eroded by inflation. Because of this, without intervention we may not see a return to the strong lower middle class and the subsequent demand growth it will bring for quite some time. That is why I believe now is the perfect time to once and for all adjust the minimum wage back to the (meager) buying power it once had and peg it to a modest inflation metric. Businesses by and large, bolstered by the recent modest economic gains, can likely afford it, but the demand it will drive will in my opinion more than offset the expense in the form of higher top-line revenue in the short-term. A stimulus that avoids government tax-and-spend – history shows that almost every additional dollar in modest wage-earners’ pockets gets spent almost immediately in their communities. And it puts no business at a competitive disadvantage – most of these jobs are in the service economy and hard to offshore. Combine that with reducing the ability of large corporations to benefit from American innovation, markets, and talent, while averting their American tax burden, and we can significantly ease our government’s financial pressure and restart investing in infrastructure that will sustain our nation for our children.

    • John Schneider 09 / 08 / 2014 Reply

      Quite honestly, we couldn’t agree with you more. Very eloquently put and thanks!

  • Froogal Stoodent 05 / 08 / 2014 Reply

    Not sure that the actual implication of GDP is that the economy improved 6.1%. I have little knowledge of economics, but the improvement is not going to be that high. You can’t just add percentages of some unknown quantity like that.

    • John Schneider 09 / 08 / 2014 Reply

      We agree. We tried to make a point a failed. Good catch. We tried to explain that going from -2.9% to 4% was a significant change, like going in reverse at 30 mps, then going forward at 100 mph on a dime. A catalyst would be required for a significant turn around such as that I we didn’t see that in any second quarter data.

  • No Nonsense Landlord 09 / 08 / 2014 Reply

    I agree. The economy is doing OK, and there are plenty of jobs, but flipping burgers is not a great job. At some point, the minimum wage will be high enough that an uneducated person can make any job a career.

    Corporate profits are up because prices are headed up. They sell less widgets, but at a higher price. All the top line revenue growth goes right to the bottom line as the fixed costs do not increase. The earnings per share is also up, as there are so many buybacks.

    • John Schneider 09 / 08 / 2014 Reply

      Yes, there are too many share buybacks. As Bill Gross referred to it, "it’s not business manage, but balance sheet alchemy." Until someone puts more effort into helping the American worker,household net worth with remain stagnant until the next bubble.

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