Saturday, June 28, 2014

Despite Huge Drop in GDP, Economists Still See Better Days. Really?

When it was reported that the economy shrank nearly 3% in the first quarter, most economists -- the same ones who were completely caught off guard by the downward revised 3% number -- seem
 to think its still on track to be positive; claiming that the first quarter was a one-off anomaly due to weather, lower healthcare spending, and a decline in exports. 

The problem with this thinking is that, just one day after the dismal first quarter GDP was announced, another disappointing number, consumer spending, signaled even more trouble in the 2nd quarter.  In May, the second month of the 2nd quarter, consumer spending came in at half of what those same economists were predicting, at an abysmal 0.2% percent growth.  This after, April had literally shown no growth.  Since consumer spending makes up 70% of the calculated GDP number, its hard to believe that the 2nd quarter GDP will be anything but lackluster or, worst case, another negative number; thus, signalling a recession.  If that happens, the weather can't be blamed for the lack of consumers being holed-up in their homes, not buying products or seeing their doctors.

Unless spending comes in like gang busters in June, this economy is showing the clear signs that the consumer has reached a tipping point and incomes have not kept up with inflation.  As a result, people may be putting off buying big ticket items, spending less on leisure, entertainment, other discretionary items, or even seeing their doctors less regularly because they are simply so cash-strapped that they can't afford to pay the deductibles.  As history has proven time and time again, the lack of consumer spending is a primary reasons for recession.

Therefore, should anyone believe all those "happy times" economists who now seem to think that the first quarter was just a fluke?


Economists brush off dire GDP: ‘This is a blip’:

Consumer Spending in May Was Disappointingly Weak:

What is Economic Recession? - Definition, Causes & Effects:

Cutting Through The Fog: The Economy Shrinks By 2.9%: Recession Is Now A Statistical Possibility:

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