Really? The Fastest Growth In GDP Since 2003?

In the latest iteration of Gross Domestic Product (GDP), we were told that the economy grew at 5% in the third quarter of this year.  This coupled with a 4.6% growth in the second quarter apparently gives us the fastest economic growth since 2003.

But, let me ask you this.  Do you feel like, financially, you are living in the best of times in the last 11 years?  Probably, not. 

So, why does the GDP growth look so good?  The answer is simple. Nearly a half trillion dollars in extra growth is being added to the GDP numbers each quarter that wasn't being counted in 2003.  That's because, beginning with the 2nd quarter of last year, the folks who calculate the GDP each quarter, the Bureau of Economic Analysis, started adding in the value of intellectual property -- the costs of research and development of new products, and the costs of buying copyrighted material such a movie scripts, books, songs, etc.  Previously, those costs were merely counted as intermediate business expenses that were ultimately rolled up into the final cost of the product and not counted as part of the GDP.

To understand that this is a significant change, let me use the example of a fictional publishing company who spends $100,000 to buy the rights to print an author's book.  In the past, that $100,000 was just written off as a business expense and the real value of it was enumerated in the GDP when the book was sold.  Today, under the new and creative accounting for intellectual property, that $100,000 cost is added to the GDP up front.  Then, subsequently, the book's sales are also added to the GDP when they occur.  This sure seems like some kind of double counting. Doesn't it?

Many believe this trickery adds a full one percent to the GDP growth each quarter.  So, last quarter's growth was probably only 4% -- not 5% -- when the old method of accounting was used.  Similarly, the 4.6% growth in the second quarter would have been 3.6%.  However, this new method of calculating the GDP certainly gives President Obama bragging rights regarding the growth of the economy being the fastest since 2003.

Lastly, in my opinion,  the best measure of the health of the economy is what you and I are spending.  And, last quarter, Americans only spent at an increased rate of 2.5%; well behind a supposed overall growth of  5%.  What's worse is that the  consumer is taking on record amounts of credit debt while increasing their spending.  Not a good thing.  What really drove the growth in GDP was a 9.9% growth in government spending and 8.9% increase in business investment (which includes intellectual property).

References:

The U.S. economy grew at its quickest pace in 11 years in the third quarter, the strongest sign yet that growth has decisively shifted into higher gear: http://www.cnbc.com/id/102291457

GDP: Does Lady Gaga Count?: http://www.econlife.com/gdp-does-lady-gaga-count/

GDP Revisions Make Recovery Look Better, Recession Not as Bad: http://blogs.wsj.com/economics/2013/07/31/gdp-revisions-make-recovery-look-better-recession-not-as-bad/

U.S. consumer credit up a record amount in July: http://blogs.marketwatch.com/capitolreport/2014/09/08/u-s-consumer-credit-up-a-record-amount-in-july/

With GDP growing strongly, Republicans' economic dilemma gets more complicated: http://www.washingtonpost.com/blogs/plum-line/wp/2014/12/23/with-gdp-growing-strongly-republicans-economic-dilemma-gets-more-complicated/

pb

Silver at a 4-Year Low!

All those companies hyping gold are now telling us that buying silver is the best kept investing secret.  Well, as this screen shot from CNBC clearly shows, as of yesterday, silver hit a 4-year low.

What this simply means is that silver, just as gold, has not been a hedge against excessive government spending.  And, if you happened to buy silver in the last four years, your losing money.

In April of this year, I wrote a blog entitled The Truth About Buying Gold and Silver, in which I warned about the excessive hyping of these metals as an investment opportunity.   At that time, gold was at $1300 an ounce (now at $1217.70) and silver was just below $20 (now at $17.75).  While gold and silver are moving down, the stock market has been reaching record highs.  You be the judge . Does gold and silver deserve all the hype that the sellers would have you believe?

A Rosy GDP Report With A Lot Of Sour Notes

Simply looking at the headlines, one might think that the reported 3rd quarter GDP growth of 2.7% means that the economy is growing again after having languished at 1.7% last year.  But, if you look at the truly "key" numbers that underlie that report, there's some very worrisome facts.

First, there's two consumption numbers that are extremely weak: (1) Consumer Spending and (2) Business Investment and Spending.  Consumer spending, which typically drives 70% off our economy, was adjusted downwards from a previously reported 2% to only 1.4%.  Business investment, which generally helps drive the non-consumer portion of the economy, went from a previously reported drop of 1.3% to a newly reported decline of 2.2%.  On top of that, businesses spent 2.7% less on equipment and software than they did in the previous quarter.   Put these numbers all together and it paints a clear story that people and businesses are not buying the things that would normally drive the economy.  If this continues, we are definitely headed for a recession.

The only reasons that the report was as rosy as it was reported is because business inventories grew (without having any buyers); exports increased (because the dollar continues to be weak); and government spending jumped a whopping 9% from the previous quarter.   None of those things are either good for economic growth or would signal any sustainable growth in GDP going forward.   The bottom line is this GDP report was actually a bad report and the fact that the stock market isn't going bonkers over it just proves that.

--- MarketWatch: Third-quarter growth revised up to 2.7%: Inventories, exports boost growth, but consumer spending softer: http://www.marketwatch.com/story/third-quarter-growth-revised-up-to-27-2012-11-29

Does Obama Even Remember 9/11?

In speech after speech, Barack Obama keeps blaming George Bush for his own economic and deficit woes.  The way he tells it, Bush took a Clinton surplus and turned it into a deficit by his spending on two wars, and because the Bush tax cuts (for the rich) made it so.

What is really infuriating about Obama's claim (along with many Democrats) is that it completely ignores why there was one of those wars and an increase in deficit spending, and why the tax cuts were even passed into law.  By blaming Bush for these problems, Obama is completely ignoring the impact of 9/11.

Besides the fact that 9/11 forced us to go to war in Afghanistan, that attack on the twin towers sent this country into a tailspin.  People stopped flying; especially to travel locations.  They were scared. Unemployment zoomed in travel destinations such as Las Vegas, Orlando, and Hawaii.  The economy suffered and tax revenues fell; resulting in budget deficits.

On top of that, Federal spending skyrocketed; further causing budget deficits to increase.  President Obama conveniently forgets that the Department of Homeland Security and the hiring of thousands of Transportation Security Administration (TSA) airport screeners arose from the ashes of 9/11.  Billions more were spent on screening devices and baggage scanning systems.  Aircraft cockpit doors were made entry proof.  Billions were spent in beefing up federal buildings in the U.S. and around the world to protect them from either drive up or drive into car bombings and/or walk-in terrorist bombers.   And, billions more were spent on container x-ray devices at every U.S. seaport of entry.

Lastly, the Bush Tax Cuts were passed into law in 2003 because 9/11 had literally slowed the economy to a snail's pace.  In fact, from 2001 to 2003, the economy only grew by an anemic 7.7%; when, in fact, a growth of 18% or more would have have normally been expected.  After the tax cuts became law, the economy recovered; increasing by 26% from 2004 until the the recession hit in 2007.

Obama's claims are truly being taken out of context.  And, don't expect the mainstream media to set the record straight!