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/

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Don't Believe The Hype Over The 3.9% Growth In GDP

Apparently, the economy -- as measured by the Gross Domestic Product (GDP) -- grew by an unexpected 3.9% in the third quarter.  Coupled with 4.6% in the second quarter, this is the best growth in back-to-back quarters in 10 years.  But, there is a serious problem with both of these numbers. The fact is, that the consumer spending is a lot weaker than those numbers would imply.

You see, about 70% of any GDP calculation comes from what you and I spend.  While this last quarter looks rather hot with a 3.9% growth rate, the consumer spending only grew by 2.2%.  In an even hotter second quarter at 4.6%, consumer spending only rose by 2.5%. Simply, consumer activity is tepid and that's not good.  It shows that lagging incomes, high rates of poverty, and higher prices for food and energy are taking a toll.

There is also another number that makes up the GDP and that indicates a lack of consumer spending: Imports.  We are a nation who is heavily dependent on imported goods.  Yet, last quarter they fell seven tenths of a percent.  Proving the demand for imported goods has also slowed.

This begs the question, if 70% of GDP is household spending and that was weak, where did all the growth come from.  Well, you can thank our war with ISIS.  Military spending jumped 16%;  and overall, federal spending jumped 9.9%.  Business spending, too, had a hefty impact; growing by 7.1%, but it is always heavier in the third quarter as manufacturers rev up production of goods prior to the holiday season. 

Personally, I think that all the business spending may be for naught.  Especially, if the consumer continues to lag behind.  It may just be the case that the consumer is the Grinch that stole this Christmas.

References:

U.S. Third-Quarter GDP Revised Up to 3.9% Growth: http://online.wsj.com/articles/u-s-third-quarter-gdp-revised-up-to-3-9-advance-1416922352

U.S. GDP Grew 4.6% In Second Quarter 2014, Up From Earlier Estimates: http://www.forbes.com/sites/samanthasharf/2014/09/26/u-s-gdp-grew-4-6-in-second-quarter-2014-up-from-earlier-estimates/

What Are the Components of GDP?: http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm

New data shows Americans' incomes still stagnant after recession: http://www.reuters.com/article/2014/09/16/us-usa-economy-poverty-idUSKBN0HB1LN20140916

If There’s No Inflation, Why Are Prices Up So Much?: http://business.time.com/2013/03/12/if-theres-no-inflation-why-are-prices-up-so-much/

Military Spending Madness

Albert Einstein once defined madness as doing the same thing over and over again in the anticipation of seeing a different result.

To that end, Barack Obama and this Congress are in the process of repeating the mistakes of Jimmy Carter and Bill Clinton with respect to military spending.

Following the failure of the Vietnam War, Jimmy Carter and his dominant Democratic Congress decided to slash military spending. This was despite the growing threat from the Soviet Union. When Ronald Reagan came into office, he rebuilt the military and many believe that this was the single-most contributing factor to the collapse of that communist block of countries. In essence, Russia's communist/socialist society couldn't compete, economically, with our capitalist-supported growth in military strength.

Then, following the collapse of the U.S.S.R., Bill Clinton and his very supportive, Democratic congressional majority decided to, once again, slash military spending. Bill Clinton called it the "Peace Dividend" and slashed our troop strength by 30 percent or by 600,000 service members. Then, 9/11 occurred during the following Bush's presidency and we went to war in Afghanistan and, ultimately, Iraq. We know from both of these conflicts that more troops were absolutely needed to maintain the peace but we were being hobbled by the past reductions of the Clinton Administration. The "surge" proved that more was better. But success in Afghanistan suffered because there weren't enough total troops to support a surge-like effort in both countries at the same time.

Now enter Obama.

Once again there is a move to minimize our military's spending. Cuts are being planned in missile defense, F-22's, the new Marine One helicopters, and a variety of other weapons systems. Interestingly, though, it appears troop strength will be increased and this is a direct slap to the past reductions by the Clinton Administration (See Full Story).

Surely, some of these programs, especially the new Marine helicopter, are wasteful and will not necessarily make us any more secure. But, to cut out 2 billion dollars for the deployment of missile defense is just penny-wise and pound-foolish. What is even more insane is that we announced the missile defense cut at the very same time that North Korea launched another weapons-capable missile. In February, Iran was able to launch a satellite into space using their long range missile capability. How long do you think it will be before either Iran or North Korea hands that technology over to the likes of Hugo Chavez? Or, worse yet, a nuke and missile system to Al Qaeda?

It just seems we never learn from our past and we are again buying into the madness that Einstein once defined. Obama's sole focus, now, are on his social programs. But, the neighborhood we now live in is actually more dangerous than ever before. It is if we are living in a bad neighborhood, buying iPods and Big Screen TV's, while our windows are left wide open and doors unlocked.

Al Qaeda and the Taliban are not defeated. Iran and North Korea are threatening to be serious nuclear powers; while developing missile-delivery capabilities. Both Iran and North Korea are known peddlers of weapons technologies. China is spending billions to be a dominant world military power. Russia is threatening to rise once again by trying to rebuild its military. Amid all this, we are cutting back. That is truly madness!

Colin Powell: Is He Suddenly Now In Belafonte's Good Graces?

In 2002, the singer Harry Belafonte referred to Colin Powell and Condoleezza Rice "house niggers" for being too connected to the Bush Administration and its policies. As Black News Weekly reported, Mr. Belafonte appeared on "Larry King" to defend that position (See Full Story).

My intent of mentioning the above incident is to highlight the opinion of the left, albeit very extreme in this particular case, about Colin Powell. He has never been, nor been seen as a supporter of liberal viewpoints. To say, now, that he is endorsing Barack Obama, and that "race" has nothing to do with it is a little hard to fathom (See Full Story).

As a former, premier military leader of this country, I find it difficult to believe that Colin Powell supports Barack Obama's direction for our armed forces (See the video). This, alone, should be a big issue for Colin Powell. Much like Bill Clinton did in the 1990's, Barack Obama will literally stifle advanced weapon systems and severely limit military spending so he can have his planned government "give-away" programs. Additionally, Mr. Obama doesn't believe in any expanded or even continued intelligence activities, such as the recent changes in FISA, and he would put unreasonable privacy rights ahead of this country's protection. Is that what Colin Powell believes would be "good" and "transformational" for America?

Beyond the military, if Colin Powell really believes in all the other liberal policies of Mr. Obama, where was he with his endorsements of John Kerry and Al Gore? Most of what Barack Obama stands for is hardly any different from these previous Democratic candidates. In fact, Mr. Obama just may be further left in his political views than those two guys! As far as I can remember, Mr. Powell backed George W. Bush and Bob Dole in past elections.

So, Mr. Powell... You want us all to believe that your decision to back Obama has nothing to do with race? I don't even think Harry Belafonte would believe that!