Fourth Quarter GDP A 'Healthy' 5.7%... Or Was It?

As is frequently the case in government provided numbers, the headline numbers mask a much different story than that which is revealed by closer examination.  And, so is the case with the rather robust growth rate in the fourth quarter Gross Domestic Product (GDP).

Strained budgets in states and local governments don’t just affect the area residents — they can cause a drag on the whole U.S. economy.

Spending from state and local governments fell at a 2% annual rate in the fourth quarter, a revised (GDP) report showed today.  That’s much worse than the 0.3% drop in the original estimate, or the 0.6% decline in the third quarter.  And, upcoming quarters could show similarly bad numbers as revenues continue to fall.

According to ShadowStats (http://www.shadowstats.com/), the FED continues to act like a serious problem exists in the economy.  One example is the ongoing explosion in the money supply.

The St. Louis Fed’s Adjusted Monetary Base, seasonally-adjusted surged by $90 billion  (an annualized 198% pace of increase) in the two weeks ended February 24th, to a record $2.184 trillion.  The prior record high had been in the previous two-week period.

The monetary base — currency in circulation plus bank reserves — is the Fed’s primary tool for adjusting broad systemic liquidity, as measured by the money supply.

However, ShadowStats own monetary estimate of M3, the broadest form of monetary aggregate, is still on track for a deepening contraction.

As a result, according to ShadowStats, economic reporting increasingly will surprise the markets to the downside.  Recent data in weaker home sales, new jobless claims and consumer confidence have not been of substance, but negative market reactions to those numbers likely foreshadow significant negative market reaction as the general outlook shifts, from one of ongoing economic growth and recovery, to one of renewed recession.  Marko's Take agrees.

Nearly 6% growth is considered an outright economic boom, but few believe the current economy is booming, despite the revised report of official 5.9% annualized growth in the fourth-quarter GDP.  As discussed later, most of the reported growth was due to relatively stronger non-farm inventories, yet the inventory improvement is not supported by strong orders.

When consumption fails to support production and inventories build-up, manufacturers tend to cut back production and GDP falls.  This sets up renewed quarterly contractions beginning as early as the current quarter.  Such would be viewed popularly as a double-dip recession.

So while the talking heads tout the so-called recovery, readers of Marko's Take know that this way of thinking will be quite short-lived.  How can there be a real recovery until the unemployment rolls start coming down?

Think we're in a recovery?  TAKE ME ON!

Marko's Take

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GDP Grows By 5.7%: Has The Recovery Finally Taken Hold?

On Friday, the Bureau of Economic Analysis (BEA) gave its initial guesstimate of 4th quarter Gross Domestic Product (GDP) of 5.7% - a number much higher than most analysts had expected.  At first, this number appears to be pretty solid and follows a downwardly revised 2.2% figure for the third quarter.

The first problem is that this preliminary estimate is nothing more than a guess and is subject to at least two more revisions before the figure becomes finalized.  Of the 5.7% number reported, a full 3.4% was the result of inventory shrinkage, as companies pulled more goods off their shelves.  In so doing, there was NO positive effect on employment, which continues to remain at unacceptably high levels.

While the fourth quarter figure is robust, GDP still remains nearly 2% BELOW the peak reached in early 2008.

The largest contributor to growth was consumer spending, which grew at 2% but was down from 2.8% in the prior quarter, when sales were boosted by the "cash for clunkers" program.

One sign from the GDP report of improved confidence at companies was an annualized 13.3% increase in spending on equipment and software—the biggest gain in nearly four years. In the past, rises in capital spending have tended to signal an increased willingness to hire.

Marko's Take?  The fourth quarter will mark the end of the "recovery" and a more severe contraction will begin to gain steam.  Without an increase in employment, no economic upturn of any duration can possibly be sustained.  Unfortunately, the oncoming "second dip" is likely to be far WORSE than the first one. 

Other ongoing economic problems include restrictions in credit availability and percolating inflation - which will undoubtedly begin to accelerate shortly.

Have a great weekend.  Disagree?  Agree?  TAKE ME ON!

Marko's Take