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“Grossly Distorted Product” or “Christmas in July”

Posted by Larry Doyle on October 30, 2009 9:10 AM |

What is the real economy doing? While yesterday’s GDP printed a surprisingly strong 3.5%, are we to take that on face value? If we care to most effectively navigate the economic landscape, we should dig a little deeper.

A full 2.2% of the 3.5% rise was directly correlated to Uncle Sam’s support of the auto and residential construction sectors of the economy. Another .6% of the GDP was directly correlated to federal spending. Obviously, the Uncle Sam economy implies a large presence by that jolly old man. However, all that money Sam is pumping is nothing more than borrowing from future generations and pulling demand forward.

What would the economy have done on its own without the government support? Let’s listen to Christina Romer. Recall that Ms. Romer referenced last week that this quarter would provide the peak impact of benefits accruing from Uncle Sam’s economic stimulus. What does she say about this GDP report?¬† The Wall Street Journal references Ms. Romer in writing, Economy Snaps Long Slump:

Without stimulus programs such as “cash for clunkers” and a first-time homebuyer’s credit, “real GDP would have risen little, if at all, this past quarter,” Christina Romer, president of the White House Council of Economic Advisers, said in a statement.

Why does Ms. Romer provide that sobering view of the economy? Very simply, if the American consumer represents 70% of the economy, then we should largely focus on that consumer. What did we learn about the consumer over the last quarter?

The Financial Times’ John Auther informs us in writing, Short View: GDP Grows, but Pain Remains:

Household disposable incomes actually fell during the quarter, by 3.4 per cent, but consumer spending rose, also by 3.4 per cent. This is not a pattern that can be sustained for long, and it is inconsistent with the need for US families to pay down their debts.

What does that disparity between income and spending represent? An unsustainable economic path. What else does it mean? The U.S. economy just had “Christmas in July.”

Did you get anything in your stocking?

LD

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