The Real Economy III: The People’s GDP
Back in November, I showed how the capital of American businesses was contracting. I said "regardless of any official announcement of recessions, US businesses have been behaving as they normally do during recessions." It is hard to understand why American businesses are becoming recession-like illiquid when the GDP numbers don’t seem to show any signs of a contracting economy.
Digging deeper, I decided that, much as the government produces inflationary numbers ex-food and energy, it would be just fair to produce GDP numbers ex-government.
As this chart shows, the only thing growing for the last 3 quarters in the American economy is the Government consumption expenditures and gross investment. The rest of the economy is shrinking.
That enough should be an eye opener to those who think the Bush administration is near to anything close to a fiscal conservative administration. However, the real economy looks much worse than that.
Here is why.
One of the GDP measures is Personal Consumption Expenditures, which includes gas and electricity. So, as gas prices rise, the GDP will grow. That’s fine, if you are on the selling side of the gas pump. However, for the consumer, an increase in Personal Consumption Expenditures due to an increase in gas prices is a minus, not a plus: The people’s economy is shrinking, not expanding, if the growth is due to an increase in gas prices.
In that aspect, the official GDP measure is like a doctor who includes the weight of a tumor in the weight of the cancer patient. As the tumor grows, the weight of the cancer patient grows, and the doctor congratulates the patient for his gain in weight declaring him to be healthier. Does it make sense to you? No, neither to the doctor, the patient, or me.
So, I decided to adjust the Personal Consumption Expenditures by the increase of the size of the tumor. With data from the Energy Information Administration I adjusted that item dividing it by the average price of Unleaded Regular Gasoline, for that quarter.
The results for the GDP are slightly different than the official numbers.
So, this is the picture of the GDP ex-Government, ex-Cancer. It shows a recession during the past three quarters, and a previous recession by mid 2006. Exactly the same picture US businesses Undistributed Corporate Profits show.
You may wonder what made the US economy grow so fast from the first to the third quarter of 2007. The answer is nothing. That’s just the increase in exports due to the fall of the dollar. If we adjust the Net exports of goods and services, the picture shows a slight improvement, but not much more.
To adjust the fall of the dollar, I used the average price of Crude Oil for the quarter. You can suggest other measures, like the fall against other currencies, or other commodities, but I think that adjusting by the only commodity that somehow "backs" the Dollar should be fair enough.
Now we have a clear picture of the real economy, or the American People’s GDP.
As a matter of fact, we have had two back to back standard recessions since 2006, with only a brief respite in the first quarter of 2007.
Tags: America, crude oil, dollar, GDP, inflation, United StatesRelated posts
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May 20th, 2008 at 10:29 am
At what point does a “Consumer Economy” start to look bad? On the surface I can see what you are saying and it all makes sense. But my question is why is it that you seem to miss the implications of what you are saying – an economy in which 70% of its value is derived from consumption (non-replaceable) is unsustainable. Could it be that our nation, after 30 years of touting the “Free Market/Invisible Hand” mantra is about to bump up against the reality, that the “Free Market/Invisible Hand” only works to concentrate wealth to the Upper Classes. The working classes have been praying and hoping for their day in the sun for 30+ years and have nothing to show for it. Worker wages have been flat since the 70s and yet the economy is said to be doing well? For whom? Now the cost of living is set to skyrocket, and there is no magic bullet to save the day.
And to add a cherry on top, the number of jobs available, which can support the currently rising cost of living, is dwindling due to increased foreign competition and decreased education and training levels of American workers. Welcome to the 21st century.
May 22nd, 2008 at 10:56 am
Schumpeter took care of answering to some extent the issue of the sustainability of the consumer economy. Proving scientifically that it is not sustainable is not as easy you may think.
The free market/invisible hand mantra has been with the American society from its inception. As a matter of fact, the American revolution was a revolution to obtain a free market.
Laizzes faire (free market) economics proved its destructive powers in the 30s with the great depression. Since them we have had different degrees of State directed economics.
The consumer society was an invention of Democratic economists to avoid a new depression after the end of WWII. It is based on the formula for full employment developed by Maynard Keynes.
The come back of Classic economics during the past 30 years, which is what worries you, came as a response to the failure of the Keynesian economics to sustain the needs of the “US hegemony”/”US imperialistic needs”/”US role as beacon of freedom” (depends who you ask to) in the world and the inflationary explosion of the 60s and 70s.
September 3rd, 2008 at 6:47 am
Sorry, I;ve been away for a while. But I agree with you totally on most of your points. The question is where do we go from here. It would appear, on the surface at least, that our economy is being pilfered, and that real wealth is once again being concentrated at the top 1% – a new The Gilded Age.