Thursday, May 3, 2012

The Illusion of an Economic Recovery

Last Friday, the government reported the gross domestic product (GDP) number for the first quarter, and it was 2.2%.  That was .8% lower than the 4th quarter’s 3% growth rate.  It was a big disappointment because most economists were expecting growth numbers closer to the 3% range.  The New York Times reported the economy thwarting numbers with a political bent that said, “The economic recovery slowed more than expected early this year, raising fears of a spring slowdown for the third year in a row and giving Republicans a fresh opportunity to criticize President Obama’s policies. . . . “When you look at the report in the totality, I think it shows that the private sector is continuing to heal from the financial crisis,” said Alan Krueger, chairman of the president’s Council of Economic Advisers. . . . Representative Kevin Brady, a Republican from Texas and vice chairman of the Joint Economic Committee, called the numbers “beyond disappointing.”  (Click here to read the complete NYT report.) 
The real story here is not the political football the economy has become, but the lack of solid numbers to tell what’s really going on.  This happens because the government does not accurately adjust the so-called growth of the nation’s economy for inflation.  If inflation was accounted for squarely, there would be almost no recovery according to economist John Williams of  Friday, Williams said, “Indeed, the “recovery” is an illusion that has been created as a direct result of methodological changes in government inflation reporting of recent decades. . . . the faux growth problem is in the use of understated inflation estimates in deflating a number of economic series.” (Click here to go to the homepage of 
To prove his point, Williams put together two graphs of GDP.  The first does NOT account for inflation accurately, but in a way Williams says is the government’s “Headline Real GDP” reporting.  Look how the economy falters in 2008 and 2009, and then the economy is up, up and away again in 2010, 2011 and 2012.  Looking at the government’s calculation for inflation (Headline Real GDP–1st graph,) you would think the economy is definitely heading in the right direction.  
When you look at the nation’s GDP and factor in the effects of true inflation (Inflation-Corrected–2nd graph,) you get a totally different picture.  Look at the big drop-off in 2008 and 2009.  Then, look at the almost nonexistent so-called “recovery.”  There is simply not much of a recovery.  Williams repeatedly says the economy is “bottom bouncing.”   I think the “Inflation-Corrected” graph below demonstrates this description.
Everyone wants to be optimistic about the economy, but when that optimism is based on bad data, it could set up ordinary Americans for disaster.  People might go further into debt instead of preparing for another downturn.  Williams goes on to say, “Underlying economic reality does not have positive implications for the system.  Ongoing economic stagnation and renewed contraction will mean much-worse-than-anticipated federal budget deficits, U.S. Treasury funding needs and banking-system solvency issues.  Despite current protestations to the contrary, the Fed likely will be forced into a new round of easing in an effort to support the still-faltering banking system. . . . Any such action also likely will provide a trigger for heavy selling of the U.S. dollar and upside pressure on domestic inflation.” 
Maybe this is why Fed Chief Ben Bernanke implied QE 3, or more money printing, was still very much a possibility last week.  A Reuters report said, “We remain entirely prepared to take additional balance sheet actions as necessary to achieve our objectives,” Bernanke told reporters. “Those tools remained very much on the table and we would not hesitate to use them should the economy require that additional support.”  (Click here for the complete Reuters story.)  Inflation-adjusted data shows there has been little improvement to the GDP since 2009.  My guess is the Fed will be forced to print money to keep the illusion of economic recovery going.

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