Global Economic Crisis

As if on cue, the Dow Jones index soared to the skies in sequence with the Commerce Department’s triumphant announcement that the third quarter GDP growth in the United States was a robust  3.5 %. After 4 consecutive quarters of economic contraction, the pronouncement that the American economy was now growing, and at a stronger rate than many experts had forecasted, the cheerleaders on Wall Street are celebrating the end of the recession. Hallelujah, the Great Recession is over, the stimulus package has worked!

Not so fast.

Let us journey back into recent history of just over one year ago. It is August 28, 2008 and the Commerce Department has just released its revised growth figures for the second quarter of 2008. It turned out, according to the statisticians at  the Commerce Department, that the American economy grew at a much faster pace than originally reported. The revised Q2 GDP growth figure for 2008 was 3.3%, nearly identical with the Q3 figures now being reported in 2009. The pundits rejoiced at this magnificent economic news, proclaiming that these numbers reflected the success of the $150 billion deficit-driven  stimulus package approved by Congress at the beginning of the year. Analysts proclaimed that the impressive growth figures for  Q2 of 2008 meant that the U.S. economy had dodged a bullet, and thanks to loose fiscal and monetary measures, there would be no recession.

Two weeks after the release of the revised and supremely optimistic quarterly growth figures by the Commerce Department, Lehman Brothers went bankrupt, the global financial system went into cardiac arrest and a synchronized recession struck virtually every economy on the face of the earth.

Before celebrating the glorious Q3 numbers for the U.S. economy, I recommend that prudent observers reflect on the massive levels of public indebtedness required to create the accounting metrics that can demonstrate economic growth simultaneously with the devastation of the real economy  and continuing increases in an already staggeringly high level of unemployment. Furthermore, digest the reality that car sales generated by the recent “cash for clunkers” program contributed nearly  1.7% of the 3.5% growth in GDP in Q3. Then, looking at the recent history referred to above, ask the hard questions on how sustainable the trajectory suggested by the third quarter numbers really is.

In my view, the 3.5% Q3 numbers of 2009 are as reliable an indicator of future economic growth as were the 3.3% GDP growth figures in 2008. As George Santayana stated, those who forget the past are condemned to repeat it.

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com

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At  its peak level of GDP, the U.S. economy depended on the American consumer for more than 70% of its output of goods and services. It has been the deleveraging of the American consumer, and to a growing extent his/her unemployment, that has been the catalyst of the U.S. recession. And not only America; the centrality of the U.S. consumer to the overall global economy has meant his pulling back on a debt induced shopping spree has sparked a worldwide synchronized recession.

The vast amount of money that Uncle Sam has borrowed to fund a nearly $800 billion economic stimulus program is supposed to substitute for the falloff in consumer demand, stop the avalanche of job losses and in the process regenerate consumer spending. The perception that this policy response was beginning to bear fruit has been the foundation of a recent flurry of statements emanating from the Federal Reserve, intimating that the recession was winding down, with recovery just around the corner. Both the Fed, Obama administration and Wall Street fully expected that the July retail sales figures would reflect a return to growth in consumer spending, juiced up by a taxpayer funding “cash for clunkers” gimmick aimed at kick-starting auto sales.

When the official sales figures were released by the Commerce Department, jaws dropped right through the floor. Instead of the .7% rise that was expected, July’s retail sales figures revealed a decline of .1%. However, the reality was much worse than even the posted decline, for the July figures were artificially inflated by a large increase in automobile related products due to “cash for clunkers.” Without the engineered car driven increase in consumer purchases, the actual retail sales contraction was .6%.

The ugly truth is that no matter how manipulated official economic statistics are, including the U3 unemployment number, the reality is that total consumer purchasing power, reflecting the number of hours worked multiplied by average wage, has declined to a level that makes it virtually impossible to recreate vigorous economic growth. Despite the happy talk from Washington,  I think it would be surprising if the Obama administration does not ask Congress for a second massive stimulus package before the end of the year.

Should a second stimulus package be proposed by President Obama, he may encounter stiff resistance from Republicans and fiscally conservative Democrats over concerns about the exploding national debt. However, it is likely that the Obama administration will place a higher priority on going into the 2010 mid-term elections with the ability to claim they have reduced unemployment rather than positioning themselves as fiscally responsible.

Higher deficits, however ,create the danger of inflation and much higher interest rates. Escalating interest rates will serve as a brake on economic expansion, defeating the purpose of deficit  funded stimulus programs. Now, in that situation, one can always resort to monetary policy, with the Federal Reserve reducing interest rates. However, in this unique economic disaster our planet is currently navigating its way through, the Fed, as with many central banks throughout the world, has already reduced its funds rate to close to zero.

Could the Obama administration be running out of options? If fall retail sales continue to plummet and unemployment rises, things could get even more ugly for the problematic American economy.

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In Q2, Denninger points out, the government’s spending grew by 10.9%, contributing to a positive movement of 3.3% in the second quarter’s reported GDP. Remove that 3.3% from the equation, and the actual Q2 data for the consumer economy witnessed an overall contraction of -5.2%, a figure substantially worse that the official government Q2 report.

The statistical argument raised by Karl Denninger warrants careful consideration by all those who are seeking an accurate gauge of what is actually transpiring in the real economy. Furthermore, the track record of both the Commerce Department and Labor Department has not been exactly stellar with regard to its statistical accuracy in measuring the impact of the Global Economic Crisis on the American economy. Simultaneously with the release of reassuring Q2 numbers, the Commerce Department also admitted it had gotten its evaluation of the recession’s affect on the U.S. economy’s GDP from its onset in Q4 of 2007 through the latter part of 2008 stupendously wrong, now conceding that the actual contraction was -1.9 percent instead of -0.8%, as previously reported.

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

　

　

　

　

　

　

 

 

 

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The global economic crisis accelerated the US trade deficit, which rose in October by 1.1 percent to 57.2 billion dollars. The October results also showed that America’s trade gap with China had widened, according to U.S. government official figures.

The trade numbers caught economists and experts off guard, as they had forecasted a drop to $53.5 billion. Results show that the American trade deficit with China grew slightly to $27.9 billion in October from 27.8 billion dollars the previous month. The U.S. Commerce Department released the trade figures.

The trade results also show that total trade volume had fallen by 1.7 percent. Declines were registered in imports and exports, a manifestation of the growing impact of the global economic crisis in both the United States and throughout the world. October imports declined by 1.4 percent from September to 208.9 billion dollars. Exports also showed a decline, dropping 2.4 percent to 151.7 billion dollars.

The dismal trade figures highlighted the third straight month of a drop in both imports and exports. The Commerce Department numbers reflect a weakening in the performance of the U.S. economy simultaneously with a reduction of international trade. In the first ten months of 2008 the cumulative American trade deficit was a staggering $590.9 billion.

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