GDP Half Empty
Friday, 10/27/2023 13:01
Spending spree financed on credit...
WE LEARN that gross domestic product expanded at an annualized 4.9% rate last quarter,
writes Brian Maher in The Daily Reckoning.
"The sharp increase came due to contributions from consumer spending, increased inventories, exports, residential investment and government spending," says CNBC.
Various reports describe the data as "strong"..."stellar"..."sizzling."
Just so. Yet here at The Daily Reckoning, we tend to observe glasses that are half empty of liquid – not half full of liquid.
Silver linings are gray edges and bright sides are usually the wrong sides.
And like a man lowering water balloons onto a parade...or heaving a stink bomb into a wedding party...today we cast a pall upon the news.
We simply do not believe what we are told. We believe we are being taken on a sleigh ride.
In the official telling GDP equals: consumption plus investment plus government spending plus net exports.
Let us consider the equation's initial component: consumption.
We learn that third-quarter consumer spending leapt 4% – plenty handsome.
Thus we are told the American consumer is flush. She represents some 68% of third-quarter economic expansion.
"This report confirmed what we already knew," says a certain Michael Arone of State Street Global Advisors, continuing:
"The consumer went on a shopping spree in the third quarter."
Yet this she did heavily on credit – she had a credit card in her purse.
American credit card debt attained a record $1 trillion in this year's third quarter. Again...a record $1 trillion.
Meantime, Americans' personal savings rate registered 3.9% this past quarter.
The long-term average nears 9%.
We must conclude the American consumer is purchasing on credit because her piggy bank is depleted of coins.
Is this the sign of flush times? Or of lean times?
What is more, she is in for a splendid migraine when her shopping bills come due.
The annual interest charge for retail credit cards has attained a record 29% this year.
Can she keep pace? We are not half so convinced she can keep pace.
We expect to find her in a very poor way this time next year. That is, if we can find her at all.
Her head may first slip beneath the water presently rising around her.
Let us proceed to a central assault upon the consumption theory itself – the nearly universal theory that consumer consumption constitutes 70% of the United States economy.
It likely constitutes far less.
Official calculations of the gross domestic product neglect tremendous piles of economic doings.
These doings include business investment and spending on "intermediate" goods.
These are inputs required for the production of final goods – hence they are intermediate goods.
The steel in the automobile, the sugar in the candy, the wood of the furniture...these are intermediate goods...for example.
Yet their purchase does not classify as consumer spending – else they would be double-counted in the ledgers.
Explains economist Mark Skousen:
"GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy – intermediate production or goods-in-process at the commodity, manufacturing and wholesale stages – to avoid double counting."
Now mix in expenditures on intermediate goods. What do we find?
We find that consumer consumption merely constitutes perhaps 30% of GDP. Skousen:
"I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP...By this measure – which I have dubbed gross domestic expenditures, or GDE – consumption represents only about 30% of the economy, while business investment (including intermediate output) represents over 50%."
To emphasize: Business investment represents over 50% of the gross domestic product.
What do we learn today?
We learn that business investment slackened 0.1% in the year's third quarter.
We are not the least surprised that business investment slackened 0.1% in the year's third quarter.
That is because borrowing costs are on the jump. And credit has become somewhat dear.
The 10-year Treasury yield crossed 5% this week – if only briefly.
And as we explained yesterday: Business projects that may yield juice at lower rates of interest may not yield juice at higher rates of interest.
And so they are not undertaken. And that is why – we hazard – business investment has slackened.
But to proceed...
Let us recall the GDP equation: consumption plus investment plus government spending plus net exports.
We now train our sights on the government spending "contribution" to the gross domestic product.
We are told total government spending contributed 0.8 percentage points to third-quarter GDP.
Affirms MarketWatch:
"Government spending, meanwhile, rose sharply again, largely because of an increase in defense-related purchases. The US has sent lots of arms to Ukraine and has to replenish its own dwindling military supplies."
We can merely surmise that any economic reversal should be met by vast increases to the expenditure on tanks, warplanes and warships.
The economy would be up and away in very short order. But we let it pass.
A question nonetheless arises: How can government spending add even the lonest cent to the gross domestic product?
We must first recall that government lacks all resources. Imagine a parasite with its fangs sunk into a host.
You have just imagined a government.
This parasite may serve certain useful functions, we may concede if we are in generous humor.
The host/parasite relationship nonetheless obtains.
Before government can ladle out one meager Dollar for guns, for butter, for bread, for circuses...it must first pluck it from private pockets – directly or indirectly.
That is, through taxes or credit. That is, through taxes or taxes.
As we have explained before: The Dollar borrowed appears a lesser plucking than the Dollar taxed.
But it is an equal plucking. It is merely a plucking at one remove.
Do not forget, the borrowed Dollar must be repaid – with interest into the bargain. And who pays it?
The answer, at all times and in all places, is the taxpayer.
Government at all levels is credited with a thumping 36% of United States GDP spending.
Yet we are fond to cite this example:
Assume the government pays a fellow to shovel a hole. Assume further this government pays him to empty the dirt back in.
In the official telling you have just witnessed an increase to the gross domestic product.
Yet have you?
Or have you merely witnessed a sort of leg-pulling, a statistical feint – a squandering of time, effort and resources?
We believe you have your answer.
Furthermore: Automobile production, computer production, food production, widget production, all enhance the consumer's material existence.
Does tank production? Does warplane production? Does warship production?
We are riddled with doubt.
They may be necessary. They are very likely necessary.
Yet let us see them in their true aspect – as expenditures – not consumer "goods".
They do not enhance the consumer's economic health.
Thus we conclude our reflections on today's "sizzling" economic report.
Into our hellbox it goes. And hopefully into yours.
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