Spin vs. Fact and GDP Contracts Net -.2%

The Spin (consumer spending increased!)

“Though cautious, consumers are holding up despite high personal debt, a tight job market and hard-to-get credit. A government report out Wednesday is expected to show consumer spending rose 0.5 percent in October, compared with a 0.5 percent drop in September. Incomes, the fuel for future spending, are expected to edge up 0.2 percent, after being flat.”

The Facts

Consumer spending rose .5%.  What does that mean?  That means if you spent $1,000 last month, then this month you increased your spending by $5.00. Five bucks.  Wow.  A $5 buck increase for every $1,000 in spending doesn’t sound like a recovery to me.

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The Spin (stock market surging!)

“Over the past few months, though, the stock market has surged. A rally on Monday carried the Dow up 133 points to its highest point in just over a year.”

The Facts

The stock market is based on stock prices.  Stock prices are based on how well companies are performing. If stocks go up, then companies are making more profits which means the economy is recovering.  At least, that is what they want you to think.  Unfortunately this is a fallacy of causation.

Companies can make more profits in two ways. They can increase sales, or they can cut costs.  One way to cut costs is to lay off a lot of workers.  That means you are squeezing more productivity out of fewer people.  So even with the same sales, or even declining sales, when you decrease costs, the area between your cost and your sales is your profit.  So the more you cut costs, the larger that “profit” area gets.  As long as you can cut costs faster than your sales are declining, it will still look like your profits are going up.   And yet, the media use this as an example of economic recovery even though clearly, it does not necessarily mean that.

On the news they will say, “higher productivity” led to increased profits.  This is a sneaky  use of the word, “productive” which is like “produce.”  This doesn’t mean the company “produced” more because of more demand for their product, which would be a sign of economic improvement, it just means that each employee has been forced to be more productive in their job because there is less of them at the company.  So again, higher productivity can still mean the company is experiencing declining sales, i.e., poor economic conditions.

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The Spin (GDP rose 3.5%! The economy is recovering!)

As I mentioned in an earlier post, the government released a 3.5% increase in GDP.  This was all over the government “cheer-leading-pom-pom” news as a sign the economy is recovering.

The Facts

The 3.5% GDP has been revised down, which is not unusual.  The new GDP is 2.8%. Somehow I bet we won’t hear much about how it was revised down in the news.

In my prior post I did some quick math to show how 3.5% was really only 0.5%.  Let’s review:

  • Cash-for-Clunkers and the federal home buying incentives made up 1.5% of the GDP
  • Inventories are in decline, but they declined less in Q3 which made up another 1% of the GDP
  • Government spending was 0.5% of the GDP

So, removing government spending and a “slow down” in the decline of inventories, you are left with only 0.5% GDP.  Hardly a recovery.

Now that GDP has been revised down to 2.8%, what you really have is a negative -0.2% contraction.

Those stubborn facts.  Always getting in the way of our government’s pom-pom propaganda.



Categories: Government Failures

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