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Sunday, August 29, 2010

Is GDP a Good Indicator When Government Intervenes?

I looked over various data points on the health of the economy to see how we are doing and if we are really in this recovery the main media talks about.  It is healthy to constantly ensure your thesis is correct and your not missing anything.  To that end, I looked at GDP once again.
As a rising GDP for 3 quarters generally signals economic health and we had 2 quarters of major growth (2009 Q4 2.9%, 2010 Q1 5.9%) and even though Q2 2010 wasn't higher than 5.9% experienced in Q4 of 2009, coming in around 3.0%, it was still a relatively healthy figure.  One could argue that he 5.9% was an anomaly.  Given this, I was willing to investigate further.  I analyzed the timeframes of when the stimulus of 2008 came in.  The economic stimulus act of 2008 was signed by President Bush on February 13th 2008 and was worth $152 billion.  The legislation provided tax rebates for low and middle income families, as well as incentives for business investment and to increase the limits imposed on mortgages eligible for purchase by Freddie Mac and Fannie Mae.  This money did not go into the economy immediately.  Most did not receive their government checks until well into summer/fall.  The amount per family depended on tax bracket and the amount received depended on if you owed money or not.  It was reported to have increased spending by 3.5%, but in the context of the stock market, the market was in a free-fall throughout 2008.

One could argue the stimulus was so ineffective against the headwinds of corruption in the investment community, ratings agencies and mortgage failures, that we had to introduce another bailout package in 2009.  Hence, President Obama signed the Economic Recovery and Reinvestment Act of 2009 worth a reported 787 Billion dollars, but increased to over 800billion after.  The act was signed February 17th and had near immediate effects.  This stimulus' aim was to promote consumer spending, promote investment and increase consumer spending.  If you are interested on what it was spent on see link here.  As you can see, things began to turn around in the market and in the economy.

If we overlay the same data for the dow (only quarterly) to the quarterly report of the GDP we get something interesting.  At the same time the Stimulus was introduced, GDP and the DOW did well.
You can see the correlation between the market and GDP.  Just as major stimulus was being introduced in 2009, the market flourished and so did GDP.   In 2010, with stimulus and support for it waning (along with a realization of the damage debt can do to an economy), GDP moves downward and the market sits stagnant.  The 2009 GDP report shows growth in the 3rd and 4th quarters largely coming from Corporations or Gross Private Domestic Investment.  Gross Private Domestic Investment are expenditures by firms for tools, machines, apartments, buildings and new factories (not that factories are being stood up in the US much) and a change in inventories.  The consumer increased a bit mainly from consumption of durable goods (mainly motor vehicles and parts/ recreational goods and vehicles, which incidentally was the same timeframe for cash for clunkers) and services.  

So what does this tell us, well it tells us that GDP growth in the 2nd half of 2009 was false, it was increased on false money (borrowed money by the American tax payer).  When the incentives slow or stop, so does GDP and growth (as we have seen stimulus slow and already spent from the consumer standpoint).  Two large takeaways are that GDP is no longer a good gauge of economic health, as long as taxpayer dollars are funding it and.  We would have to continue funding spending to ensure we can grow GDP.  That is not a recipe for a successful economy.  If QE2 comes to light again (and not that I am for it), then we need to invest more in becoming producers again (funding farmers to produced food for people not gas, energy grid improvements and factories to create the parts and bring back jobs that were outsourced overseas).   Unless we make changes from a mostly service society to a well balanced industrial and services society, I cannot see where growth will come from.  

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