Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management

GDP Growth = Healthy Economy? Uhm No | October 29, 2009

Earlier today, CNN Money released a new gallery report asking: “Are Things Really Getting Better?” Meanwhile, on their front page, the headline reads: “Economy Finally Back in Gear.”

So does the government’s recent announcement that GDP grew 3.5% last quarter, the economy’s first growth in a year, mean that we’re out of the recession? Um, not exactly. Lets put some additional analysis behind the “Getting Better” article. CNN broke economic indicators down into 7 segments. We’ll tackle them one by one:

1. GDP Growth: As I just mentioned, the economy grew by 3.5%, a strong figure when it stands on its own. But many observers believe this represents artificial growth fueled by government spending (i.e. stimulus dollars and the Cash for Clunkers). Now that many of these dollars have been spent, where does the economy go from here? In other words, are these number sustainable?

2. Job Growth: For the 21st straight month, the economy is expected to layoff jobs, to the tune of 175,000 more losses this month. Here is where things get interesting. Job growth is seen as a lagging indicator for an economic recovery. Many economists will tell you we should see a return to job growth in early 2010. But where will this job growth come from? Which sectors of the economy are set to deliver enough expansion to bring the unemployment rate from near double digits to calmer numbers?

3. Housing: This is probably the ugliest chart CNN has posted out of all of them. Home values are still declining, but at a slower rate. Unfortunately, there’s still a glut of supply out there. Many people are buying homes simply because the government is holding interest rates at all-time lows. It’s never been more affordable to buy a house. But once again, how long can this last? What happens when the government begins raising rates to combat fears of inflation? Will the improvement hold?

And that paragraph doesn’t take into account the expected Commercial Real Estate market bust. That bubble still needs to pop, and its effects on the economy or unforeseen.

4. Inflation: This is an area of concern further down the road due to the still present risk of deflation (if the economy hits the skids again) and the risks of hyperinflation, if the government doesn’t reign in low interest rates quickly enough.

5. Manufacturing: CNN describes growth in the  manufacturing sector as “tepid.” The reason its tepid will be made obvious in my next point.

6. Consumer Spending: This is the traditional boon of the American economy, accounting for 70% of our total GDP. Unfortunately, Americans just aren’t spending the way they used to. The recession has seriously spooked people, and our country has been long overdue for a deleveraging process. Simply put, people are saving more and spending less. That’s why manufacturing growth is down. People just aren’t consuming as much as they used to, and as a result businesses are making fewer items for sale. This also ties back into the job growth picture. If companies aren’t manufacturing, jobs aren’t being created, money isn’t being spent, and the economy continues its downward spiral.

7. Ironic that CNN’s last point of analysis would be a stock market that’s “roaring back.” Smart analysts out there understand that the surprisingly strong bull run over the last six months has been driven by two primary forces. First, we’ve seen a correction off the absurd lows of Q1 2009. Second, we’ve seen investors speculating that global government stimulus would be enough to drive us out of the economic doldrums. Meanwhile, several multinational companies that compose the DJIA and S&P 500 indexes have been reporting strong earnings reports over the last 2 months, serving to fuel the run up even more.

However, I would argue that the stock market at its current point is overvalued. See Tyler Durden’s analysis of market correlations over at Zero Hedge for why fundamental market indicators point to retreat off the bull run we’ve witnessed through the spring, summer and into fall.

In short, our economy is still in grave peril. Real manufacturing growth is tepid at best. Job losses are still the norm. Worst of all, the financial institutions are back to operating the way they were two years ago. Their balance sheets are still saddled with toxic assets. And the national debt continues to explode. Many economists are now saying that this could be a “jobless” recover (which isn’t really much of a recovery), with the most pessimistic saying we could be looking at a decade or more of fluctuation between recession and rebound (think of Japan’s lost decade).

Buckle up folks. This is going to be a hell of a ride.


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