Adventures in confirmation bias: The GDP data this morning was a deep sigh of relief for those people who fear a recession may be coming.
I don’t have that sense of relief. Perhaps its my own bias, but the details of the GDP report reveal not an organic growth period in a healthy recovering economy, but rather a tepid post-credit crisis expansion highly dependent on government largesse and Federal Reserve accommodation.
It is about what we should expect: Below-trend growth, as the economy gradually heals, individual and bank balance sheets slowly improve, and the excesses of the prior cycle get wrung out of the system.
Consider the major factors within this GDP report:
-Residential construction rose 14.4%. Housing is a bright spot; with sales and prices increasing. However, this has been artificially goosed by the Fed’s ultra low rates and purchases MBS. Mortgage rates are at their lowest levels since WW2, and foreclosure abatements have created an appearance of reduced distress sales. So this portion of GDP is positive but artificial; it added about 0.3% to GDP.
-Defense Spending rose by 13% — this added 0.6% to GDP. This is not what we want driving GDP, but rather, Ii prefer to see private sector improvements.
-Business Spending remains soft. Ignore the nonsensical “Uncertainty” trope; if demand were there, businesses would add personnel and make CapEx investments as necessary. (idiotic rationalizations spoon fed to the gullible do not count as intelligent economic analysis to me — and that includes “uncertainty”).
-Slowing Exports (down 1.6%) took a few bips off of GDP.
-Midwestern Drought I do recognize that the probably whacked almost half a percentage point from overall GDP numbers (0.1% times 4Qs for an annualized 0.4%).
By my numbers, half of the GDP gains came from Fed/Uncle Sam. The slowdown in Europe and Asia are pressuring economic activity; the drought took away some of the gains, and without that, we should have seen some more strength.
Overall, this report suggests that we are not yet in recession, yet, but are barely above stall speed — more like a 1.5% GDP ex-government interventions and drought. The improvements we are seeing seem to be driven mostly by Fed and government intervention.
The key question, in light of the mediocre earnings season, is how long the propping up can continue.
GROSS DOMESTIC PRODUCT: THIRD QUARTER 2012 (ADVANCE ESTIMATE)
BEA, October 25, 2012
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