Whatever GDP's Path, Don't Expect a Bull Recovery
A recent survey of economists in the Wall Street Journal pointed to economic recovery beginning in September. The problem here is that true economic growth is about productive economic activity, not GDP numbers that presume the U.S. economy is an entity unto itself.
The simple truth is that individuals don’t just start producing at a certain point as economists assume. In that sense, the notion of resumed activity at a date certain should be taken with a grain of salt.
In much the same way, other commentators see recovery as something around the corner thanks to strong increases in the supply of money. To believe this is to put the proverbial cart before the horse. Money creation is itself not wealth. Instead, money is a concept, and when it’s stable in value, productivity increases. At present there’s no stability in the value of a dollar that remains very weak, so the idea that Nirvana awaits thanks to the creation of more in the way of weak greenbacks seems destructive at best.
On the GDP front, it’s easy to see why some might presume a recovery that won’t be, but that will show up in this most Keynesian of economic measures that presumes real output can be measured within country borders. Indeed, government spending will surely increase this measure of output, but as most intuitively understand, governments cannot create economic growth. More realistically they can rob the economy of growth thanks to taxing and borrowing money from the private sector. No growth will occur, probably the opposite, but unreliable GDP figures will suggest recovery.
Even more problematic when it comes to GDP is the faulty way in which it measures trade. When massive amounts of imports reach our shores, meaning the trade “deficit” is increasing, this is one of the surest signals of economic growth. That’s the case because production and consumption are ultimately identical, and when imports flow our way, that’s a sign that we’re being rewarded for our productivity with more imports. But with our trade deficit at a 9-year low, meaning imports are declining, this unfortunate signal of our wilting productivity will paradoxically add to GDP growth. In short, what so many economists deem “recovery” in fact signals the opposite.
To develop a sense of what economic “recovery” will feel like, it would be best to look back to Jimmy Carter’s presidency. With the dollar regularly testing new lows alongside weak imports and heavy government spending, the U.S. economy experienced under Carter what author William Greider described as “one of the longest and most expansive periods of economic growth in postwar history.” It’s also true that percentage job growth under Carter hit postwar records.
So while job and GDP measures of growth showed expansion under our 39th president, markets saw something entirely different. Not fooled by Keynesian measures of output, investors bid up shares during Carter’s presidency a paltry 24 percent. And in real terms, investors lost a great deal of ground given the inflationary dollar that paradoxically added to GDP growth.
More modernly, job growth under President George W. Bush was similarly impressive, plus he regularly pointed to a 52-month expansion in GDP terms as a way of talking up the economic portion of his presidency. The problem there was that neither the markets nor voters were fooled, just as they weren’t under Carter. The S&P fell 36 percent during Bush’s presidency.
In truth, the dollar was in steady decline throughout his two terms, and as Carter’s term in office proved, GDP statistics can’t whitewash over the economic realities wrought by currency decline that effectively robs voters while retarding economic growth. Notably, the dollar’s debasement was a boon for firms in the energy sector, and it was energy sector health that made the total market look healthier than it actually was.
Indeed, as of last May, when the S&P was 40 percent higher than it is at present, profits within S&P firms were the worst they’d been in a decade. If not for the earnings of ExxonMobil, Chevron and ConocoPhillips, S&P profits would have shown their biggest declines since Bloomberg data analysts began compiling earnings data. By last year the energy sector accounted for 15 percent of the S&P’s total capitalization, and this explains why a relatively high S&P average of 1473 coincided with a great deal of unhappiness among the electorate.
The broader lesson from all this is that stocks do well when the dollar is strong and gold is falling, and they do really well when the dollar is strong and stable. At present the dollar is weak and gyrating, so no matter what the faulty measures of GDP may suggest in the coming quarter, any future recovery is something investors and workers alike should curb their enthusiasm about.
Inflation rarely if ever correlates with strong stock markets, and worse, the chance for a noticeable economic recovery was most likely stolen from us last fall. It was then that the federal government stepped in to block out the very company failures (and resulting unemployment) that if allowed to occur, would have authored a greater recovery. As awful as unemployment and bankruptcy are, both are economically cleansing for allowing debased assets and capital to reach better overseers, all the while creating a happy process whereby healthy firms are able to hire skilled workers on the cheap.
Instead, Congress and both the Bush and Obama administrations foisted bailouts on a country whose voters did not want them. The alleged “security” offered us has shown up in growing government oversight of the banking sector that promises to politicize the latter while giving American citizens a form of economic paralysis.
So while esoteric data may well point to economic recovery beginning in the fall, the reality will likely feel a lot different. In short, we’ll only feel economic recovery through rising market indices and in ways intangible once the toxic asset that is the dollar is strengthened alongside a humble Washington that steps aside and allow markets to work. Absent that, what some deem recovery will be the kind of growth that shows up in government statistics, but that most won’t notice.