1.6%: Weak GDP Does Not a Weak Economy Make
At present there's quite a lot to criticize President Obama about when it comes to his administration's economic policies. But with regard to last Friday's Gross Domestic Product (GDP) revision which allegedly points to a weakening economy, the anger should center on what a worthless number GDP is, as opposed to Obama's admittedly limited worth as an economic strategist.
One editorial that decried the revised number and the President's surely unfortunate policies noted a big drop in new home sales and weak manufacturing data as symptoms of those policies. It went on to say that during economic recoveries numbers like GDP are supposed to go up. That, of course, would be true if we desired a weaker economy.
A struggling manufacturing sector was cited as evidence of a depressed situation, but in an evolving economy like ours, rational thinkers would be more concerned with rising, as opposed to falling manufacturing activity. The latter surely mattered in the early part of the 20th century when General Motors was the world's most prominent company, but in the 21st a great deal of growth in the factory sector would suggest a move toward falling profit margins and economic backwardness.
Politicians and economic commentators love to romanticize manufacturing, and their elevation of it is most likely evidence that they've never worked in a factory before. Sure enough, there's a reason that the parts of the country reliant on what made us prosperous in the past are the most depressed at present. What this signals is that the best and brightest from those areas long ago migrated to the parts of the U.S. where service economic models dominate relative to the backbreaking - and less profitable - sectors reliant on the production of goods that could easily be made for us overseas.
That a decline in home sales has been cited as a signal of economic hardship is equally remarkable, if not more so. Indeed, it's generally agreed that the rush into housing this decade harmed the economy for builders and lenders booming at the expense of other capital-starved sectors. It's also generally felt that the federal government's subsidization of the already apparent U.S. housing obsession exacerbated the problem.
So while a reduction in the rate of home purchases may have compromised GDP growth, it can credibly be said that if the price of a less vibrant housing market results in a lower, artificially constructed number, then we should take it. What would be more troublesome is if sales continued to increase on the way to a higher GDP calculation. We tried to make housing central to our economic health and energy very recently and our efforts ended in tears, along with the unfortunate bailout of the economic actors engaging in what was economy-sapping activity.
In another account covering Friday's GDP revision, one newspaper noted that "Friday's GDP report showed a surge in imports, which grew at the fastest rate in 26 years, during the second quarter. Growth in imports far exceeded U.S. exports and wiped out more than three percentage points of U.S. growth in the quarter." If so, let's thank heavens for a number that was revised downward.
A higher calculation, if higher due to reduced imports, would logically signal a weaker economy and the reason why is basic: all consumption - and imports are consumption - is the result of production first. In the real world we trade products for products, and since there's no evidence of compassion on the part of global producers, the surge in imports to record levels points to a substantial increase in productivity stateside in order to pay for those imports.
Try as economists (including Obama's) might to reverse this basic economic law through the elevation of "demand", the simple truth is that when imports exceed exports this happy reality reveals a rising level of economic productivity in concert with increased capital flows into the "trade deficit" nation. Imports and capital inflows are highly bullish evidence of economic health, not destitution.
Back to Obama, his policies - including increased taxation, heavier regulation and a weak dollar - are not working very well. Worse for our young President, he suffers a Bush holdover in Ben Bernanke whose hubris compounds the problem given his naïve belief that protecting holders of Treasuries and mortgage securities somehow stimulates growth.
Never explained is why a software developer in Austin, TX or Palo Alto, CA would increase his production thanks to a Fed eager to double down on a housing bet gone awry, not to mention increased government borrowing thanks to lower yields. Lower interest rates? The economy has boomed in the past with higher rates reached free of Fed meddling. Washington is clueless when it comes to understanding why people produce, and worse, it's foisting its oblivious ways on the individuals who comprise any "economy" at their productive expense. They need to be left alone, so that they can heal and grow alone.
So while President Obama should certainly be criticized for policies that create barriers to economic activity, the use of GDP to unleash the criticism weakens the argument altogether. No doubt the U.S. economy is struggling at present, but Friday's GDP revision - far from evidence supporting a broadly held view of weakness - actually points to an increase in our economic health despite all the shackles placed on us by Washington.