The State of the US Economy

By Jim Welsh | August 26, 2008 | 1:18 PM | 1 Comment

Economists who still proclaim that the U.S. economy is not or will not experience a recession should go into hiding, unless they desire to make an even bigger fool of themselves. Let’s look at how the Commerce Department determined the economy grew 1.9% in the second quarter: Overall growth was 3.0%, and after subtracting the impact of inflation, real GDP grew 1.9%. But was inflation in the real world just 1.1% in the second quarter? At the end of June, Consumer Price Inflation was 5.0% higher than in June 2007. In other words, any reasonable inflation estimate would have pegged real GDP as negative. A weak economy means job losses are going to continue, and the unemployment rate will climb to 6%, and probably higher in 2009. More job losses means more defaults on mortgage and home equity loans, auto loans, credit cards, and corporate loans. There is never one wave in a tsunami.

In the second quarter, exports added 2.4% to GDP. I expected global growth to show more signs oslowing by the third quarter, and the signs are everywhere. Last week, Japan, the second largeseconomy in the world, reported its worst quarter in seven years, as GDP contracted at an annual rate o-2.4%. On August 14, the European Union said its gross domestic product contracted -.8%. In GreaBritain, retail sales have fallen -.9% over the last year, manufacturing output is down -1.3%, and homprices are 9% lower. I noted in my March letter that the U.S., Japan, E.U., and Britain represented 71% of world GDP, which made it nearly impossible for China and India to decouple, since they are export dependent and their combined GDP is just 7.5% of world GDP.

Therefore, it shouldn’t be a surprise that China and India are now slowing. The U.S. economy is in recession, and the contraction in credit creation and future lending is going to keep the economy weak well into 2009.

 

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the gdp deflator is the gdp deflator is different animal from the cpi. why? there is hardly any overlap between what is produced and consumed. examples. - 30% of gov't spending is on military. there is no inflation as prices were negotiated years back with lofty profit margins. - 70% of the total economy is exchange of services. with the exception of the ones that use commodities inputs, the rest experience no inflation (financials, real estate, health care, etc.) their actual 'growth' might be correlated though with cpi, due to indexation. having said all that i see the economy shrinking in real unit production and if measured in gold rather than fiat money. Submitted by Anonymous (not verified) on Wed, 2008/08/27 - 2:59am » reply |