Downward Revision of GDP Should Set off Alarm Bells



Aug. 27, 2016 –

To gauge the health of America’s economy, the gross domestic product (GDP) is, of course, an important indicator.

In essence, GDP represents the size of the economy. It’s the total value of all goods and services.

Remember our disappointment from the government’s first GDP estimate of weak 1.2 percent growth?

Well, it turns out to be even worse. The Q2 GDP been revised downward from 1.2 percent to 1.1 percent.

That means for the first half of 2016, GDP growth rate is less than 1 percent. And it’s not even the first downward revision over the past year.

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The Bureau of Economic Analysis in the U.S. Department of Commerce explains its Q2 revision:

The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE) and exports that were partly offset by negative contributions from private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

Translation: The trend for the nation’s economy is a cause for pessimism. The new economic normal is unacceptable.

Recession definition

The organization that makes the determination of recessions is the National Bureau of Economic Research (www.nber.org).

Its definition of a recession:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Yes, consumers are spending moderately, but there is no reason to conclude it will remain the same. The mega decline in business investment is a big negative.

A recession might not be imminent, but the trend is alarming.

Q2 business profits were down 2.2 percent compared to the same period the year before.

It’s illogical to assume such poor earnings will continue to boost the stock market.

It’s also likely to be another omen.

We’ll soon be in Q4 when many companies – after budgeting for the New Year – lay off employees. As it is, in a normal quarter, an average of 250,000 workers file for unemployment benefits each month.

News coverage

It’s also alarming how little attention the news media is paying to the troubled economy. In fact, Google News – the aggregator of global news sources – did not even include the GDP revision among its top headlines.

One of the slowest news days of the summer is Friday when Americans try to get in all the recreation they can before Labor Day. So when did the Commerce Department issue its downward revision?

Journalists were told to hold the report until Friday:

EMBARGOED UNTIL RELEASE AT 8:30 A.M. EDT, Friday, August 26, 2016

So the economic news largely remains a secret with the masses.

“It isn’t what we don’t know that gives us trouble, it’s what we know that ain’t so.”

-Will Rogers

With such tepid growth, it’s surprising the Federal Reserve would even entertain the notion of raising interest rates.

Rates have been kept low to prop up the economy and have protected the Obama Administration politically with voters.

But ask beleaguered senior citizens — with underperforming CDs and savings accounts — who remember all the hardships from the 1930’s Great Depression. The Fed policy hurts them and the average American trying to save – they get miniscule interest on their savings.

There’s a weak demand for investment capital. So an increase in rates will lead to continued sluggish growth in GDP.

Economic Misnomers

The past eight years have been just the opposite of the 1980s. Under the Reagan Administration, the economy was white-hot.

It was so hot some people wondered whether the economy was overheated – as the U.S. enjoyed quarterly growth rates of 5 to 7 percent.

Today, at just 1 percent, the falsehood we hear from Democrats is that the economy is doing well.

Perhaps the fastest-growing region is Washington D.C. Three of the nation’s top-five wealthiest counties surround Washington.

That’s where many federal-government employees and leftwing Democrats and economists live. Many are getting rich and have reason to defend the status quo.

Unbelievably, even liberal economists such as Paul Krugman try to justify the horrendous national debt, Debt Is Good – The New York Times.

But Mr. Krugman defies common-sense wisdom we get from the U.S. debt clock:

But to Mr. Krugman, et al, an anticipated tax increase under a Hillary Clinton Administration, according to her economic plan, makes sense.

However, a report from a nonprofit think tank, the National Center for Policy Analysis (NCPA), indicates her economic plan would decrease the GDP by 1 percent. This would put American closer to a recession.

“What we have here is a plan to destroy hundreds of thousands of private sector jobs just to pad government payrolls while, in the process, doing almost nothing to improve tax fairness,” writes NCPA economist David Tuerck.

More bad news

Announcements on ObamaCare premium increases are due this fall. Premium increases of 20 percent or higher are forecast in various states. Texas has already announced a 60-percent increase.

Compared to 2007 before the Great Recession, the U.S. is still short 1-million manufacturing jobs according to the Financial Times.

Solutions

So the revised GDP represents a new economic normal? Hardly, it sets off alarms.  We can do better.

Ask the average small businessperson who has to stay within budgets. Take a page from the Reagan Administration.

For starters, attack the national debt, change the tax code and implement tax cuts, deregulate unnecessary rules, repeal ObamaCare and increase energy production.

From the Coach’s Corner, additional relevant reading:

“It isn’t what we don’t know that gives us trouble, it’s what we know that ain’t so.”

-Will Rogers

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.


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Seattle business consultant Terry Corbell provides high-performance management services and strategies.