Do the last US 3rd Quarter GDP figures stand up to inspection?
The press recently celebrated the 3.5% annualized rise in the third quarter in reported U.S. Gross Domestic Product (GDP). The figures were widely reported with, for example, CNNMoney, carrying the following headline and opening remarks:
Economy finally back in gear
Government says GDP grew 3.5% in third quarter, ending a year-long string of declines and coming in better than forecasts.
I urge caution in interpreting these figures at face value. After all, the current GDP of the U.S. economy is simply the intersection of aggregate demand with aggregate supply.
As the figure below shows, GDP increases with increases in either the demand or supply curve, although increases in demand are accompanied by rising price levels while increases in supply push prices down and real incomes up.
The quarterly figures make clear that the increase in demand was driven almost entirely by the expansion of government spending; the other three components of demand – consumption, business spending, and net exports, were either flat or falling.
Government spending is inherently short-term; it does not create wealth or enable sustainable growth. In fact, neither consumption nor net exports create sustainable economic growth either. Only business investment in new productive equipment (which includes business fixed investment, new residential housing and additions to inventory) has the potential to create sustainable growth in U.S. GDP, and then only when the investment leads to a permanent increase in the productivity of the business, namely a rightward (increased output per input) or downward (decreased cost) shift in the Aggregate Supply curve.
And there was little chance that the reported increase in GDP resulted from a long-term increase in the productive capacity or efficiency of the U.S. economy, as Business Investment was soundly negative in the 3rd quarter of 2009.
By Sherry Jarrell
[P.S. Karl Denninger at Market Ticker also raised big question marks about these figures. Ed.]
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