Friday, July 30, 2004

Down, down, down she goes. When even General Glut is not pessimistic enough, you know things are spiralling downward.
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.0 percent in the second quarter of 2004, according to advance estimates released by the Bureau of Economic Analysis.
Recall the prognostications of so-called "experts", aka professional economists. The Bond Market Association was predicting second quarter growth in the area of 4.9%. The Blue Chip Survey came in at a ridiculous 5.2%. Alan Greenspan looks little more than a fool now since, with the first two quarters of the year at 4.5% and 3.0%, 2004:III growth needs to come in (assuming equal growth over the rest of the year for the sake of simplicity) at a rip-roaring 4.7%-5.7% pace and an only slightly cooler 4.6%-5.6% for 2004:IV. And yet nobody is predicting fourth quarter growth even above 4%. A problem, no?

The only thing keeping GDP growth up as far as 3.0% was capital investment. Goods consumption actually fell in the quarter (durable goods -2.5%, nondurable goods -0.1%) with this the third consecutive quarter of falling spending on cars. Spending on services ticked up a more healthy 2.3%, but most of that (59%) is accounted for by another big rise in medical expenditures -- good for GDP, bad for the real economy (unless of course you think the most wasteful health care system in the world is something to brag about).

At the same time this was the fourth consecutive quarter in which capital investment has risen by double digits. The combination of very low growth in consumer spending plus very high capital investment is a perfect recipe for overproduction and deflation. One can argue that capital is simply recovering from its investment strike of 2001, but that line is wearing rather thin by now.

There is a bit of good news in the report. State and local government spending increased for the first time in three quarters.

So, I hope you've learned your lesson. Don't listen to Alan Greenspan. Listen to General Glut.


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