The Great Recession in the US Is Worse Than We Were Previously Told

With all the hoo-hah over the deficit fandango, relatively little attention was paid to the latest GDP number and the prior revisions to growth.

The US needs to get serious about jobs creation and median wage growth. Austerity does not facilitate growth, despite the corporatist spin to the contrary.

The problem with the first stimulus package was that it was too heavily weighted to tax cuts and efforts to promote consumption, and not programs to stimulate domestic jobs growth.

Cutting taxes, including capital gains taxes, does not promote growth. Reducing government in and of itself does not promote growth. These are fallacies that continue to hurt the country.

To accomplish its goals, the US must prioritize its spending away from financial and military adventurism, and let go of the false theories of efficient markets and trickle down growth.

That will be difficult given the current structure of the country's leadership and the embedded nature of its crony capitalism.

Consumer Metrics Institute
Lakewood, Colorado
July 29, 2011

BEA Reports 1Q-2011 and "Great Recession" Far Worse Than We Were Previously Told

Included in the BEA's first ("Advance") estimate of second quarter 2011 GDP were significant downward revisions to previously published data, some of it dating back to 2003. Astonishingly, the BEA even substantially cut their annualized GDP growth rate for the quarter that they "finalized" just 35 days ago -- from an already disappointing 1.92% to only 0.36%, lopping over 81% off of the month-old published growth rate before the ink had completely dried on the "final" in their headline number. And as bad as the reduced 0.36% total annualized GDP growth was, the "Real Final Sales of Domestic Product" for the first quarter of 2011 was even lower, at a microscopic 0.04%.

And the revisions to the worst quarters of the "Great Recession" were even more depressing, with 4Q-2008 pushed down an additional 2.12% to an annualized "growth" rate of -8.90%. The first quarter of 2009 was similarly downgraded, dropping another 1.78% to a devilishly low -6.66% "growth" rate. And the cumulative decline from 4Q-2007 "peak" to 2Q-2009 "trough" in real GDP was revised downward nearly 50 basis points to -5.14%, now officially over halfway to the technical definition of a full fledged depression.

One of the consequences of the above revisions to history is that the BEA headline "Advance" estimate of second quarter GDP annualized growth rate (1.29%) is magically some 0.93% higher than the freshly re-minted growth rate for the first quarter. From a headline perspective, that makes for a far better report than the 0.63% drop from the previously published 1Q-2011 number -- since otherwise the new 2Q-2011 numbers would be showing an ongoing weakening of the economy.

Unfortunately, meaningful quarter-to-quarter comparisons are nearly impossible in light of the moving target provided by the revisions. But among the notable items are:

-- Aggregate consumer expenditures for goods was contracting during the second quarter, with annualized demand for durable goods dropping 4.4% during the quarter -- into the ballpark of the numbers we have measured here at the Consumer Metrics Institute. This decline was enough to shave 0.35% off of the overall GDP (with just automotive goods removing 0.65% from the annualized GDP growth rate).

-- The drag on the GDP from governmental cutbacks purportedly moderated by a full percent, improving to a -0.23% drag from a revised -1.23% impact in the first quarter. This reversal may be the result of either the waning effect of expiring stimuli or overly optimistic BEA "place-holders" while more data gets collected. Many state and local public sector employees would be shocked to learn that real-world governmental downsizing has moderated.

-- Net foreign trade added 0.58% to the GDP growth rate after subtracting 0.34% during 1Q-2011 (a 0.92% positive swing) -- all in spite of oil prices reaching recent peaks at the end of April. Anomalies in imports caused by tsunami suppressed trade with Japan may have been the culprit here, since the growth rate in exports (and their contribution to the overall GDP growth) actually dropped quarter-over-quarter. Imports reportedly pulled overall GDP down by only 0.23%, after subtracting 1.35% from the revised figures for the prior quarter.

-- Commercial Fixed Investments contributed 0.69% (over half) of the reported annualized growth, up over 50 basis points from the revised contribution for the first quarter. Inventory building contributed an additional 0.18% to the growth rate, although that number is only about half of the boost provided in the revised 1Q-2011 data. These are the only two really positive signs for the economy contained in the report.

-- Working backwards from the data, the BEA effectively used an aggregate annualized inflation rate of somewhere near 2.39% to "deflate" their top-line total nominal data into the "real" data used for their headline numbers. This was after raising the aggregate deflater effectively used for the first quarter to somewhere near an annualized 2.72% rate -- indicating that the BEA believes that (for the purposes of their headline number) inflation moderated somewhat during the second quarter. They wrote in their July 29 press release that:

"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first."

We understand that the aggregate "deflater" has to use numbers appropriate to the individual line items being deflated, including producer price inflation data and foreign exchange inflation rates (although 2.39% might be modest for most of those as well). But if the unadjusted trailing 12 month price changes in CPI-U (3.6%) recorded by the Bureau of Labor Statistics (the official source of U.S. Government inflation data) is used to "deflate" the nominal data, the actual "real" growth rate for the second quarter drops to 0.011% (slightly over 1 basis point), which the BEA would normally round to zero. It is likely that the entire reported growth rate for the second quarter is actually an artifact of under-recognized systemic inflation.

---

The Numbers (as Revised)

As a quick reminder, the classic definition of the GDP can be summarized with the following equation:



GDP = private consumption + gross private investment + government spending + (exports − imports)

or, as it is commonly expressed in algebraic shorthand:


GDP = C + I + G + (X-M)

For the first quarter of 2011 the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows:

GDP Components Table

	Total GDP	=	C	+	I	+	G	+	(X-M)
Annual $ (trillions)	$15.0	=	$10.7	+	$1.9	+	$3.0	+	$-0.6
% of GDP	100.0%	=	71.0%	+	12.7%	+	20.2%	+	-3.9%
Contribution to GDP Growth %	1.29%	=	0.07%	+	0.87%	+	-0.23%	+	0.58%

The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table we have split the "C" component into goods and services, split the "I" component into fixed investment and inventories, separated exports from imports, added a line for the BEA's "Real Finals Sales of Domestic Product" and listed the quarters in columns with the most current to the left (please note that nearly all of the numbers below for earlier quarters are changed from our previous commentary tables):

Quarterly Changes in % Contributions to GDP

	2Q-2011	1Q-2011	4Q-2010	3Q-2010	2Q-2010	1Q-2010	4Q-2009	3Q-2009	2Q-2009	1Q-2009
Total GDP Growth	1.29%	0.36%	2.36%	2.50%	3.79%	3.94%	3.81%	1.69%	-0.69%	-6.66%
Consumer Goods	-0.33%	1.10%	1.87%	1.09%	0.87%	1.45%	0.12%	1.70%	-0.52%	0.05%
Consumer Services	0.40%	0.36%	0.61%	0.75%	1.18%	0.47%	0.21%	-0.04%	-0.76%	-1.07%
Fixed Investment	0.69%	0.15%	0.88%	0.28%	2.12%	0.15%	-0.42%	0.13%	-2.26%	-5.09%
Inventories	0.18%	0.32%	-1.79%	0.86%	0.79%	3.10%	3.93%	0.21%	-0.58%	-2.66%
Government	-0.23%	-1.23%	-0.58%	0.20%	0.77%	-0.26%	-0.18%	0.28%	1.21%	-0.33%
Exports	0.81%	1.01%	0.98%	1.21%	1.19%	0.86%	2.51%	1.49%	-0.02%	-3.82%
Imports	-0.23%	-1.35%	0.39%	-1.89%	-3.13%	-1.83%	-2.36%	-2.08%	2.24%	6.26%
Real Final Sales	1.11%	0.04%	4.15%	1.64%	3.00%	0.84%	-0.12%	1.48%	-0.11%	-4.00%

---

Summary

For the most part the "Advance" GDP report for the second quarter is positive only in comparison to newly re-worked numbers for the first quarter:

-- The good news is that commercial investment appears to be improving and inventories are no longer growing at the previously unsustainable rate.

-- But the bad news is that consumer spending on durable goods fell substantially during the quarter, dropping quarter-over-quarter by 4.4%.

-- Some of the other favorable data, including foreign trade, are likely the result of one-time anomalies (e.g., tsunami suppressed imports).

-- The "deflater" used to translate the nominal data into "real" data continues to suffer from credibility issues, and it may be the entire source of the reported growth.

The Real Problem

The greatest problems in the report, however, were the massive revisions to past history -- including the very recent past. For both the first quarter of 2011 and the worst quarters of the "Great Recession" those revisions were substantial enough to raise questions about the reliability of any of the recently reported BEA data:

-- Data published as recently as 35 days prior had growth rates slashed by over 80%.

-- The worst quarter of the "Great Recession" was revised downward by over 2%, with the annualized "growth" rate now reported to be a horrific -8.9%. And the "peak" to "trough" decline in real GDP for the "Great Recession" is now recognized to be over 5%, halfway to the clinical definition of a full depression.

We have been concerned for some time about the timeliness of the BEA's data, particularly given how much the nature and dynamics of the economy have changed since Wesley Mitchell initially developed the data collection methodologies in 1937. These past revisions, however, lead us to believe that the problems run far deeper -- as demonstrated by a quarter that is now over 2 years old being just now revised downward by an additional 2%. This begs two simple questions:

-- At what point in time can we trust any of the data contained in these reports?

-- How can any of the current data be used to create meaningful Federal monetary or fiscal decisions?

We wonder what Mr. Bernanke thought when told that 80% of his "relatively slow recovery" during the first quarter had just vaporized ...

Gold Daily and Silver Weekly Charts - Enjoy the Show - Reichstag Fire Or Punch and Judy?

Nothing like a crisis to make the masses more pliable for an offer they think they cannot refuse. Never waste a crisis, and if you don't have one, make one.

The Banks and their posse continued to stand on gold and silver today against the market correlations. Fairly typical post option expiration action if you can call anything typical in these times of national madness. The madness of course is to hand over the management of your life savings and your living standards to such corrupt, self-centered nincompoops.

I think we will see a contrived slither out of this budget impasse, early next week, maybe pre-announced Sunday evening, so the can kicked over to a 'blue ribbon council' that can address the nation's business without directly involving the public or their elected representatives. And the Banks and their delegates may make you an offer you cannot refuse, again.  It smells like TARP in here.

"With only 2% of the money in circulation being in gold and silver, John Law reasoned that financial stability could only be restored if the amount of paper, shares and money, was reduced and the value of [precious metal] coins was increased.

Accordingly, over a period of weeks thousands of livre notes and share certificates were publicly burnt. But confidence in paper had been lost. Every smoldering bonfire sapped the credibility of paper, and the press for coins grew more insistent.”

Janet Gleeson

I especially like the above quote by the way, because it shows that John Law's common sense reasoning held that a dramatic decrease in money supply, a 'monetary deflation' if you will, would increase the value of the currency, even when its underlying value, all the things that make it worthwhile in the eyes of the market, continued to deteriorate at a much greater rate than he could burn them.

It's Midnight. Do You Know Where Your Reserve Currency Is?

National Madness
Gilbert Keith Chesterton

"This slow and awful self-hypnotism of error is a process that can occur not only with individuals, but also with whole societies. It is hard to pick out and prove; that is why it is hard to cure. But this mental degeneration may be brought to one test, which I truly believe to be a real test.

A nation is not going mad when it does extravagant things, so long as it does them in an extravagant spirit. But whenever we see things done wildly, but taken tamely, then the State is growing insane...

I should, in other words, think the world a little mad if the [wild] incident, were received in silence. Now things every bit as wild as this are being received in silence every day.... For madness is a passive as well as an active state: it is a paralysis, a refusal of the nerves to respond to the normal stimuli, as well as an unnatural stimulation. There are commonwealths, plainly to be distinguished here and there in history, which pass from prosperity to squalor or from glory to insignificance, or from freedom to slavery, not only in silence, but with serenity.

The face still smiles while the limbs, literally and loathsomely are dropping from the body. These are peoples that have lost the power of astonishment at their own actions. When they give birth to a fantastic fashion or a foolish law, they do not start or stare at the monster they have brought forth. They have grown used to their own unreason; chaos is their cosmos; and the whirlwind is the breath of their nostrils.

These nations are really in danger of going off their heads en masse; of becoming one vast vision of imbecility, with toppling cities and crazy country-sides, all dotted with industrious lunatics.... "

See you Sunday evening.

SP 500 and NDX Futures Daily Charts - A Whiff of TARP in the Air - VIX

There will be no sustained recovery until the banks are restrained, and the financial system is reformed.

VIX spiked and the traders are edgy, but there remains a widespread belief in a cynical resolution.  I have a suspicion that the US is being brought to a crisis so that the bankers, through their political proxies in Washington, may make the people another offer which they cannot refuse.

In other words, there is 'a whiff of TARP in the air.'

I had to chuckle again a bit as the pampered princes and princesses on Bloomberg were puzzled by the weak GDP number this morning in the light of 22 percent rises in corporate profits.

If something looks too good to be true, guess what. But what else would one expect in a system of lax regulation, crony capitalism, massive corporate tax evasion, corrupt regulators and ratings agencies, and widespread accounting fraud?

"That brings us to the final outcome of this debacle. A radical campaign to reshape popular opinion recognized the seductive potential of the appealing phrase "free markets." Powerful business interests, largely captured regulators and officials, and a lapdog media took up this amorphous, malleable idea and made it a Trojan horse for a three-decade-long campaign to tear down the rules that constrained the finance sector. The result has been a massive transfer of wealth, with its centerpiece the greatest theft from the public purse in history.

This campaign has been far too consistent and calculated to brand it with the traditional label "spin". This manipulation of public perception can only be called propaganda. Only when we, the public, are able to call the underlying realities by their proper names—extortion, looting, capture, propaganda—can we begin to root them out."

Yves Smith, Econned

Gold Daily and Silver Weekly Charts - The Collapse of the US Dollar Against Silver

“I have not sold any gold, I have bought more gold. If gold goes down I'll buy more. The price of gold is going to go much, much higher over the next decade.”

Jimmy Rogers

I suspect that the capping on gold and silver will continue into the month end tomorrow, and quite likely into some resolution of the debt ceiling discussions which will probably occur next week. They might not, and that will indeed be interesting. The Mad Hatter and his Merry Pranksters think that a 'little default' might be a good thing to make the country more malleable to their non-negotiable demands.

On a deal, the first impulse will be for stocks to rally sharply and the metals get beaten, in the usual 'risk on' trade. However, depending on the resolution of the debt ceiling, when people think of it after they have had their jollies in the first reaction, they may realize that absolutely nothing has really been fixed. The US financial system will still be corrupt and broken, and the politicians have openly stopped caring about the voting public and their opinions, in their desire to put on the corporate feedbag.

Speaking of broken systems, I am featuring worthless currencies on the sidebar this week. And one I am highlighting below, the famous US Continental Dollar, and a chart showing how it was devalued in comparison to silver, until it was finally withdrawn in 1781. Roughly two zeros were knocked off it.

I was discussing this with a friend and they said, 'Well of course, but these currency failures are the result of unfunded war debts. It is not the same in the US now.'

It's not? The US debt crisis is directly attributable to unpaid war debts, both class war and military conflicts in the famous global war on terror and on the middle class. They'll never learn.

Bon voyage, Bucky.