Turning the Corner

Posted: October 30th, 2009 | Author: | Filed under: Data, Economics | Tags: , , , , , , | 1 Comment »

The wise minds at the BEA say the economy has turned a corner, posting GDP growth at a relatively robust rate (3.5%) in the third quarter, just like Ben Bernanke promised it would.

Still, the fact that we’re rising from rock bottom doesn’t tell us how long it will take to get back to where we were, or what the recovered economy will look like. For that, we need to dig deeper into the numbers, and, simply put, the picture isn’t pretty.

Firstly, the growth in the GDP is driven, as usually happens, by personal consumption. And that consumption is largely due to government stimulus–cash for clunkers, tax breaks etc. That’s obviously the point of government stimulus, so to that degree, it’s working.

But ultimately, the purpose of those policies is to jumpstart organic growth in the economy, and I’m not sure that’s happening. Ideally, you create programs to make people spend, and that spending leads to investment in jobs, which gives people more income to spend etc. At the moment, there’s no sign of a turnaround in the employment figures.

Moreover, even if that job growth occurs and the economy starts to grow without government training wheels, there are reasons to worry. Look deep into the BEA report and you’ll see that personal income is declining again, even as GDP grows. In other words, people are making less but spending more–the money they’re spending is just the goodies from the stimulus, not new wealth that organic economic growth has bestowed upon them. And once the stimulus dries up, those people can only do two things: stop spending [result: recovery halts] or start borrowing [result: unsustainable credit bubble]. Sound familiar?

As I wrote last winter, one of the problems during the last twenty years has been the disconnect between GDP growth–which correlated with spending–and declining or stagnant incomes. If the recovery continues that pattern, it only sets us up for a future reckoning.

One Comment on “Turning the Corner”

  1. 1 Some Soul-Searching On Inequality - Instant Cappuccino said at 5:59 am on December 8th, 2010:

    […] to see incomes fall even as the economy is growing. There are two problems with thus: first, the kind of debt bubbles created by the gap between growth (ie consumption) and income, and secondly, the ease with which a […]

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