The US Commerce Department’s Bureau of Economic Analysis (BEA) recently revised its estimate of the US economy’s growth in gross domestic product (GDP) upward. Whereas the previous estimate was that US GDP grew at an annual rate of 0.7 percent in the first quarter, the BEA revised the figure upwards to 1.2 percent as more complete data was acquired. While the increase in growth is beneficial if it reflects reality, it is still far less than most people would like. It seems to indicate that, almost ten years after the financial crisis, the economy still has not recovered to its full potential.
The 3% Growth Goal
Presidential candidates and Presidential Administrations have often claimed that their policies would help the economy reach growth rates of three percent, four percent, or more. These proclamations are often based on historical data showing similar average rates of growth over certain periods of time. But economic growth isn’t linear. Some years may see greater or lesser growth than average. But if governments proclaim a certain target and pursue economic policies to reach that target, they risk throwing things out of kilter.
In the United States this has occurred through the actions of the Federal Reserve System, which creates money out of thin air and injects it into the banking system. While this stimulates some growth in the short-term, it sows the seeds for the inevitable bust.
Difficulty in Assembling Data
As the BEA acknowledges by its revision, calculating total domestic output is difficult to do. It relies on data that is almost necessarily incomplete. There is no way that the federal government can assemble every single piece of data that exists to calculate total economic output, so there is an amount of estimation and fudging that always exists when compiling those figures. GDP calculations have therefore always been fraught with error.
GDP totals also include government spending as one of the factors. That means that the more money that the government spends, the higher GDP will be. This is why you’ll hear many economists bemoan cuts in government spending, claiming that cutting government spending will result in less economic growth.
Of course, this neglects the fact that governments normally get money to spend either by taxing or borrowing. In both cases that money is being taken out of the private sector, where it could be used to increase production, and being given to government, which doesn’t produce anything, merely redistribute resources. The inefficiency is obvious to anyone who takes a good, hard look at it, yet the mantra of “government spending = economic growth” remains firmly embedded among many pundits and economic commentators.
Is the Economy Growing or Not?
Of course the question that everyone wants to know the answer to is whether or not the economy will start growing faster, or whether this slowing economic growth is an indicator that growth will begin to decline.Since the economy normally picks up in the second and third quarters, data coming out three to six months from now should give a better indication of the trend going forward, but it looks like this year may see pretty slow growth. And if second quarter growth is even close to the first quarter’s low growth rate, that might be an early indicator of recession on the horizon. The Federal Reserve’s extraordinary monetary policy during the financial crisis hasn’t done any favors, and instead has laid the groundwork for a stagflation a la the 1970s. Investors who protected their assets by investing in gold and silver during the ‘70s came out of that era in great financial shape, as will investors who protect their assets in the same way today.