The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent ("the recession is over"), January retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean?
The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.
More than a fourth of the reported gain in January retail sales is due to higher gasoline and food prices. Questionable seasonal adjustments account for the rest. Productivity was up, because labor costs fell 4.4 percent in the fourth quarter -- the fourth successive decline.Initial claims for jobless benefits rose. Productivity increases that do not translate into wage gains cannot drive the consumer economy. Housing is still under pressure, and commercial real estate is about to become a big problem.
...Without growth in consumer incomes, the economy can go nowhere. Washington policymakers substituted debt growth for income growth. Instead of growing richer, consumers grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this with his low interest rate policy, which drove up housing prices, producing home equity that consumers could tap and spend by refinancing their homes. Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died. ...
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