GDP numbers make double dip threat real

Cross-posted from Credit Writedowns

I have stopped reporting the quarterly GDP numbers but this last reading bears mentioning. The US Bureau of Economic Analysis reported the following at 830AM ET:

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 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  In the first quarter, real GDP increased 0.4 percent.

The immediate reaction was a drop in the dollar to record lows against the Japanese yen and Swiss franc, a drop in Ten-year yields to 2.88%, a drop in the Dow Futures to –137 and a rise in the Gold price by $10 to $1626.

While the headline number was well below expectations of 1.8%, what must be noted are the major revisions. Q1 2011 is now reported as +0.4%. That’s a major downward revision which demonstrates that QE2 was in fact doing nothing for growth and that the US is already at stall speed even without the negative impact of the European sovereign debt crisis and the debt ceiling fiasco. The double dip scare is real.

Here is how the BEA explains the extensive revisions:

Current-dollar GDP was revised down for all 3 years: $77.6 billion, or 0.5 percent, for 2008; $180.0 billion, or 1.3 percent, for 2009; and $133.9 billion, or 0.9 percent, for 2010. The percent change from the preceding year was revised down from an increase of 2.2 percent to an increase of 1.9 percent for 2008; was revised down from a decrease of 1.7 percent to a decrease of 2.5 percent for 2009; and was revised up from an increase of 3.8 percent to an increase of 4.2 percent for 2010. Current-dollar gross national product (GNP) (GDP plus net receipts of income from the rest of the world) was revised down for all 3 years: $82.9 billion, or 0.6 percent, for 2008; $174.1 billion, or 1.2 percent, for 2009; and $132.8 billion, or 0.9 percent, for 2010… Current-dollar GDP was also revised down for all 4 years from 2004-2007: $14.5 billion for 2004, $15.4 billion for 2005, $21.7 billion for 2006, and $33.1 billion for 2007.

While I am reporting this, I should note that the President made news regarding his understanding of the origins of the deficit and our slow growth recently when he said:

“For the last decade, we have spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation’s credit card. As a result, the deficit was on track to top $1 trillion the year I took office.”

This is patently false. In fact, this is scary. Dean Baker tells us:

This is seriously mistaken.

The Congressional Budget Office’s projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse, showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not "on track to top $1 trillion."… Obama does not have the most basic understanding of the nature of the budget problems the country faces. He apparently believes that there was a huge deficit on an ongoing basis as a result of the policies in place prior to the downturn. In fact, the deficits were relatively modest. The huge deficits came about entirely as a result of the economic downturn…. This misunderstanding of the origins of the budget deficit could explain President Obama’s willingness to make large cuts to core social welfare programs, like Social Security, Medicare, and Medicaid…

Hat tip to Brad DeLong for the information

In sum: The President has no idea why the deficit exploded, we are in jeopardy of default, and we will cut spending in into the teeth of a serious growth slowdown. America is rudderless. God help us.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Jim Haygood

    Wall Street and pundits obsess over volatile quarterly GDP data, but year-over-data is a sounder base for analysis.

    From the tables in the GDP report, one can derive that year-over-year growth was 1.6%.

    In the postwar period, every time year-over-year GDP growth fell below 2.0%, a recession was underway or soon followed. See this chart:

    Coincidentally, this dismal GDP report was released at the crux of the debt ceiling standoff. If one wanted to demolish confidence in order to give the weak economy a final shove into the abyss, what better way to do so than by scaring the wits out of consumers?

    Congratulations, Washington DC! Let’s build a new, more honest Mount Rushmore:

      1. ambrit

        Dear SS;
        I think you’re confusing that film with Werner Fassbinders film of Gore Vidals treatment of “Die Drei Trillion Pfenneg Oper.” You remember that, it’s the film that gave us that wonderful popular song, “Barak the Knife.” (The song was very popular with the Brownshirts.) I still think Marliene Dietrichs version is the best.

  2. attempter

    Why the jeremiads? “Growth” has been a scam for over a decade now. How can the core economy, the true economy, even hold its ground let alone grow while it’s being viciously plundered by the finance tyranny and the rest fo the corporations? To even talk about any kind of restored prosperity, let alone growth, under continuing corporatism is to talk of things that cannot exist.

    Then there’s the little matter of Peak Oil and the rest of resource depletion. How is growth going to continue without ever-increasing oil production? Fundamentalist faith, evidently.

    On the other hand, if we break the finance tyranny, we’ll have taken a big step toward, not more “growth” which is impossible and undesirable anyway, but toward a new dispensation of prosperity based on true democracy and the fair and rational distribution of material goods by and among only those who work to create them. Under that dispensation, even without phony growth there will be plenty for everyone who works to live in decent comfort.

    So let’s default on all the system debts. Let the government default. It won’t immediately be a big deal anyway, contrary to the deficit terrorist propaganda. But it’ll be a start.

  3. toxymoron

    “God help us”.
    Why implore help from God to correct problems of our own making?
    Anyway, it is a dangerous strategy. Back in April the governor of Texas asked to pray for rain. All he got was more drought and apocalyptic wildfires.
    Perhaps God is only willing to help if we start tackling problems ourselves, instead of extend and pretend.

    1. Valissa

      From a historical point of view, it’s a fascinating (and rather sad) fact that Mythos has become almost wholly divorced from Logos within the larger context of Reason (using ancient definition of that). Gods are not required to be literally real, and yet many demand that must be true on both sides of the atheist versus god argument.

      In real multidimensional life (instead of two dimensional real vs not-real switch, one or zero), gods can be other than literal… they can be metaphorically, poetically, psychologically, mystically or mythically real. And yes, I am saying it’s all in one’s head, but there is nothing wrong with that as many things only exist in our heads and are still valuable.

      Shorter statement – “God help us.” is a commonly used rhetorical device that implies no literalism, or belief in god on it’s part. IMO, over reliance on literalism is a key to fundamentalism of all stripes, including rationalist fundamentalism.

      1. No Know

        George Berkeley (the namesake for UC) argued that nothing at all is real except for what’s “in our heads”.

  4. Moopheus

    “The Congressional Budget Office’s projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse, showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not “on track to top $1 trillion.””

    In other words, the CBO projection was an exercise in fantasy and denial. Pretty much as soon as that projection was published it was out of date–the deficits ballooned hugely in 2008. Certainly by Jan. 2009, the opinion of Jan 2008 was worthless.

    1. DP

      Agreed. Everybody with a modicum of common sense knew by October ’08, before the presidential election, that the old CBO projections were out the window with the economic collapse and the 2009 budget deficit would be in excess of $1 trillion. I’ll blame Obama for plenty of things but not that statement. I think it’s completely accurate to say that he inherited a structural annual deficit of more than $1 trillion.

      1. John L

        The reason the CBO numbers were so low is they cooked the books the same way Bush Jr did; by keeping the cost of two wars out of the reports. When Obama took office, that was one of his first orders, to include the cost of those wars into the budget to make the numbers honest.

        Anyone that uses the late 2008 CBO numbers to score points against Obama is a partisan hack and not worth quoting or believing for anything else.

  5. Terry

    I have a birthday tomorrow. In my rather long life, I can say I will not have ever had a birthday as sad as this one.

    The wheels are falling off political and economic America, a country that–despite periodic wars, recessions, internal strife, etc–has grown in some many ways in the nearly seven decades I have been around.

    Despite being in relatively good health, I doubt I will live to see America restore itself. It will take that long, if it happens at all.

    1. ambrit

      Happy birthday Terry!
      Don’t despair, you’ve seen enough to know that we are a stubborn and dedicated lot. As long as someone fights for right and justice the struggle is not lost. The mere fact of our living into our seventies on a large scale is a testament to how far we’ve come. We’ll pass on the torch to the younger generations and cheer them on. FDR was right; “The only thing we have to fear, is fear itself.”
      Once again, Happy Birthday, and Keep the Faith Baby.

    2. Ellen Anderson

      Hi Terry – I’m with you – on the 14th. 1941 was a great year to be born. I guess we have had the best of everything and we have been just enough ahead of the boomers to get the benefits of that demographic without the costs.

      I don’t know that we are going to see America restored because I don’t think I know what that means. But, if we live another 10 years we will see the outlines of the 21st century become clear. I hope that will mean the end of corporate rule and the replacement of the financial industry with public utility banking. I also hope that we will see the end of the private automobile’s ability to destroy public spaces and the rise of small scale local farms and businesses.

      I think that people around our age have a special responsibility to try to understand what needs to be done and to try to do it.

  6. rps

    Add to CBO’s “projection” of $198 billion another $700billion TARP, and Public-Private Investment Program (P-PIP), Term Asset Lending Facility (TALF), FDIC’s legacy loans guarantees, to name a few of the bailout programs run by the Treasury and Obama is not far off the mark of “nearly” a trillion

  7. PaulL

    198B is fantasy. The cost of two wars were deliberately kept off budget so political hacks could make false arguments like this poster did.

  8. Linus Huber

    One interesting aspect to all of this is the fact that despite close to no growth, corporations were able to reap in record profits. I think, with all the stimulus and similar activities, costs of maintaining the status quo have been transfered to the tax payer while business was able to operate on a lower cost basis. In other words the government’s deficit may be mirrored in the profits reported by the business sector. If anyone has an opinion on this, I would appreciate a comment.

    1. Jackrabbit

      One interesting aspect to all of this is the fact that despite close to no growth . . .

      . . . in the economy, being insolvent, and having engineered a credit crisis that cost trillions, Banks were able to continue as they were and pay record bonuses.

    2. jwbeene

      It’s really simple corporation have exported real production which has cause a trade imbalance that is vertical since 1980.

  9. Hugh

    I find it interesting that the BEA release just baldly states that first quarter growth was 0.4%. Nowhere does it mention that this was a major downgrade from the original 1.8% figure reported. That 1.8% was already a really crappy number and it got significantly worse in the revision, but all there was was a lot of talk of more general revisions. This brings up the question of how solid a number the 0.4% is. It won’t be affected by the new, broader revisions but we are still left wondering how good a number it is.

    And look at this:

    The acceleration in real GDP in the second quarter primarily reflected a deceleration in imports,
    an upturn in federal government spending, and an acceleration in nonresidential fixed investment that
    were partly offset by a sharp deceleration in personal consumption expenditures.

    So imports are down because consumers don’t have the money to spend. The federal government helped buoy things up but the kleptocrats in the Congress and White House are trying their best to kill that. Additionally, most of the growth in government spending would have been erased except for the wars. Nonresidential fixed investment was up. I have to wonder how much of this is related to our bloated healthcare and financial sectors. And how long it will last in the face of 0.4% growth, the death of the consumer, and budget cutting mania. This is a snapshot of a profoundly sick economy.

    1. Cedric Regula

      I guess we could say the japan quake made 2Q GDP go up???

      But that would embarrass too many economists. They were lowering the 2Q forecast because of the quake.

      1. MyLessThanPrimeBeef

        It would be wrong for people to, therefore, hope for more quakes in Japan.

          1. Cedric Regula

            I think GM was. They were channel stuffing their dealer network bigtime, and when honda and toyota couldn’t deliver, GM made out like a bandit selling from dealer inventory.

            It’s almost spooky how GM knew the quake was coming.

          2. ambrit

            Didn’t GM do most of the engineering on the HARPA Project? If so, even tinfoil hats aren’t going to help us.

  10. Jackrabbit

    In defense of the economic establishment, utility CAN be maximized with hopium. Thus, while GDP models may have over-estimated GDP, they weren’t far off from a theoretical GDP+hopium model.

    Hopium is a Giffen good that is attracting increased research. Practical applications of hopium lie in the areas of ass-covering, financial innovation, and entitlement reform.

          1. ambrit

            Sorry to disabuse you, but hopiums major side effect is incontinent detumescence. (In other words, you have to sell short.)

    1. No Know

      You think we can trade it with the Chinese like the British did a couple of centuries ago?

      1. ambrit

        The Chineese were Righteously mad about it then, and would be even more so today. (Would Bollywood make an epic version of “55 Days in DC?”)

    2. Patricia

      Hopium is not to be confused with dopium which, at a half-life of 100 thousand years, is a constant source of cancerous growth.

    1. Cedric Regula

      S&P corporate earnings are just about back to pre-crash levels. Without the 7 million employees. Oops.

        1. Cedric Regula

          Read somewhere they have more cash than BofA too, and in the case of Apple, the cash really does belong to Apple.

          I wonder if there are Apple bonds. Don’t think they ever went that route.

          1. Cedric Regula

            Used to be t-bills back when those paid something, Then ABS market was popular for a bit more yield, but then that froze up when they found out the “assets” weren’t worth anything.

            If they have any big investment ideas or acquisitions they keep it liquid for that. Otherwise expect a big stock buyback, or maybe a huge one time div payment like MSFT did a number of years back.

          2. MyLessThanPrimeBeef

            I suggest they built more spacey buildings.

            Medieval merchants spent theirs on paintings. Today, we spend it on artsy buildings (as works of art, of course).

          3. MyLessThanPrimeBeef

            Another idea is to set up a charity.

            Whom should Apple to charitable to?

            Their customers, of course! They are the sources of Apple’s wealth. Be kind to your benefactors.

            So, the charitable way is to charge less for iPhones. Maybe even refunds. Profit sharing ALL THE WAYYYYYYYYYYYYYYYYYYYYYYYYY!!!

    2. propertius

      Give us a few years – the way things are going that “surplus population” won’t last long.

  11. Tony61

    Obama was not wrong. When he said, “As a result, the deficit was on track to top $1 trillion the year I took office”, he was referring to the economic downturn that was fully in place after the fall of 2008.

    To think that the budget deficits were only going to be a few billion after the devastation of the credit markets is just plain fantasy. Obama knew GDP growth would go negative, housing would crumble further, unemployment would skyrocket, and therefore tax revenues would plummet and a huge budget-draining stimulus package would be necessary. In other words, the US was on track to have trillion dollar deficits.

    Yet another economic principle that Dean Baker does not understand.

    1. attempter

      Obama knew GDP growth would go negative, housing would crumble further, unemployment would skyrocket

      Of course he knew it. Those were among his core goals, and he’s systematically pursued them with his vicious criminal policies.

    2. Tim

      Tony – right on the money. The congressional budget projections are also numerous and questionable since they are often only published in response to what-if legislation, so they are tough to use as a comparison, well after the fact, to someone’s statements. The deficit was north of $1T in 2009 and 2010.

  12. monday1929

    It is not a “Double Dip” recession, It is a Depression that began in 1999-2000.

  13. LAS

    President Obama has the power to request any information he wants. He can have tons more information, more explanation, or investigation than any of us is empowered to request. This is a totally willful point of view; he just feels his destiny has nothing to do with middle class values.

    He seems to equate middle class values with negativity, as if it were destroying the nation as opposed to making it great. Now who would it be that reinforces that to him?

  14. Patricia

    “The President has no idea why the deficit exploded…”

    Obama is neither ignorant or innocent. His actions in other areas (executive power grab, increase of NSA/TSA, laissez-faire on environment and infra-structure and fair-trade laws, aggressive attacks on SS/Medicare, increase of military action, attacks on whistle-blowers, health care charade, etc) show that he is actively about something else altogether. And that “something else” is bad for the health of the rest of us as well as our planet.

    His speeches go down like poisoned food. One may enjoy the fine flavor but after a couple of hours, one finds one’s self hanging helplessly over the toilet bowl. In order to avoid repeating this scenario ad nauseum, I’ve stopped listening.

    America is indeed rutterless. Yes, “God help us”, please, and as the old saying goes, God helps those who help themselves. Let’s begin by no longer helping ourselves to ever larger helpings of Obama’s favorite dishes.

    Thanks, Yves. I very much appreciate your constant work.

    1. Cedric Regula

      “America is indeed rutterless”

      I hope no one here gives us the english translation for that phrase.

      That would be as uncouth as when they are over here and say “mind if I light up a fag?”.

  15. Brian

    “… the deficit was on track to top $1 trillion the year I took office.”

    I can read this in one of two ways.

    1. The deficit incurred during the year he took office was projected to top $1 trillion (false);
    2. The projections of future deficits, which were made in the year he took office, topped $1 trillion (possibly true, I don’t have such numbers at hand).

    IMHO the president’s statement is stupidly (and probably intentionally) ambiguous.

  16. Pragmatic Realist

    Beginning with the premise that, even if he is mistaken, the President actually believes that the problem was created by the tax cuts, the wars and the Medicare drug benefit, why were the tax cuts renewed, the wars still being fought and the Medicare drug benefit ignored?

    Why are we now addressing issues that have nothing to do with what the President himself claims (rightly or wrongly) are the roots of the problem?

  17. awester821

    Our only chance to turn this thing around is to change most of the current political paradigms. As previously described, the motivations and compensation paradigm of modern finance is also a direct problem, and primarily so, because it is as the center of our political dysfunction and leadership vacum. The truly selfishly motivated cannot effectively lead a democracy. Political control rests in the hands of those who control the money. Until we get ALL private money out of politics, we will continue to experience eletion results that gaurantee the status quo. We must remove all private money and its selfish effect on the system. We will not have political leadership in America that truely is focused on the greater good until that is done.

    The only way any of this can be done is for the “greater good” people of this country to express themselves at scale.

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