Sunday, March 2, 2008

Delusions of Adequacy

"I'm concerned about the economy. I don't think we're headed to recession. But no question, we're in a slowdown." - President Bush from a speech on the economy Thursday.

The fact may be that the U.S. is not heading for recession, but already there. The definition of a recession is two consecutive quarters of GDP contraction. We are still in what could be the first quarter of negative growth (data is not available until after the quarter is completed), but it is possible that the recession has already begun. Of course we won't know if we are living under a shrinking economy until after it has already occurred (and when we are aware of it, we may already be pulling out of it - an interesting situation, is it not?). But with all the information available, what reasoning besides wishing really hard, would make the quote above sound reasonable?

The third quarter of 2007 the U.S. had a GDP growth rate of 4.9%. The fourth quarter 2007 the U.S. had a GDP growth rate of 0.6%. Clearly, this is a dramatic drop in the quarter that includes the Christmas season which is when the largest amount of spending done by the American people occurs. Since then, the price of oil/gasoline has increased which will lead to an increase in the price of other goods and services which makes the case for increased inflation. At the same time, consumer confidence is declining, the housing market continues to be difficult and credit concerns are still present. On top of this, money is flowing out of the stock market and into precious metals (the price of silver has increased almost 25% in the last six weeks) - another indicator that investors are concerned that the market is not a safe place to keep their money. Oh yeah, and the dollar is falling in value against every other major world currency and the number of jobless claims are increasing.

Nearly every single indicator is pointing to recession. What is going to keep us from sliding into one? What about the economic stimulus package that Congress rushed through passing on to be signed by our glorious leader? That package, that may or may not prove helpful, is scheduled to hit the tax payers in May. Assuming that the current quarter is headed for a GDP contraction (which is not necessarily true), the second quarter would also have to see GDP decline for the recession to be official. The second quarter ends with the month of June, so there will be less than half of a quarter for the money to be collected and spent for the chance at a GDP boost to push the second quarter of 2008 into positive territory. That is not much time for a plan that may or may not work - of course, we won't know if it worked until after it has succeeded or failed. I do not envy economists.

I am aware of the president's thoughts on issues like, global warming/the environment, the handling of the war in Iraq, tax cuts during war times and the definition of the word "mandate" (winning the electoral college but losing the popular vote is not a mandate of the people). In retrospect, why should I be surprised of his perception of the economy when my opinion differs entirely on nearly every other subject? Maybe he is trying to keep the public perception positive, or maybe he really believes the stimulus package can work... or maybe he is just delusional. Only time will tell.


Anonymous said...

Or maybe he is an idiot...

Andrew Skaff said...

A valid argument and most likely the correct one.