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Max Fraad Wolff Headshot

Fog or Cloud? GDP, Jobs and Everything Else

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What a lot of conflicting news we have gotten. It feels like a storm is brewing. But, large patches of the economic sky look clear and sunny. Then again, dark clouds hang in all directions. Or, is that just fog? It has been very hard to make sense of contradictory economic news. In such times people often go with their gut feelings. Mine is that we are far from seeing the end of the credit crunch and that there will be real hardship for cash poor and debt strapped consumers over the next 18 months. I have thought this before. Often I was premature and off on the timing. I process economic information and attempt to make sense of it for a living. I am having a rough go of it. I imagine some of you are too. It is toward helping out in that regard that I write today.

GDP Surprise

On October 31, 2007 the Bureau of Economic Analysis (BEA) released its advanced estimate of third quarter GDP growth. Real -- adjusted for inflation -- GDP growth ran at an estimated 3.9% across the third quarter. I must admit, I was surprised. Advanced estimates are subject to rather dramatic revisions and are based extensively on guesswork and extrapolation -- much like the October non-farm payrolls number we got this morning, November 02, 2007. The last two quarters have been defined by tanking consumer sentiment, fear from large firms, financial turmoil, skyrocketing oil and food prices, plunging dollars and robust economic growth! Employment has weakened across the second half of the year. The Federal Reserve has been forced to loosen rules, cut multiple rates and reassure markets on several occasions. Financial firms are undertaking large lay-offs and senior management heads have rolled. The third quarter had distressingly low employment growth, an average of 97,000 new non-farm payroll jobs per month. Goods producing employment actually fell across the third quarter. Goods producing employment continued to fall in October. A look at third quarter GDP shows a curious fact, goods exports surged. This declining employment area was the single largest contributor to third quarter GDP growth. 44% of quarterly real GDP growth came from increases in export of goods. In case you thought we just consumed less here, we did not.

The other area of strength in GDP growth was personal consumption expenditure on services. Housing and medical costs led the way in this area. It would seem people are spending more on their homes and health care. Never mind that these two may be increasingly related as housing stress creates health issues. It begins to look like the good economic news flows from foreign buying of our now cheap exports and debt driven consumer spending on health and housing. Last but not least, the BEA reports data adjusted for their estimate of price increase. The inflation adjustment for the third quarter was very low. The lower the inflation level the higher the economic growth appears. The spiraling cost of energy and food suggests the BEA may be wise to use a higher number as an inflation gauge. If this happens for the revised GDP numbers, the revision will be downward. I strongly suspect the 166,000 new October 2007 payroll jobs announced this morning will fall in revision as well.

Government data on GDP and jobs growth are anomalous bright spots in a dark landscape. Happy times government data is joined by impressive results from the high tech sector that has boomed across the last few months. Energy firms have performed well as oil has risen rapidly, breaking record price after record price. This has been tempered by earning reductions from leading large integrated oil firms as profits from refining have slumped. Oil grows as the dollar continues to fall to new lows. This is also helping our exports as you have heard and heard again. This creates a strange feature of the recent GDP numbers. As our dollar falls and oil spikes, we are earning a pretty penny exporting. Or is our currency falling enough and fast enough to swell the dollar value of foreign earnings? As the dollar falls in value, foreign currencies rise in value -- this is two ways of saying the same thing. US Dollar weakness swells the dollar reported value of foreign currency earning. It is hard not to suspect this as we are employing fewer folks in goods production and earning more at it. This means we are celebrating the decline of our currency as economic growth. This economic growth is calculated using estimates of inflation that seem a bit low given what is happening to the prices of food and energy? As our dollar falls we will have to pay more for what we buy from abroad. That will have to show up at some point as rising prices. If we factor all the above, the third quarter GDP number loses some of its countervailing wisdom shine. This morning's jobs numbers are similarly odd. A third of new job creation occurred in the business and professional services area. What? The lay-offs across the financial space will be large and have just started. Thus, it remains hard to know and even harder to fully embrace the great news coming out form the BEA and BLS.

The Fed did not seem to feel like the economy was growing well when they cut both the discount and Fed Fund's target interest rates on Wednesday October 31, 2007. The Payroll and GDP numbers make the Fed look as hasty and focused on financial markets as they did in the last round of cutting. Our last round of cuts came amidst upside surprise data on the economy and jobs. The Fed is neither supposed to be focused on financial markets nor, do they admit to being so focused. The Federal Reserve is sufficiently fearful of the housing and financial pain to cut interest rates as dollars slide across the late summer and fall. They do this in the face of upside surprise after upside surprise in GDP and jobs numbers? Federal Reserve Policy action is consistent with economic weakness and implicitly doubts the macroeconomic health reported in the GDP and jobs numbers.

It appears that the economy is trending down. As is always the case, this is an uneven process across time and the sectors of the economy. The robust numbers on GDP and job growth seem to be generated by our falling dollars, debt driven consumer spending and a very low estimate of inflation. Employment has been slow to respond to changes. To date there has been only a tiny decline in housing employment in official numbers. Thus, epic pain and slump in all things housing and building related does not show up in employment numbers. Perhaps, enough is going right around the US economy and world to prevent trouble showing in official GDP and employment numbers. It is still a foggy picture. However, it looks to me like some of the fog is actually cloud.