Today you'll hear on the news that we are in a recession that is being caused by the terorrist attacks and scared consumers. The consumer is holding up well and actually increased his spending in the last quarter. This is the truth about the economy:
Inside the Third Quarter GDP Numbers: The Myth of the Scared Consumer
A year ago I wrote an article with the same title as this one. Last year ,at this time, the third quarter Gross Domestic Product(GDP) was positive, but we looked inside of the numbers themselves, broke them down, and saw warning signs that told us that the economy was on the verge of a massive slowdown. The complete collapse in corporate investment, especially in technology, was the chief sign. People were talking at the time about a "new economy," but we knew that was more of a slogan than anything else.
Once we got into the year 2001 everyone was claiming that the economy was bottoming out and would boom by the end of this year. Everyone said that Greenspan's interest rate cuts would make the market go up and the economy grow. They said the bottom was in January and then said it was in April and then said it was in the summer. It never happened.
Instead of recognizing that the economy has been in a gradual slowdown for a long time now, these same analysts and economists are throwing their past predictions into the memory hole and are claiming that the terrorist attacks created this recession. Greenspan himself said that this is just a temporary phenomena caused by the terrorist bombing and his interest rate cuts in September fixed everything.
Implicit in the groupthink consensus about the economy is the idea that the psychology of the consumer is key. Greenspan said the other week that his interest rate cuts will make the consumer more confident and then he'll spend more and make the economy recovery. The casual listener would conclude that the economy is slowing down, because people are just scared and worried about terrorists. The truth is that the consumer remains the strongest part of the economy and the real culprit for the slowdown is the continued drop off in corporate investment and technology spending. This is a trend that has been continuing all year and has gotten bad enough to cause the economy to shrink. Yes the terrorist attacks are having an effect on consumer spending, but if you break the numbers down you'll see that this slowdown is not just about psychology and consumer confidence. It is really about a lack of investment spending.
Today the GDP numbers were released and showed a .4% contraction in the economy. This is the official beginning of the US recession.
Let's break the numbers down and find out what is really causing it. From the commerce report itself:
"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.4 percent in the third quarter of 2001, according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 0.3 percent."
"The major contributors to the decrease in real GDP in the third quarter were exports, equipment and software, nonresidential structures, and private inventory investment. The negative contributions of these components were largely offset by positive contributions from personal consumption expenditures (PCE) and federal government spending."
Consumer purchases actually increased in the third quarter:
"Real personal consumption expenditures increased 1.2 percent in the third quarter, compared with an increase of 2.5 percent in the second. Durable goods purchases increased 1.7 percent, compared with an increase of 7.0 percent. Nondurable goods increased 0.6 percent, compared with an increase of 0.3 percent. Services expenditures increased 1.4 percent, compared with an increase of 2.8 percent."
The contraction in the US economy is actually being caused in a reduction in investment spending, especially in technology, computers, and software:
"Real nonresidential fixed investment decreased 11.9 percent in the third quarter, compared with a decrease of 14.6 percent in the second. Nonresidential structures decreased 12.1 percent, compared with a decrease of 12.2 percent. Equipment and software decreased 11.8 percent, compared with a decrease of 15.4 percent."
The bottom line is that consumer spending continued to grow in the fourth quarter while the trend of lower investment spending continued. This trend has lasted over a year and is taking a heavy toll on the economy. It is causing more and more people to lose their jobs every week and eventually the rising unemployment will cause the consumer to buckle if it continues. If that happens the recession will be much worse than it is now.
Most recessions are caused by a cycle of higher interest rates, layoffs, and then a drop in consumer spending. Once interest rates are again lowered then people are hired back and begin to spend again. But the economic contraction itself is caused by a drop in consumer spending. This cycle is completely different. This time the economy is shrinking while interest rates are dropping and the main culprit of the slowdown is a collapse in corporate investment spending.
To understand why this recession is happening and what it will take to make it end you need to know what is causing the latter.
To anyone who cuts off the television and looks at a chart of the stock market it is easy to understand.
We had an investment bubble. Thanks to Alan Greenspan's lowering of interest rates in 1999 to bail out international bankers, we had a stock market bubble in 1999 that burst. That bubble generated an excess investment in computers, telecommunications, and networking infrastructure. Just as stock market prices soared and crashed so did this technology bubble. What is more, corporate debt was used to create this bubble. So you have a situation in which corporations over invested themselves and now hold huge amounts of debt on their balance sheets. They will not increase their investment spending - which is needed to make this economy grow again - until they work off this debt. That is something that will take time and cannot be cured by lower interest rates.
This recession is not about feelings. It is not being caused by people worried about terrorist attacks. It will not be cured by the Federal Reserve cutting interest rates to make people feel better. This is not about psychology. This is the fallout of the biggest speculative bubble in American history. It has been caused by one man and his mismanagement of the monetary system: Alan Greenspan.
The recession will end when people pay off their debts. When indebted consumers free themselves from the bondage of credit card debt and capitalists fix their balance sheets then the economy will grow again. People were encouraged to make irresponsible purchases and investments because men of power, such as Alan Greenspan and the liars on Wall Street, told them that they were in a "new economy" which would grow forever. This is about a readjustment of beliefs and attitudes. A recognition that their is a business cycle and that there is no free lunch. It is a return to reality. That is why corporate investment is still in a free fall.
We'll know when the economy bottoms out by watching corporate investment levels. You won't know by listening to the Treasury Secretary proclaim that the bottom is in for the 7th time this year(he did it again today). You won't know when Alan Greenspan says he has fixed things like he has said dozens of times already. You won't know when some jackass on CNBC looks into the TV and lies to you and tells you to buy stocks because they always go up. You'll know when we look at a future quarter's GDP number and see that corporate investment grew. That is something that hasn't happened in over a year and not coincidently the start of the drop in corporate investment was the beginning of the economic slowdown.
One day corporate investment will grow. We'll see it. And we'll know that things are beginning to pick up again. The sad thing is that most Americans won't know it. To them it'll still feel like a recession. The people who take pay cuts or lose their jobs won't be comforted by the fact. These people are victims of a corrupt and power hungry Federal Reserve Chairman who puts the interests of international finance above the interests of our country. Just as the people of New York City and Washington D.C. were victims of the terrorist attacks, the American economy has been the victim of Alan Greenspan. Bush is doing all he can to fight the terrorist war. Now he needs to remove the lunatic at the Fed and clean house.
This might sound tough or harsh. But sometimes I have to call it as I see it. Everyone on TV is focused on the consumer and his or her feelings; as if it is the consumer's fault the economy is slowing up. I want to throw the reality of this slowdown up into your eyes so you will see what is really causing it. So you'll know the truth. At the least you'll know to be skeptical when you hear yet another talking head claim that Greenspan will make the economy go up. In the end the country will be stronger. It will eventually learn from his mistakes and his successor will do a better job. That is what happened in the 1980's when Paul Volker was the Fed Chairman. He fixed the imbalances of the 1970's and put the country on the path of economic growth. But Arthur Burns, his predessor had to be fired first. If Bush refused to clean house then he will be be re-elected President and he doesn't deserve to be. After the war on terrorism, the removal of Alan Greenspan from the Federal Reserve Board is the most important issue facing this country.
Look at the GDP numbers and see for yourself:
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