This morning’s Q1 GDP revision might have been a wake-up call. After all, clocking in a -2.9%—-cold winter or no—it was the worst number posted since the dark days of Q1 2009. Well, actually, it was the fourth worst quarterly GDP shrinkage since Ronald Reagan declared it was morning again in American 30 years ago.
Stated differently, 116 of the 120 quarterly GDP prints since that time have been better. Even when you adjust for the Q1 inventory “payback” for the bloated GDP figures late last year, real GDP still contracted at a -1.2% annually rate.
Still, within minutes of the 8:30AM release, the Wall Street Journal’s news update did not fail to trot out the “do not be troubled” mantra. Not only did “…early second-quarter data indicates the economy has improved this spring as warmer weather helped release some pent-up demand” , but the reader was also advised in a declarative sentence that the US economy’s real growth capacity is far higher, implying that Q1 results were some kind of freakish aberration:
…growth over the first six months of the year likely fell below….. the U.S. economy’s longer term growth rate of just over 3%.
Well, here’s real GDP since the turn of the century. The average real growth rate is about 1.8%—-barely half the cited figure. So where does the 3% growth rate for “potential GDP” come from, then? The answer is that its Keynesian writ, and the pretext for the Fed’s endless monetary “accommodation” .
But doesn’t an actual 14-year trend trump theories that have become self-evidently irrelevant and macro-models that have been chronically wrong? In fact, the 3% potential GDP growth narrative is mocked by the fundamental arithmetic of true economic growth—-which is to say, labor hour gains and capital investment.
During 2013 the private business economy generated 194 billion labor hours—the same figure as 1998. Likewise, real investment in productive plant and equipment assets since 2000 has barely inched forward at a 0.8% annual rate—-or by less than 30% of its pre-2000 trend rate. In light of these virtually zero growth fundamentals, how could the Keynesian 3% potential GDP expansion model be presented as an axiomatic given?
So too with the winter weather bugaboo.
Residential investment …..fell by a 4.2% pace in the first quarter, revised from the previous estimate of a 5% fall. The housing market rebound, an important growth driver earlier in the recovery, was derailed in late 2013 by cold winter weather and rising mortgage rates.
Well, winter must have started in October.
When the daily narrative is this lame it is no wonder that our happy talk financial system drifts toward the wall. The Cool-Aid drinkers have simply lost touch with reality.