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October 28, 2005

Economic Good News... Or Is It?

Headline story: the US economy posted tremendous third-quarter growth, 3.8 percent. To quote the New York Times article:

"This is actually fairly amazing..." Joshua Shapiro, chief United States economist for MFR Inc. said...

That 3.8 percent growth in GDP is, of course, due to higher spending. Personal consumption, in fact, was up by 3.9 percent. I wonder, could the higher spending possibly have anything to do with the rising fuel prices that--just by pure coincidence--helped oil companies post the highest quarterly profits ever?

And is that spending really a good thing? Consider two other little items from the very same article--the one that characterizes the "strong" growth in an economy that "picked up speed." Disposable income is down and the personal savings rate is now solidly below zero:

  • "Adjusted for inflation, disposable income fell 0.9 percent... Some of the drop was attributable to lost rental and business income on the Gulf Coast after Hurricanes Katrina and Rita lashed the region."
  • "The personal saving rate fell into negative territory, minus 1.1 percent, from 0.1 percent. That indicates that people were paying for their increased spending by borrowing more money."

I hate to harp on the bad news, but those recent nuggets of trouble (suitable, of course, only to color the headline story that GDP is rising) are just the tip of the iceberg...

So someone please tell me, in the face of so many countervailing indicators--the sort of indicators that people actually experience--why is GDP growth still reported as the single gauge of economic progress? Why does GDP's growth merit favorable subjective characterizations like "strong"? And why, in the media's eyes, is "GDP" semantically equivalent to "the economy"?

UPDATE 10/31/05: Want to hear more bad news about the economy? According to Oregon Hunger Relief Task Force, new late-October data from the USDA shows..

...the fifth consecutive annual increase in the number of food insecure Americans nationwide. The total number of people living in food insecure households -- meaning those households that experienced difficulty purchasing food due to a lack of financial resources -- increased to 38.2 million in 2004.

Read the full USDA report here.

Posted by Eric de Place | Permalink

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Comments

one word: spin.

tell the people we have a good economy, and they'll keep spending. if the economy is good, they'll be able to make back that borrowed money (someday . . . )

the scary part is wondering how many people have to go into massive debt to make up for those in the country that routinely save anywhere from 5-50% of their disposable income (or more). that is a sobering figure.

Posted by: Leah | Oct 28, 2005 8:24:53 PM

I can't awnser many of the questions that Eric poses in this blog. However, the economy is expected to slow down and it was just announced the feds want to raise the interest rates to 4%. The middle class needs to learn to not rely on just their paychecks to support themselves. By investing fully in a 401(k) plan, or and an IRA, and owning a home, and individual can have considerable wealth on not that much money. THis however, is only really feasible if there is no credit card debt. And since consumers increasingly buy on credit, creating wealth for themselves and making their money work for them is an impossible task. Middle class Americans are digging themselves into a financial hole, and I don't have any sympathy for them.

Posted by: Gary Durning | Oct 31, 2005 10:59:12 AM

You raise some important issues, Gary. However, I would also encourage you to remember that everyone must make their own financial decisions in life. For instance, I've been hearing some financial analysts say that, in some cases, it's better to rent a home rather than buy it these days.

Posted by: Michelle Parker | Oct 31, 2005 11:54:43 AM