How GDP Distorts the True Health of the Economy

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When we hear people talk about what a great job Obama has been for the economy it is usually because of the following factors:  He averted the Great Depression, Americans are working again, deficits have gone down, inflation is low, the GDP (Gross Domestic Product) is the highest in the history of the world, and he saved the auto industry etc.

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For part 3 of my series on “How it’s Rigged” , I’m going to tackle the Gross Domestic Product or GDP.

 

The first issue I want to address is the fact that when the GDP increases, it generally means people are spending more money.

The past few years Americans have spent more money on Health Care, Food, regulations, bombs and taxes just to name a few.  I’d argue that the average American is not better off for having the cost of their: Children’s college go up,  their health care costs going up, bombing more brown people in the middle east or spending more on taxes.  These are all drains on productivity and take capital that could’ve been deployed in the real economy productively and force us to fund bigger liabilities just to survive.

 

The other issue that is usually ignored is the pace at which we need to accumulate debt just to add to GDP.

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If we look at the graph above we can see that until 2009 the GDP was growing faster than the debt.  Since 2009 it’s more than $1 of debt to raise the GDP $1.  Any business that lets say took $2 to earn $1 would not stay in business very long.

Although this is not comparing apples to apples, the chart from Zerohedge below shows it took $10 in total new debt added to the economy (so not just government debt) to produce a $1 increase in GDP!

 

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Again, if anyone were running a business this way, they would find themselves on the wrong end of the labor force participation rate we discussed in part 1.

If we look back to part two of the series on inflation it will bring to light another key distortion in the GDP data.  Since the inflation rate is artificially kept down through various methods Real GDP growth usually takes the Percentage increase in GDP and subtracts the inflation rate to give you a more accurate GDP number.  The data from the World Bank below shows a current deflator of 1%.

 

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This means if we take the current GDP increase of  2.1% and subtract 1% which is the deflator we get a Real GDP of: 1.1% (See figure 6).

Imagine if inflation was admitted to be only 3%.  Now instead of having GDP growth we would actually see GDP shrinking and as we all know if you aren’t growing your dying.  Now imagine a scenario where inflation was actually 5% or 8%.

 

If we take a look at how www.shadowstats.com calculates inflation and how they overlay their calculation with the governments GDP data we get a much less rosy picture than what is currently being presented.

 

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This would suggest that we have been in recession since early 2014.

 

When looking at GDP in a vacuum it is easy to get optimistic about the absolute number.  However when we dig beneath the surface you can easily see how we’re not told the entire story.

 

 

At the end of the day, the GDP is an antiquated measurement for the true health of an economy.

I would rather use a figure that takes into account Debt or uses Key Performance Indicators that actually matter to the average person.

These may include:  Median 401(k) balance for retirees, or networth or those who have 6 months of savings… or any savings.   If the .01% get all the spoils while the average American slowly slips into despondency then we can expect a Brexit style revolution here.

My only fear is that those who have created the crisis (The FED and Politicians) will be the same ones who offer the solution.  We know big government and deficit spending is like trying and anchor around the economy but that doesn’t mean we can’t expect the same response from the FED which is hitting CTRL P down over at Constitution Ave ( FED HQ’s).

 

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.