Wednesday, August 5, 2009

More misleading government statistics

The Department of Commerce released Gross Domestic Product (GDP) growth statistics last week for the 2nd quarter ending June, and the numbers came in at "only" a 1% contraction, in contrast to the 1st quarter number which came in at a disastrous 6.4% decline. The contraction was smaller than what the Street expected, so markets rallied and the "green shoots" optimists came out celebrating that the recession had ended. The "getting less bad" argument was gaining traction. A couple thoughts gave me pause:

1) this GDP growth number is still negative. Sure, it's not AS negative but it still is negative. And since unemployment is a lagging indicator for economic growth, even if we are on our way to recovery, employment growth won't occur until 2010--at the earliest.

2) this aggregate number doesn't tell the full story. While overall GDP growth was only slightly negative, the private sector has experienced a much bigger decline. Why? Because all of the growth came from federal, state, and local government spending. The public sector is crowding out the private sector--the true engine of economic growth. More federal government employees were hired, while private industry was still laying off employees. That is not a long-term plan for success.

So while the GDP numbers were slightly encouraging (if still negative), I wouldn't start celebrating just yet. Meanwhile, I'm still long the market, but as soon as Congress returns from their summer recess later this month, I have a feeling Mr. Market will take away the punch bowl. Markets like it when Congress is not in session--they can't muck it up when they are idle.

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