Is Our Economic Growth Rate Rising Or Falling?

Current expectations say the economy (as represented by GDP) is recovering slowly but that growth will rise in the second half of the year; yet economic data points in the opposite direction. Which view is correct?


In the short-term, expectations are what drives the market. Current expectations assume that the “gap” in demand (consumer spending) can be filled by enough government spending; and that the markets (securities and housing) can be levitated by the Federal Reserve pumping $100 billion per month into banks to keep mortgage rates low and allow the banks to invest in equities etc.) Then, when the markets rise, housing prices rise and the spending gap is filled, the government and the Fed can begin withdraw money from the economy and raise interest rates. This “improving economy” story is told and repeated 24/7.

When a negative data point comes along like the jobs report on Friday (expectations of adding 193,000 jobs turns out to be 88,000 jobs on a model adjusted basis); they report the headline but focus on a single positive data point within the report like hours increased 0.1% and extrapolate from that single data point that things are still improving. They do the opposite when the headline number meets expectations like the prior months jobs report and ignore the underlying data points like the huge number of those jobs that were part-time, low-pay and no benefit jobs.

Net: current status quo maintained.

In the long-term, expectations will have to adjust to reality. This recession is not the result of an “inventory correction cycle” (prices rising faster than supply); this recession was caused by a debt cycle (debt rising faster than incomes.) Therefore, to get back on track, we have to reduce debt (sovereign, corporate and personal) to not only sustainable levels, but to levels where credit expansion can take place again. So, in the long-term, expectations are that economic growth is falling.

Net: the market is very short-term oriented; therefore, you must be positioned both positively and negatively.