GDP Cannot Pass the Test

One of the most misleading numbers in macroeconomics – the Gross Domestic Product (GDP) – just got a little more jumbled here in the United States. A revised second-quarter GDP release, slated for Thursday, will likely show a dramatic increase in GDP, up to 2.7 percent annually from a projected 1.9 percent, according to MarketWatch.

Normally, an annual GDP increase of 2.7 percent would be cause for celebration but GDP is a misleading statistic and cannot be taken alone as a sign of economic well-being. Gross Domestic Product is meant to show overall growth, but the majority of the growth is not coming inside the United States. The dollar is still historically weak, which allows foreigners to purchase cheap U.S. goods, while it keeps Americans from spending their money abroad. We are exporting a great deal more than we used to due to the weak dollar while the currencies of other nations are at all-time highs.

The United States of old was not only a massive exporter but also the world’s largest importer of foreign goods and services. In the days when the dollar was king Americans could afford to buy anything from anywhere. Times however, have changed dramatically in the past decade. As our currency falters against the euro, sterling and Canadian and Australian dollars, the United States becomes ever more dependent on goods from nations whose currency values are manipulated to stay lower than our own – namely China, but also Japan and Mexico.

To add injury to insult, not only does GDP not reflect real circumstances in the U.S., but the little productivity we have had in the past year has been wiped out by the declining housing market which contains $12 trillion of America’s wealth. The United States relies on its housing market to drive the economy and the consumer, but home sales are down and do not seem likely to rebound anytime soon.

As the housing market faltered to record lows and major institutions stumbled to the verge of absolute collapse, consumers in the U.S. lost confidence in their system and in their paychecks. Demand has decreased significantly on everything from fuel to food to non-essentials, and consumer confidence is still very weak despite showing small increases in recent surveys.

The Economic Stimulus Act of 2008 was passed with the intent of increasing GDP and domestic consumption. Unfortunately, the government’s $100 billion stimulus gamble has dried up, and it did little to encourage any sort of tangible long-term rebound.

This nation still has a long climb to regain its place as one of the world’s most stable economies, and a GDP increase of 2.7 percent annually simply will not achieve that goal – for some perspective, China regularly experiences annual growth in excess of 10 percent. We need to rebuild our wrecked financial system, and reinvest our money in the American home which has for so long been the repository of our economic strength. Increased exports have provided a little relief to the manufacturing base which has been undermined by NAFTA the WTO and other “free-trade” policies, but relieving one sector while the others languish will not solve any of the problems inherent in this economy. We still have much to do and a long way to go.

Source MarketWatch:

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