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Thursday, October 29, 2009

GDP: Grossly Distorted Product

An inside look of Q3 GDP data (source: WSJ):

If the Obama administration was managing a company, it might have hoped the latest gross domestic product numbers would be greeted with cries of "great quarter, guys!"

At least the stock-market obliged, rising on better-than-expected GDP data Thursday morning. But then bulls have grown used to looking to Washington, D.C., for inspiration. Zero rates and stimulus programs boost economic data as well as nudge money towards riskier assets.

Fully 2.2 percentage points of the third quarter's 3.5% growth figure related to vehicle purchases and residential construction, both juiced by government support. Federal spending added 0.6% to growth.

If these GDP data really were company earnings, they would be what analysts euphemistically call "low quality." Investors buying into the market on these figures are ignoring weekly unemployment claims data that came in above 500,000 again on the same day.

The wider danger is that all these short-term fixes leave the economy dangerously addicted to taxpayer-funded steroids. The circularity in the housing market, whereby Washington provides tax-breaks to first-time buyers, guarantees most of the mortgages written, and then buys most of those, beggars belief -- and suggests a worrying case of amnesia following the bursting of the housing bubble.

Another idea that has been floated is to give tax-breaks to firms encouraging them to hire. Yet with quarterly earnings besting forecasts so far, it doesn't look like firms are exactly short of funds to pay workers. What they lack is a clear sense that the economy is on a stable footing. Distorting the cost of money, durable goods demand and labor productivity will not help that; it will merely serve to build up further problems.