Wednesday, November 10, 2010

Why The Economy Is Doing Much Better Than It Seems

¹²Political Economics: Why The Economy Is Doing Much Better Than It Seems

Two percent GDP growth is nothing to write home about, but a surge in imports suggests consumers and businesses are spending.
By Brian S. Wesbury and Robert Stein | 10 November 2010

Brian S. Wesbury is chief economist and Robert Stein is senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes and write on the First Trust Economics Blog daily. Wesbury is the author of It's Not As Bad As You Think: Why Capitalism Trumps Fear and the Economy Will Thrive.
Back in 1992 the Democrats' mantra was "It's the Economy, Stupid." The economy was recovering from the 1990-1991 recession, but job growth was slow and the unemployment rate held stubbornly in the mid-7% range. Despite real GDP growth of 4.3% in 1992, Republicans could not overcome negative feelings about the economy and lost the election to Bill Clinton.

We bring this up because we were struck by how unanimous the Republican attack on Friday's third-quarter report on GDP growth was. Republicans are using the same playbook that worked so well for the Democrats back in 1992. The first estimate of real GDP for Q3 put annualized growth at 2%.

Taken at face value, this rate of growth is not enough to create new jobs at a pace that will bring the unemployment rate down significantly. Growth also looks like it's slowing— real GDP grew at a 1.9% annual rate in Q2 and Q3 vs. a 4.4% growth rate in the previous two quarters. But this overall number masks turmoil underneath.

Quarterly GDP data go back to 1947 and never— never!— in the past 63 years has the trade deficit widened as quickly (even relative to the size of GDP) as it has in the past two quarters. And because GDP is designed to measure production inside the U.S., imports are subtracted [[from GDP: normxxx]] because they're produced elsewhere. But a surge in imports suggests U.S. consumers and businesses are spending.

But compensating for these trade flows provides us with a measure of Gross Domestic Purchases— how much stuff we buy, not how much we produce. These purchases grew at a 3.9% annual rate in Q3 after a 5.1% growth rate in Q2. In the past year domestic purchases rose 4% at an annual rate vs. a 3.6% annual rate during the same time period in 1992. That's right: The spending side of the economy is even stronger today than it was when the Democrats were berating the economy in 1992.

To be fair, some of the imports ended up in inventories. So to adjust for that, economists use a measure of final sales to domestic purchasers, a metric that rose 3.4% at an annual rate in the past two quarters. This is slightly slower than the 3.9% rate of growth in this category of spending in 1992. In other words, while a 2% growth rate in real GDP is not worth writing home about, it certainly masks an underlying strength in demand that investors should not ignore.

Political spin is ubiquitous these days. But it's important for investors to know that it's just spin. The underlying economy is doing much better than it seems.


Rail Traffic Continues To Grow

By Pragmatic Capitalism | 10 November 2010

The recovery in rail traffic continues at a solid clip. According to the AAR total carloads grew 6.3% over 2009 while intermodal traffic jumped 14.2%. The breadth of the expansion remains healthy with 13 of the 19 commodity groups showing growth:

The Association of American Railroads (AAR) today reported that weekly rail traffic continues to gain over 2009 levels with U.S. railroads originating 292,884 carloads for the week ending Oct. 30, 2010, up 6.3 percent compared with the same week last year. AAR will no longer report 2010 weekly rail traffic with 2008 weekly comparison data since October 2008 marked the beginning of the recession-related downturn in rail traffic. Intermodal traffic for the week totaled 232,717 trailers and containers, up 14.2 percent compared with the same week a year ago, with container volume up 15.7 percent and trailer volume up 6.5 percent.

Thirteen of the 19 carload commodity groups increased from the comparable week in 2009, with significant gains in metallic ores, up 128.2 percent, and crushed stone, sand and gravel, up 27.5 percent. Commodity groups posting declines included primary forest products, down 13.4 percent, non-metallic minerals, down 9.3 percent, and grain mill products, down 7 percent.

Carload volume on Eastern railroads was down
.3 percent compared with last year. In the West, carload volume was up 11.1 percent from the same week in 2009.

For the first 43 weeks of 2010, U.S. railroads reported cumulative volume of
12,324,661 carloads, up 7.3 percent from last year, and 9,364,481 trailers or containers, up 14.6 percent from the comparison week in 2009.
Source: AAR

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