Economics & Research Blog
Ignore the Economics and Move on as Best You Can
GDP for the second quarter was revised down from the preliminary estimate of 3.
By Dr. Joe Webb
Published: October 1, 2008
GDP for the second quarter was revised down from the preliminary estimate of 3.3% to the final estimate of 2.8%. Remember, their first estimate (called the “advance” estimate) of the second quarter was 1.9%. So let me get this: from the first time they estimated 2Q GDP, they increased the growth rate estimate by 74%. Then they reduced that estimate by -15%. That made the net change 47%. Think they're having problems figuring out what's going on?
This is another reminder that economic data only divert the attention one needs to address their daily business issues. The statisticians will get their view of the second quarter economy finalized two years from now. They are doing the best they can, but does it really make a difference to a print business owner if GDP is 1.9% or 3.3%? What matters more is what is happening to their customers. There are growth markets (professional services, especially medical and health services, and education) and declining markets (new real estate and new construction). Are you focused there?
I've been getting e-mails and calls about the financial bailout and various related questions. What is really quite amazing are the claims that the markets stopped working, which is how the whole disaster occurred. Well, that's wrong. The markets are working. Markets punish bad behavior, ruthlessly. Any of the plans proposed end up dragging the problems out further. Regulations designed to protect the market end up creating disequilibriums. Now that there is fear in the market again, the chances for rational behavior have actually improved. Flooding the market with money created the problem, and now we're supposed to believe that flooding the market with money will solve it.
To see what has happened to this bailout bill, and all of the items and tax breaks added for various groups and situations to garner support, click here for the 451 page document. Somehow, they got another one-year fix of the Alternative Minimum Tax in there. It's still the worst tax in the entire code, and it joins a tax break for businesses in American Samoa among other things in the bill.
Wednesday's ISM report, about which I will comment in greater detail in Monday's column, does not give much hope for the manufacturing sector. The reading was 43.5, below the 50 level that implies no growth or decline. A reading of around 42 implies recession, and we're close. The report showed an increase in exports and a recession level of imports. When imports rise, the economy grows; the evidence is convincing, but protectionist emotions appear to be taking over, always amplified in elections and economic slowdowns.
I expect a bad unemployment report on Friday (perhaps 6.3%), and a weak ISM Non-manufacturing report as well (perhaps 48).
While some would expect that loose money would stimulate the economy, and it can't. Inflation is killing business growth and personal incomes. It is forcing more family members into the workforce which is making the unemployment rate go up, even though the number of people employed is not far off records set in 2007. Any decreases in commodities prices are signs of economic weakness. While they may improve the inflation readings in some cases, the damage has been done. It will take a couple of years for this to play out, sooner with a bold Fed, which we do not have. This Fed works out of fear at a time when strengthening the dollar is what is needed, no matter how many slings and arrows are headed in their way for such actions. The Fed meets at the end of the month, and may lower rates. If they get scared enough, they may not even wait for a meeting.
I told my son that he's going to college at the exact same time I did. Confused, he said, “huh?” I explained that this is playing out so much like the Ford-Carter years that I was getting flashbacks.
This is a perfect example of why mid-size and large companies need age diversity in their management. Having young executives helps adapt to the newness of the marketplace. Having older executives provide stability to get through times like these because they've seen it before. If they made “young executive mistakes” at that time, and remember not to repeat them, all the better.