Economics & Research Blog
Don't Get Excited Over 4.9% GDP Growth
The news that Q3-
By Dr. Joe Webb
Published: November 30, 2007
The news that Q3-2007 real GDP growth was revised up by +4.9% was treated as ho-hum by the markets because they are currently mired in the aftermath of the subprime crisis. But there's even a more important reason to not be impressed: that's the annualized rate compared to the prior quarter. On a year-to-year comparison, Q3-2007 is only 2.8% higher than the GDP annualized figure of Q3-2006.
This week, the markets were full of rumors about more rate cuts coming. While they are trying to prevent a banking collapse, giving more money to the money addicts will only encourage their bad habits. The arguments of "too big to fail" have been uttered about some banks, but that is the exact medicine that's needed. By saving one or two institutions, they will penalize consumers with more inflation.
More interesting to me is that corporate cash flow is down -9.3% compared to this time last year. In fact, it's been negative these last three quarters. The corporate cash party seems to have ended with Q3-2006, when it was up 12.5% compared to the prior year. The last time we had three negative quarters was 1989-1990, and the last time we had two, was in 2000, both times considered by many to be the beginning or parts of recessionary periods. This definitely is not encouraging. I'm still surprised more analysts do not follow this part of the GDP reports more carefully. It's a great indicator of capital investments and trends in discretionary spending.
For those of you working on budgets, remember that GDP is inflation adjusted. If you are not doing that, you need to grow +5.3% in unadjusted dollars to keep up with the general economy.