A Great Example of “Gloom and Doom” from the Media

This is corrected. The paragraph about “business spending” has been changed since the initial post. [An oops by Linda.]

In the May 16, 2011, special “Royal Wedding” issue of Time magazine, reporter Stephen Gandel took the somewhat disappointing first (“Advance”) estimate of US real GDP growth in the first quarter of 2011 and spun it into the following misguided and extremely negative piece.

Is the Recovery Over? The latest economic growth figures are grim (Time, 5/16/2011, page 17)
The US government’s gross-domestic-product report for the first quarter of 2011, released April 28, showed that nearly every sector of the economy slowed compared with the last three months of 2010. The numbers were weaker than expected. Consumer spending down. Business spending down. Housing sector down. Exports down. Federal spending way, way down. (It decreased 7.9%, the largest drop in more than a decade.) The housing sector is also decreasing. There was, of course, one thing that was up: inflation. So is this a brief pause on the way to a healthy recovery, or is it the first sign, now that the stimulus package has ended and Ben Bernanke says he’ll stop juicing the bond market come June, that this recovery was never really sustainable? Right now, most signs point to the latter. [end of article]

So, let’s try looking at the facts. First of all, the answer to the headline (Is the recovery over?) is obviously a resounding, “YES!” It ended in the fourth quarter of 2010 when real GDP finally exceeded the old record set in the fourth quarter of 2007. That’s the technical definition of the “recovery” phase of an expansion–when GDP exceeds the previous high.

Consumer spending was not down as stated in the article. It rose at a seasonally adjusted annual average of 2.7 percent to a new record level of $9.5 trillion or 70.6 percent of real GDP. It IS true that the rate of growth was less than the 4.0 percent at a seasonally adjusted annual rate of the fourth quarter of 2010, which is probably what he meant to say, but it was higher than that of any other quarter since the expansion began in June 2009. So, not exactly down.

Gross private domestic investment, which is presumably what he refers to as “business spending” grew at a seasonally adjusted annual rate of 8.5 percent in the first quarter of 2011 after falling at a seasonally adjusted annual rate of 18.7 percent in the fourth quarter of 2010. How he could call that result “down” is beyond me. Almost all of the first quarter growth was from inventory building, which is almost always a sign of business confidence that sales will grow in the future. Almost all of the decline in the fourth quarter was also due to inventories, which subtracted 3.42 percentage points from the growth rate then. The positive contribution from inventories was 0.93 percentage points in the first quarter of 2011.

Exports rose at a 4.9 percent seasonally adjusted annual rate in the first quarter. So, not down.

He is correct that federal government spending on consumption and investment fell, but that was all in defense and no one expects that to continue. [Note from Linda: Besides, isn't any kind of decline in federal government spending a good thing? Aren't we all horrified by the deficit?]

Residential investment has declined in all but three of the last 16 quarters, so that’s hardly news. It is probably at or very close to the bottom by now.

With personal incomes at record levels and growing; strong growth in employment so far in 2011; rising industrial production, retail sales and tax revenues to all levels of government, it’s about impossible to square Mr. Gandel’s views with reality. The expansion is gaining momentum and is likely to last for many years to come.

You should ignore articles from pessimists like this. The good news on the US economy is far outweighing the bad these days.