he newspapers were full of ‘joyous’ and ‘encouraging’ news about the economy this past week, and there was little mention of the fact that, on the heels of this ‘good news’, several businesses announced another round of layoffs.

It’s infuriating to me that newspaper and television reporters are so ignorant of how the economy works these days that they are unable to see what this ‘good news’ really means to their readers. Let’s break the recent euphoric announcement down into its components.

“The GDP rose 7.2% mainly on the strength of a 6% annualized rise in consumer spending”
That means consumer costs, mostly reflected in the leaping cost of home purchases, are growing at a 6% annual rate. Most of those costs are fixed, non-discretionary costs like mortgage, transportation and health, which have increased 3-to-10 fold in a generation while spending on food, clothing, recreation and furniture has plummeted in that time, because there’s just no money left over. Since incomes are not growing at all, this means consumer debt is rising yet again, and if interest rates spike the consumer is toast. And if you need a reality check, consumer spending dropped in September, showing that consumers are tapped out.
“Profits are soaring”
The reports indicate that this has occurred almost entirely by cost reductions, not increased sales. The primary means of cost reduction have been layoffs, exporting (“offshoring”) jobs, contracting out, and downsizing. In other words, profits are soaring on the backs of American workers.
“The risk of deflation is largely forgotten now”
When people are forced to spend more than they can afford on the above-noted non-discretionary items, and incur record levels of personal debt, the risk is inflation. A sudden spike in inflation would crush already over-burdened consumers, put the economy in free-fall, accelerate the collapse of the US dollar, and prick the housing bubble. The only significant asset most Americans have, the family home, would then lose much of its value, and foreclosures would soar. And economists do expect rates to rise soon.
“Unemployment has leveled off”
Half a million Americans a month are giving up looking
for work every month. In more ways than one, they don’t count in the economists’ numbers.
“Employment will have to rise to keep pace”
There is every reason to believethat net new employment by large corporations will almost all be in India, China, and other third-world countries. Hiring overseas not only reduces costs, it puts money in the pockets of consumers in those countries who are more likely to spend it on the crap these companies produce (most of which is now manufactured in these countries anyways) than debt-ridden Americans would be.

So now you know what this important economic news means. Don’t you feel better now?

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  1. Jim Moran says:

    Your line ends are disappearing in the lavender boxes.

  2. Rayne says:

    I just read last evening that GLOBAL employment has fallen and is expected to continue to fall, even though many North American jobs have “outsourced” to Asia. Cheese-on-rice, is it ever going to get better?

  3. Jim Moran says:

    The formatting problem is not evident in Mozilla. It only appears in IE6.

  4. Dave Pollard says:

    Jim: I’ve looked at this in both Mozilla and IE6 and although the font is larger in IE it reads fine. Would you mind please sending me a screen print? Thanks.Rayne: Only when we take employment into our own hands and give up expecting large corporations to help. We just have to learn to do business ourselves, and with each other.

  5. Jay Currie says:

    First, congradulations on being selected one of Canada’s top blogs in November!Second, you are wildly mistaken in your analysis of the 7.2 GDP rise and 6% rise in consumer spending in 3Q America. You seem to be equating a rise in GDP with a rise in the Consumer Price Index. In fact they are two entirely seperate things. As importantly, the GDP measures broad economic activity and will not tend to be much effected by changes in housing prices on a quarter by quarter basis. I think that there is much to be said on whther or not the putative Bush Boom will create employment – at the moment we don’t know. But suggesting that a 7.2% increase in GDP is somehow a bad thing is economically so naive that anything else you say will be automatically discounted.

  6. Dave Pollard says:

    Jay: Thanks for your comments. I’m not suggesting a big increase in GDP is bad or good. The analysis I’ve read says that the increase was due almost entirely to the big jump in consumer spending and to a lesser extent a spike in corporate machinery purchases. Other analyses say that the increase in consumer spending is due to a combination of back-to-school purchases and the incessant huge increases in fixed, non-discretionary costs like mortgage payments, health and transportation costs. And other studies say that income in real terms isn’t rising, so the increase in spending must be coming from higher consumer debts. I’ve provided links in the article to where I get this understanding. So my logic, working the other way around, is that if you squeeze people’s incomes but force them to spend massively more every month on basic necessities of housing, health and transportation, and the skyrocketing cost of these necessities pushes up GDP, that increase in GDP isn’t necessarily a good thing for consumers and citizens. I’m not an economist, so if there’s an error in this logic, let me know.

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