Never bark at the Big Dog. The Big Dog is always right.
The GDP data for the third quarter is out. The V-shaped recovery is a fact.
I predicted exactly this back in May. So did President Trump. We both did it in the face of bold, almost condescending forecasts from economists all over the country, the world even, who predicted a protracted recession that would last all the way to 2022.
Some of them, of course, wished for a long recession so Trump would not get re-elected, but those who thought they were just doing their job now have some new homework to do. Their stubborn reliance on econometrics for forecasting once again came back like those proverbial, roosting chickens.
I, on the other hand, work with theory and methodology from good old political economy. Over and over again, John Maynard Keynes, Friedrich von Hayek, Frank Knight, Arthur Okun, Paul Davidson, George Shackle and Armen Alchian prove their superiority.
Now that the gloating is done, let’s see what Trump’s V-shaped recovery looks like. According to the advance estimate from the Bureau of Economic Analysis (BEA), inflation-adjusted GDP increased by 7.4 percent from Q2 to Q3.* Private consumption roared back with an 8.9-percent increase. Most of that came in the form of durables, which ostensibly has to do with the windfall income from the stimulus checks.
It remains to be seen exactly what people spent their money on, but it is reasonable to expect a combination fo windfall consumption and the advantage of cheap credit. The part of the stimulus checks that did not go toward paying down debt was likely used for home electronics: phones, computers, flat-screen TVs. In other words, items that did not come with long-term installment payments.
On the other hand, once the recovery was underway and people got their jobs back, extremely cheap consumer credit appears to have stimulated car sales again. We should have a better grip on the details in late November.
Another big, good news item in the Q3 GDP numbers is gross fixed capital formation, or business investments. Up 16.3 percent from Q2, America’s businesses are once again putting their money into the Trump economy.
The biggest improvement in investments, 14.2 percent, came in the form of equipment purchases. This covers everything that can be put into a factory or an office for the purpose of business operations, as well as things needed for shipping and deliveries. Think of “equipment” as everything from delivery trucks and wrenches to computers and assembly-line robots.
Another show of commitment to the Trump economy comes in the form of housing. Investments in residential dwellings rose more than 12.3 percent over Q2. In fact, home construction was 6.6 percent higher in Q3 than it was in Q3 2019!
Home construction intersects business confidence with consumer confidence. If people buy homes, they believe in their own financial future. If businesses build those homes, they believe in the local economy.
But wait – we are not done with the good news. While fiscal conservatives rightly criticized Congress for its stimulus checks, government consumption – spending that pays people to do work – was down more than 1.1 percent in Q3 over Q2. Non-defense consumption by the federal government was down a healthy 4.9 percent; the equivalent for states and local governments dropped a minute 0.8 percent.
At the same time, defense spending rose by three quarters of a percent. Again, a good priority by the federal government. Unfortunately, the annual numbers for federal spending do not look as good: from Q3 in 2019 to Q3 this year, federal non-defense consumption is up almost 4.2 percent. Hopefully, the restraint shown in Q3 over Q2 will be extended into Q4.
Speaking of annual numbers: U.S. GDP in Q3 was $18,584 billion in inflation-adjusted numbers (base year 2012). This is 2.9 percent below where it was in Q3 last year. If this V-shaped recovery continues, it is not impossible that real GDP for the whole year will be positive. It is a tall order, requiring an unlikely 3.6-percent increase for Q4, but if Trump is re-elected and Biden’s ominous tax plan withers away, this growth number can actually materialize.
Again, the latest numbers from the Bureau of Economic Analysis are all good news. The not-so-good news is in the hints of inflation in these numbers. A simple subtraction of real GDP from current-price GDP – a crude inflation estimate – suggests a price bubble in Q3. By this calculation, prices on consumer durables rose 2.4 percent from Q2, a remarkably high price increase.
It is worth noting that the same prices dropped by only 0.8 percent in Q2. This could all be attributable to the aforementioned windfall spending, but I would not rule out that we are seeing the first hints of a monetarily driven spike in inflation. Let us keep in mind that Q3 was the first quarter when the Federal Reserve’s new MMT-style money printing made its first full appearance in the economy.
I hold it for unlikely that the money-to-prices transmission mechanisms have already kicked in with the force needed to spike prices, but I do not rule it out. Let us not forget that the velocity of money has dropped below 1 for the first time on record. This is dangerous: ultra-cheap liquidity always finds its way out somewhere in the economy. First it flows into equity markets – hence our stock-market boom – then it finds its way into consumer markets via cheap credit and government handouts.
We saw the first combination of that this year. The brunt of the handouts was temporary, which means that part of the transmission mechanism from money to prices has been turned off again. However, if Congress persists in its plans for another stimulus bill, the inflation outlook may change very quickly.
The BEA also published some interesting numbers on personal income. We will have to return to those later. Enjoy the rest of your day!
*) Normally I do not discuss quarter-to-quarter numbers, but due to the exceptional nature of the swings in the economy this year, it is merited to make an exception.