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GDP Catches Up

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GDP is 1%. That’s terrible. Our country is dying at 1% GDP.

Donald Trump, Third Debate

One of the great things about debating political points today is that anyone who actually knows what’s going on has no idea where to start. Trump was referring to the real (inflation adjusted) growth in Gross Domestic Product (GDP), which was lagging at the start of the year. But with a new number for the third quarter of 2016 showing a net 3.2% growth you have to wonder – What is this guy talking about?

The short version is that it bounces around all over the place. The long answer takes a lot of graphs. Welcome to Barataria, land of the long answer. Prepare for some hand waving.

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A Critical Weekend

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Monday is Labor Day.  This is a critical day for labor in America because its success is about to define our economic future, at least for the next few months.  By the time you read this, you may know how many jobs were officially created in August.  If it was 220k or more a September increase in the Fed Funds rate is likely.  If it was under 180k there probably will not be a rate increase.

The ADP Employment Report, which is less prone to noise in the first place, came in with a middling 190k gain in jobs.

What’s great about this is that Labor’s success in the last month could kill the stock market, pitting labor directly against investment.  There’s nothing productive about that arrangement, but it highlights how strange the world has been.  This oddly critical holiday is a good time to recap some of the topics that Barataria has gone over the last few months.

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Drama Over Yet?

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The stock market has rallied for two days, with the S&P500 back at 1987 from its low of 1869. It’s still down 6.8% from its peak of 2130, set in May, (and nearly matched just a month ago) and down 3.5% for the year. It’s almost like the crash never happened, right?

Well, no. But there is a lot of good news for the underlying economy, some of which came in this week. The really good news is still out into next year, which is essentially forever to this market. We have to get over an interest rate hike, which will definitely come this year no matter what you read elsewhere, and a lot of jitters.

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Growth is … ?

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“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”
– Kenneth Boulding

The figure for growth in Gross Domestic Product (GDP) growth for the second quarter came in, and it wasn’t bad – 2.3%, and the revision to the first quarter was a positive if sluggish 0.6%. Like so many economic figures it’s not great but it’s also not bad. We’re still muddling through this year hoping to make it through to better times ahead.

But will there be better times? The Federal Reserve accidentally posted on its website, briefly, some internal estimates from their own economists that show that where 2015 and 2016 won’t be too bad, with growth in the 2.3-2.4% range, it may taper off after that. But can we expect better? Should we, for that matter, expect more growth from the economy?

Or is one of the big changes in this new economy a much lower growth rate than we are used to?

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Chinese Meltdown, Latin America Next?

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The long anticipated meltdown in Chinese stocks has accelerated this week, although it took a break today. Whether or not it has implications for the broader economy in China and around the world is unclear, given how little China relies on its stock market for financing and growth.

It’s all about the “carry trade”, or ability to borrow money in a foreign currency (usually US Dollars) at low interest rates and invest it at home in the hope that the local currency (Renminbi, or “people’s currency”) will become more valuable relative to the foreign currency later. It’s a two-fer if you can invest it in something that appears to be gaining in value, such as local stocks, and Chinese investors went for it bigtime.

Yes, it was all another bubble waiting to pop, which it appears to be doing now. But can this hurt us? Speculation has centered on trade with Latin America, which has its own uneven growth and a growing reliance on China. But this is silly for a lot of reasons. It’s worth looking at Latin America as a unit and seeing what effects we can really expect.

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