Wednesday, August 3, 2011

Current State of the Economy

The latest GDP numbers came out last Friday, and they point to the start of the next leg down in nominal terms. Although the initial estimate for the second quarter of 2011 came in at 1.3 percent as far as the nominal GDP is concerned, earlier quarters were revised downward. The nominal GDP growth for the first quarter of 2011 was revised downward from 1.9% to 0.4%. The GDP number for the second quarter of 2011 is virtually guaranteed to be revised downward in the coming months which would likely put it below zero. The US economy is now declining in nominal terms, not just real terms.

The nominal GDP does not tell the full story, and the rising GDP numbers since 2000 reflects the relentless devaluation of the dollar rather than economic growth. We must get the Real GDP, which is GDP after adjusting for inflation. We turn to Shadow Government Statistics to get the actual inflation numbers, which would then allow the Real GDP to be evaluated.

The government has changed the formula for evaluating the inflation rate and the unemployment rate a number of times, often for political reasons. There has recently been talk of the Obama Administration putting lipstick on the pig known as inflation with the chained CPI. This is the reason why we go to to get the actual numbers.

Here is a chart of the Real GDP of the United States economy.

As the chart shows, the US economy has been steadily declining since 2000. So far, the US economy has erased 18 years of growth, and now produces the same amount of goods and services as it did in 1983. The chart clearly shows that we are in a major depression. The decline from the peak so far is almost as large as the decline that took place during the Great Depression, and yet, we are still seeing calls for a recovery, such as this one.

The US economy is still sliding down the Slope of Hope. As we get closer to the "point of recognition", we start to see signs of the coming event. People are starting to recognize the true magnitude of the bear market that we are in, as evidenced by this poll, which indicates that 39% of people think that the economy is in permanent decline.

The "point of recognition" should take place around October 2013, and it will be known as "The Great Panic of 2013". This would also be when economists and analysts start to recognize that a major depression is in progress. This would be the center of Cycle wave c (2007 - 2021).

It is also worth mentioning that the chasm between the rich and the working class is still growing larger, which is consistent with a bear market rally, rather than a real economic recovery.  In a real economic recovery, the working class would be gaining ground relative to the rich over time -- this did not happen in 2002 - 2007 and it is not happening now.

Here is a chart of the DJIA from 1974, showing the fraction of nominal GDP growth that went to corporate profits and wages. Notice the progressively weaker breadth after 2000.

The information on the chart comes from a study of the so-called "jobless recovery" following the 2009 low. Just 1 percent of the nominal GDP growth went to wages as of the fourth quarter of 2010. Virtually all of the nominal GDP growth went to corporate profits. In the first quarter of 2011, the fraction of nominal GDP growth that went to wages was actually negative. By comparison, 25% - 35% of nominal GDP growth went to wages in the economic recovery following the recessions that ended in 1982 and 1991, and following the major recession that ended in 1974.

Here is a chart relating "wave personality" to the economy and job market.

As I indicated in an earlier post on job market fundamentals, the weakening breadth that has been unfolding since the 2009 low in the DJIA is not consistent with a real economic recovery. A real economic recovery is associated with the start of a new bull market.

As I predicted, we are seeing a lot of talk about a "double dip recession". Expect this to continue until October 2013, when the "Great Panic of 2013" takes place. Expect President Obama to continue playing the "bump in the road" card even as the layoffs accelerate in the job market until October 2013.

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