The second quarter GDP, as reported by the Bureau of Economic Analysis on August 28, demonstrated an annualized growth rate of 4.2 percent. This follows a contraction of 2.1 percent in the first quarter. What, then, has driven this turnaround so dramatically from one quarter to the next?
According to the BEA report, the uptick in real GDP can mainly be attributed to increased exports, private inventory investment, and a rise in personal consumption expenditures (PCE). Additionally, there was notable growth in nonresidential fixed investment, as well as state and local government spending, despite being partially offset by a rise in imports. It all sounds quite promising, indicating a robust economic expansion.
However, many households do not feel this positive shift. The inflation-adjusted earnings of Americans per hour are lower today compared to five years ago, even while corporate profits soar to new heights.
You might assume that an expanding economy and record corporate profits would lead to a surge in job creation. Unfortunately, this has not been the case; new job growth is occurring at a slow pace.
The latest report from the Bureau of Labor Statistics revealed an increase of only 142,000 new jobs in August. Although the unemployment rate fell, this was primarily due to a decrease in the labor participation rate. If the economy is indeed growing at 4.2 percent and corporate profits are reaching all-time highs, then something seems to be amiss in terms of job creation and income stability.
A Discrepancy in Growth
The exact reason for this discrepancy remains unclear, but monetary policy may play a significant role. After six years of a zero interest rate policy, it is likely impacting the economy in ways we cannot fully understand.
For instance, the Federal Reserve’s artificially low interest rates have encouraged corporate executives to borrow funds and engage in stock buybacks. As a result, the average total compensation for the top 500 executives has reached $30.3 million. Essentially, Fed policy has provided executives an opportunity to manipulate the system for their personal gain.
The Federal Reserve believes that keeping interest rates at zero will motivate banks to lend more and encourage consumers to spend instead of save. Their expectation is that increased borrowing and spending will lead to higher demand, enhanced growth, and job creation. However, this expected outcome has not materialized.
What has occurred, instead, is significant inflation in the stock market. This phenomenon has contributed to the narrative that the economy is thriving. After all, record highs in the stock market must indicate a strong economy, right?
Not necessarily. There seems to be a disconnect between the stock market and the real economy. This discrepancy likely arises from the Fed’s aggressive monetary policies. Eventually, this gap between asset prices and actual economic health will need to reconcile, likely resulting in a decline in stock prices.
The Impending Breakdown
When the stock market eventually falters, the comforting illusion it has cast over the economy will vanish. With this, panic will ensue, prompting urgent calls for government intervention. Such a response will likely entail renewed bailouts, increased credit creation, and the socialization of private losses.
The architects of these policies will persist in their actions, continuing to inject “funny money” and credit into the system until an ultimate collapse occurs. They seem incapable of recognizing that artificially inflating GDP by encouraging consumer debt represents illusory growth that depletes capital and erodes wealth.
In reality, sustainable long-term economic health hinges on increased savings and investment rather than accumulating debt. Yet, this requires effort.
In today’s landscape, hard work, prudence, and thoughtful consideration are increasingly undervalued. Consequently, the public often supports reckless fiscal policies and continues to vote for leaders who promise more entitlements. Ultimately, many people desire bailouts, safety nets, and government support throughout their lives, opting to relinquish personal responsibility in exchange for economic security.
In essence, they seek something for nothing. We regret having to state this, but the evidence is undeniable. This, in summary, outlines why we are facing a grim future.
Sincerely,
MN Gordon
for Economic Prism
