Taking Apart 3Q GDP and the Coming Double-Dip Recession

Gross domestic product grew at a 3.5 percent annual rate in 3Q.

This does not surprise me. In fact, I have a bet with Bob Murphy, made in January, that it would. This is what I wrote in January when most economists were saying that the GDP wouldn't turn positive until 2010:

...my whole point right along has been that the government will maneuver to make the official data look good. The real economy will be a mess.

Murphy predicts that there will be no net growth in real GDP during 2009. Again, expect the real economy to be a mess, but real GDP will turn positive no later than sometime during the second half of 2009

So there you have it, GDP is up and the economy is a mess. Again, I issue the challenge to find me any other economist that said the economy would be up AND a mess.

Most of these guys are trend followers, they forecast whatever they have seen in front of them for the last 80 minutes or so. One number can be off and they'll switch their forecast faster than Jamie McCourt switched from Frank McCourt to the Pillsbury doughboy.

How did I figure it? Because I forecast based on a theory. The theory being that where money goes, so goes the economy. Where the money doesn't go the economy doesn't go. I have been attacked for this theory from commenter's here at EPJ and buy some pretty impressive scientists. The charge is usually, "Your theory is very simple." No one attacks the theory itself. My response to this charge is that I have other simple theories. If you don't have gasoline in your tank, your car will not run. If you don't breathe oxygen, you will die. Simple, yet, effective theories by which forecasts can be made. Simplicity has nothing to do with the accuracy or non-accuracy of a theory. How reality based a theory is the key. If you want complex, follow the economist with their complex equations. As a Google programmer once said to me, their equations are very elaborate and clever in their attempt to try and get around the realty that you can't have such equations because there are no constants in the world of human action.

Yes, the complex does exist. Long Term Capital Management employed it, so did buyers of subprime syndicated mortgages. But if you want to make money, quit deluding yourself with the hocus pocus equations and focus on what you really can know, and money flows is one of the most important.

Back to the current GDP numbers, a huge chunk, and I am talking a huge chunk, occurred because of cash for clunkers. Excluding motor vehicles, third-quarter GDP advanced at only 1.9 percent pace.

On top of this, residential housing soared as a result of fist-time buyer programs, i.e., residential fixed investment surged by 23.4%, the largest rise since 1986. More directly, federal government spending increased 7.9%, after rising 11.4% in the second quarter.

What about the non-government economy?

Business spending reduced GDP by 0.24 percentage points. It fell by 2.5% in 3Q.

There you have it, a government manipulated GDP, with the rest of the economy a mess. What's worse is that when I made my forecast in January, Bernanke was printing billions of dollars that was finding its way into the stock market and these government programs. Bernanke, for all practical purposes, hasn't printed a dollar since February. This tells me the stock market spike is over and the overall economy is headed much lower. The positive GDP number here (and you could have one in 4Q) will mark the middle point of a W double-dip recession.