Economists
look to GDP to determine if the US economy is in a recession. Generally, it
takes two quarters of the economy shrinking (economists call it negative
growth, but they’re linguistically challenged) for the National Bureau of
Economic Research to declare a recession. Of course, those two quarters
indicate the bottom of the recession, by definition.
The
problem with GDP accounting is that it ignores about half the economy. GDP was
designed to calculate new, value added production. Using standard accounting
lingo, GDP is not gross anything; it’s net production. Net numbers, such as net
profit, are the gross (total) sales minus the costs of doing business, such as
material costs. That’s GDP. So GDP mostly counts retail sales and government
spending while leaving out most industrial production. And that’s one reason
that recessions take mainstream economists by surprise.
Recessions
start in the mining, energy, industrial production sectors that are missing
from GDP. They spread to shipping, railroads and trucking and finally hit
retail, GDP, last. The odds are good that the US will hit its two quarters of
shrinking GDP early next year, but that won’t be the beginning of the
recession. It will be the bottom. The beginning will be calculated from the
peak of previous GDP growth, probably the second quarter of 2015.
We
have been watching the slow motion destruction of the industrial/capital goods
sector for a while: Year-over-Year, Durable Goods orders tumbled 3.6%,
accelerating weakness from August, according to Zero Hedge.
From
railroads to manufacturers to energy producers, businesses say they are facing
a protracted slowdown in production, sales and employment that will spill into
next year. Some of them say they are already experiencing a downturn, said a recent WSJ
article.
“The
industrial environment’s in a recession. I don’t care what anybody says,”
Daniel Florness, chief financial officer of Fastenal Co., told investors and
analysts earlier this month.
Most
of the new jobs created since the recession have come from the oil and
gas industry: Direct
employment in the oil and gas industry rose 40% from 2007 through 2013, as
compared to a decline of about 3% in the overall U.S. economy. With the bust in
oil and natural gas prices, those jobs are evaporating.
Caterpillar, the
epitome of capital
goods production, has lost sales for a couple of years and looks forward to a
bleak future: Caterpillar said Thursday that its full-year sales and revenue
for 2015 and 2016 have weakened, with 2016 revenue now projected to be 5% lower
than 2015′s already diminished levels.
Walmart
is facing declining sales and that may mean that the disaster in industrial
production is finally bleeding over into retail. It's only a matter of time
before the stock market catches on and corrects the over valuation that has
caused it to sail far above that justified by profits.
http://affluentinvestor.com/2015/11/how-gdp-data-blocks-us-from-seeing-the-recession/
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