Rob Arnott on bogus U.S. GDP numbers... 5/15/2011

U.S. GDP numbers are totally bogus because they fail to take into account how much of the economic expansion is government stimulus driven by federal deficit spending. Remove that deficit spending and the U.S. economy is essentially bottom-bouncing along the same GDP levels as back in 1998. Our economy is showing no signs of sustainable recovery.



Here are some quotes from the article. And, you can read the entire article HERE:



But what if the [GDP] number turns out be fake? That's the provocative question posed by renowned U.S. money manager Rob Arnott, who makes a convincing argument that what passes for growth in the U.S. and a bunch of other deficit-ridden economies is less than it seems.



... the chairman of California-based Research Affiliates is absolutely certain that next week's revised U.S. GDP number will be as bogus as a three-dollar bill. That's because it will not take into account how much of the American expansion stems from the government's deficit-spending binge.



Gross domestic product is used to measure a country's economic growth and standard of living. It measures neither, Mr. Arnott says flatly. GDP measures spending. It does not measure prosperity. Unfortunately, the finance community and global centres of power are wedded to a measure that bears little relation to reality.



The problem, he argues, is that the GDP figure fed to the public does not distinguish between consumption that is covered by current income and that which is financed by deficit spending. He likens it to a family with too many credit cards. The more credit they use, the higher the family GDP climbs. But that expansion is unsustainable. Once they are forced to slice up their cards, their GDP must plunge.



People would have a truer gauge of the economy's performance if the government provided what he calls structural GDP, which does not include debt-financed consumption. Currently, per capita GDP in the U.S. is not far off an all-time high. But excluding deficit spending, the real number is 10 per cent below the peak reached in 2007. Indeed, it has fallen back to levels not seen since 1998.



If structural GDP fails to grow as a consequence of our deficits, then deficit-spending has failed in its sole and singular purpose, he says. What we find is that this recession is horrific.



He would also isolate private-sector GDP by subtracting government spending (excluding transfers). Lo and behold, this measure is also back at its 1998 level. What his calculations show is an economy bottom bouncing and showing no signs of recovery. All we're doing is borrowing more and spending more. That's the only GDP growth we've got.



Ultimately, the addiction to debt-financed consumption has got to come down.



What should an investor make of all this?



As deficit-spending is reined in, either voluntarily or because the capital markets choke on new debt, that could have an effect on capital markets as quantitative easing winds down, Mr. Arnott says. It's hard to identify uncertainties that could drive markets massively higher, but relatively easy to identify those that could drive them massively lower.



Which means now is a wonderful time to have a very defensive investment posture.