GDP & the Economy

Today's final 4th quarter 2005 GDP report came in showing a 1.7% annualized growth rate for the quarter. Though this decline is concerning, the actual breakdown of contributions is even more concerning. The total increase in GDP during the 4th quarter was only $46 billion in chained 2000 dollars. (i.e., it was adjusted for inflation using the government-controlled BEA's own secret formula.)

Normally, consumer spending is 2/3rds of economic activity. This was not the case in the 4th quarter, however. In fact, personal consumption expenditures accounted for only $17.5 billion of that growth, or only 38%. The biggest contribution came from capital investment (overinvestment?) The total gross private domestic investment was $72.5 billion, or over 4 times as much as consumer spending. Of this investment, $51.2 billion is accounted for as increase in private inventories. In other words, $51.2 billion of the contribution to that $46 billion came from unsold goods (surplus.) With a GDP growth as low as it was, and an increase in unsold goods greater than the GDP increase, there are no signs that this is an economy that is "strong, and getting stronger." Producing 4 times more goods than Americans can purchase is a recipe for disaster. Since American consumers account for 80-90% of the purchase of American goods, this is especially concerning.

To complete the picture, the subtractions from the total GDP should be mentioned. Our 4th quarter trade balance was -$37.7 billion. Government spending declined $4-6 billion. (I'm giving a range, since the published numbers don't add up perfectly.)

Below is a modified copy of a chart showing this information from the U.S. Bureau of Economic Analysis:



The above chart can be found in its entire (unreadable) form at: BEA-GDP

Our economy is in MAJOR trouble if we continue to prop up our GDP with unsold inventories and overinvestment, instead of consumer spending. Our economy cannot continue to devote only a 38% fraction of GDP to consumer spending. Unsold inventories are worth nothing if they aren't sold. This is not a sustainable course.

unlawflcombatnt

EconomicPopulistCommentary

Economic Patriot Forum

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The economy needs balance between the "means of production" & "means of consumption."

The last company that I worked for used Just-In-Time (JIT) processing system implemented about 4 years ago.

JIT manufacturing

Implementing just-in-time production can:

prevent over-production
minimise waiting times and transport costs
save resources by streamlining your production systems
reduce the capital you have tied up in stock
dispense with the need for inventory operations
decrease product defects

The company did between 30 and 40 million dollars in business a year, and the savings of not having capital tied up in raw stock and finished inventory amounted to a few million dollars at any given time.

The down side of this, and I think this is discussed on the link I provide, is that, if there is downtime, the customer could charge the company a surcharge for any downtime. I know at one time that there was a 4 hour grace period and then it was $100,000 per hour for every hour down after that. For the managers of the company, the act of trying to keep from ever paying for downtime over-weighed the millions not tied up in inventory.

Some of the companies that are in the same business that "we" were did not seem to be able to understand the whole concept of JIT processing, so they reduced raw stock, but continued to put finished components in inventory, so it didn't save them that much.

JDub