Economists say Falling Inventories, Steady Unemployment and Shrinking GDP is actually Good News

Posted by PITHOCRATES - February 2nd, 2013

Weekin Review

There is a slew of bad economic news but you wouldn’t know that if you listened to the economists.  Who say that this bad news is some of the best news bad news can be.  Even with unemployment rate ticking up slightly and GDP shrinking they still see the glass is half full.  Eternal Keynesian optimists they are.  But even their explanations are cause for concern (see US economy shrinks 0.1 pct., 1st time in 3 ½ years by Christopher s. Rugaber, Associated Press, posted 1/30/2013 on Yahoo! Finance).

The U.S. economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. The decline occurred despite faster growth in consumer spending and business investment.

The Commerce Department said Wednesday that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That’s a sharp slowdown from the 3.1 percent growth rate in the July-September quarter and the first contraction since the second quarter of 2009.

Economists said the surprise decrease in the nation’s gross domestic product wasn’t as bad as it looked. The weakness was primarily the result of one-time factors. Government spending cuts and slower inventory growth subtracted a total of 2.6 percentage points from growth.

Those volatile categories offset a 2.2 percent increase in consumer spending, up from only 1.6 percent in the previous quarter. And business spending on equipment and software rose after shrinking over the summer…

Subpar growth has held back hiring. The economy has created about 150,000 jobs a month, on average, for the past two years. That’s barely enough to reduce the unemployment rate, which has been 7.8 percent for the past two months.

Keynesians focus on consumer spending.  For them an increase in consumer spending equals a healthy economy.  Despite that economy shrinking by 0.1%.  They explain that away as just being a fall in inventories.  As if businesses will go back to increasing their inventories in the next reporting period.  Making everything fine once again.  But if non-Keynesians take all of this data together they arrive at a different conclusion.  The economy is bad.  And will be getting worse.

Consumer spending rose while inventories fell.  And no one is hiring.  What does this mean?  Businesses above the retail level (wholesalers, manufacturers, industrial processors, raw material extraction, etc.) don’t like what they see.  So they’re cutting back production.  They’re not expanding or hiring people.  With these businesses producing less there is less product flowing into inventories.  With less flowing in while there’s more flowing out inventory levels fall.  Which eventually will lead to higher retail prices as goods become scarcer.  Leading to a fall in consumer spending.  And less hiring at the retail level.

So what does this mean?  Businesses above the retail level see a recession coming.  And they’re already hunkering down to limit their losses.

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