As Mark Twain once said, “There are three kinds of lies: lies, damned lies, and statistics.” To me, this nicely sums up recent economic figures that suggest America has escaped the clutches of another great depression and is on the way to a sustained recovery. Government reports say that GDP rose at an annualized rate of 3.5% in the third quarter compared with the second. This was the first increase since the second quarter of 2008. However, as GDP grew consumers grew more skeptical as indicated by a fall in the consumer confidence index. A poll in The Economist found that 35% of respondents think the economy is getting worse; just 28% think it is getting better. Unemployment is still rising, and even a White House adviser, Christina Romer, predicts it will remain “severely elevated” throughout next year.
A lot of the third-quarter GDP growth was the result of temporary government stimulus like the cash for clunkers and new home buyer tax credits (which were recently extended into 2010). Consumer spending grew by 3.4%, the best since early 2007, largely because people were buying new cars in July and August under the CARS and new car tax deduction programs. Sales have since fallen back. Residential construction leapt by 23.4%, the first advance since the end of 2005, helped by an $8,000 tax credit for buyers of new homes. But new-home sales dipped by 3.6% in September, as the deadline to qualify for the credit loomed. Of course the statistics the government and Obama administration officials discuss are the positive ones.
Similarly, the Obama administration released the most detailed information yet on the jobs created by the stimulus. Of the 640,239 jobs recipients claimed to have created or saved so far, officials said, more than half — 325,000 — were in education. Most were teachers’ jobs that states said were saved when stimulus money averted a need for layoffs. Yet many have cited the high unemployment figure, at 9.8 percent, as proof of the failure of the stimulus, which they voted overwhelmingly opposed. This is countered by supporters of expanding the stimulus programs, who say that these payments helped avert a second Great Depression.
Many polls and anecdotal evidence show that most Americans are more worried about the economy more than anything else. After all it hits closer to home than any other macro issue. To appease this, it is likely the Obama will keep the stimulus spigots flowing – case in point, another $250 social security stimulus in 2010. Other programs would extend health insurance and unemployment-insurance benefits by 14-20 weeks for some jobless workers, while providing more food stamps to many struggling families. These measures are ones taken in a struggling economy and not in a robust one.
It’s still too early to tell if growth in the third quarter reflects the dynamics of a genuine recovery. Until housing and unemployment show a sustained recovery (3 or more quarters), it’s premature to say that the country and the world are out the dark economic woods. While more stimulus are probably needed to keep economic growth moving along this year, they will add to an already dangerously high deficit. The upcoming Federal reserve meeting will provide an interesting gauge of where officials think the economy is headed (look for a big stock market reaction on that day), but I hope that lessons learnt over the last couple of years are heeded. Statistics tend to provide a partial picture and as we have seen in the past can vary sharply from one quarter to another. From a personal perspective, I think it is worth taking a few more risks as a long term investor, but still keep up a conservative approach to managing your day-to-day finances and career.
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