Economy grows because of fewer imports

October 31, 2014


The economy grew at a 3.5% annualized rate last quarter, in large part because of fewer imports. It shows that analysts are wrong to rely on debt-driven consumer spending to fuel growth.

The reason they are wrong is because we don't want consumer spending to be the basis of our next level of growth.  We want investment and net exports to drive our growth.  America needs to produce a bit more of what it consumes.

The economy grew at a solid pace during the third quarter, driven by an uptick in military spending and a drop in imports, showing the U.S. on relatively firm footing as worries mount about a global slowdown. (Wall Street Journal)

GDP includes the sum of four factors: consumption, investment, government procurement and net exports.  Our investment has been down as foreign mercantilists and trade cheaters work to de-industrialize America.  That lessens GDP growth.

Net imports subtract from/lessen GDP.

We've been relying upon consumption for over 70% of GDP, which is proportionately too high.  We consume more than our production and incomes would allow.  It is debt-fueled consumption.  Financial services industries like it, but not the real economy.  And, by the way, debt-fueled consumption is unsustainable.  Income/production-based consumption is eminently sustainable.

This is a quote I want to focus upon.

The report showed few signs of a breakout for consumer spending, which was up 2.3% from a year earlier, little-changed from the pace of the past two years. Consumer spending accounts for two-thirds of U.S. economic output.

We don't want "a breakout for consumer spending".  If consumer spending is indeed 66% (instead of 71%, for example) of GDP last quarter, that would be good news.  Instead, we want a "breakout" for investment and net exports.  If production increases here, we get that.  We get more growth.  We get income-fueled consumer spending.  We get a sustainable recovery with jobs... not a jobless recovery sustained by debt accumulation.

Here is a schizophrenic paragraph:

More robust buying among consumers would be particularly important in cushioning the U.S. if demand slows abroad. While households should benefit during the holiday-shopping season from gas prices falling to a four-year low of $3 a gallon, weak income growth remains a concern and is restraining many sectors of the economy. The nation’s housing market, for example, contributed little to growth.

The paragraph is schizophrenic in that (a) it asserts that proportionately more consumer spending is better, when we just had a big quarter based upon investment and net trade improvements; (b) if consumption increases here so as to improve demand in other countries (we buy even more of their stuff), then the trade deficit increases and we get more demand leakage that helps tank our economy via debt-fueled consumption.  (c)  Weak income growth that undercuts consumption is because we don't produce enough in this country to actually make purchases to the level needed for balanced growth. 

You have to produce before you can consume.  After the credit card runs out, anyway.

Balancing trade means we produce more here in relation to consumption.  A direct impact on positive growth.  Then we get the investment bump... a big deal... which spurs growth.  Fewer people on unemployment and food stamps.  They can consume (fueling growth) and the government doesn't foot the safety net bill for them any more.

The mini-moral here is that you should distrust those analysts who want consumption to be the driver of economic recovery.  That is a recipe for disaster.  We want investment and net exports to fuel our recover.  Then we get to be the unrivaled global power again, rather than America in decline.  Oh... and our standard of living rises broadly, which is the ultimate goal.

Be the first to comment

Please check your e-mail for a link to activate your account.