On Thursday, just days before the final day of voting, Trump will get some “good news” about economic growth in the third quarter. But beware, what he will say, and what the business press are already saying, is wrong. For example, MarketWatch is out now with a story about earnings announcements expected this week, but in the article is a section titled: GDP FOR THE RECORD BOOKS and below this MarketWatch reports that
Beyond earnings reports this week, investors also will follow the first reading of third-quarter GDP due Thursday, which is expected to show a rise in economic activity of 31.8% annualized, more than making up for the 31.4% plunge in the worst part of the pandemic.
A little simple math will show you what’s wrong with this. If you start at 100 at the end of the first quarter, and report a 31.4% plunge, you are left with an economy only 68.6% the size of what is was. An increase of 31.8%--the expected figure—in that shrunken economy gets your original size not back over 100% of what it was, but only to 90.4% (68.6 X 1.318) of the original figure.
In other words, the recovery still leaves the original economy down nearly 10% from what it was. This is why why so many are still unemployed and why Fed officials and Democrats are calling for massive assistance in the form of passing at least a two trillion dollar relief bill to make up the huge hole left in an economy already starting to struggle with a third wave of COVID-19 that threatens to dwarf the first two waves in impact. But expect the press, which even in the best of time is math challenged, to bollux this up and leave the impression that the economy is back and even higher than ever.
It isn’t.
This is an important message to get across to the final surge of low information voters who vote for the business guy because he’s “good for the economy”. It just ain’t so. And a little math exercise will prove it.
The US economy at the end of 2019 was reported as 21.43 trillion. Taking that number as the base (which isn’t quite right since it grew a little bit in the first quarter), it shrank to 14.7 trillion in the second quarter with that 31.4% collapse. That 31.8% bounce in the third quarter gets us back to 19.37 trillion in GDP, leaving a 2.06 trillion dollar hole in the 2019 final figure. That’s why McConnel’s 500 billion skinny bill was so bad.
Knock a hole about 10% of the size of the area of the bottom of your boat, and see how long it floats. That is a BIG hole. Pasting a 500 billion bandaid over a 2 trillion dollar hole won’t work. Even Wolf Blitzer might be able to figure that out if he works at it.
A multi-trillion dollar economy slashed by roughly 10% leaves this massive hole in demand, and that hole is already seeing a surge in firings. That hole will only grow as the effect of the first relief bills fade over the next month or two and as the plague increases in intensity and as flu joins COVID in crippling an a considerably shrunken and limping economy. This is why Nancy Pelosi and the Democrats have been screaming for the Republicans and Trump to wake up and take action on a new, and appropriately sized relief bill that addresses the real impact, and the added costs and drags on the economy, of the COVID crisis. That is why they acted back at the end of May to provide more relief.
The economic pain felt now, and to be felt even more soon, is ALL on the Republicans and Trump.
This is no recovery. It is more like a dead cat bounce, and any investor knows what that is. (Stems from the saying that even a dead cat will bounce—which means a bounce does not necessarily translate into a lively economy despite first impressions.)