Investors Would Be Wise Not To Fixate On GDP

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by: Bruce Wilds
GDP shows recent strong growth in GDP

Investors would be wise not to fixate on America's recent GDP, accepting it as a sign or verification the economy is hitting on all cylinders. If investors fall into the trap of focusing on the GDP and lock onto this number as a confirmation that all is well, they may be in for a huge surprise. The fact is the GDP is a poor reflection of the quality of economic growth. It is also important to remember that a lot is happening across the world, and the troubled economies of both the EU and China will feed into near-term market moves. When you throw in trade wars and the fact that central banks are beginning to see they must deal with the problems flowing from years of QE, it becomes easy to make an argument that caution is in order.

It is my personal opinion that Japan - another huge international economy which has quietly tried to stay out of the spotlight when it comes to trade - may be damaged by problems spilling out of China. Up until now, Japan has done a rather good job of allowing China and Mexico to absorb the bulk of Trump's trade tantrums and tariffs by constantly reminding us that it is a long-time ally that stands with us against China and North Korea. Prime Minister Shinzo Abe's administration has walked a tightrope. Decades of experience has taught Japan that when it comes to trade issues, it is best to maintain a low profile because it is a game they cannot win.

Still, the links and ties between China and Japan are strong, and problems in China do not bode well for Prime Minister Shinzo Abe's administration as it attempts to balance snowballing social security costs and increased defense spending. When we look closely, it is easy to see the concern within Japan that the economy is just getting by. Abe has had to promise a stimulus package to offset the negative impact of a planned increase in the nationwide consumption tax beginning in October 2019, making it unlikely that Japan will shed its status as having the worst fiscal health among advanced economies anytime soon. Sadly, what is seen by many as "a good economy" is simply an illusion build of massive deficit spending.

Federal spending is skyrocketing

Here in America, many investors point to an improving GDP as proof of an economic rebirth; however, it is difficult to ignore that the national debt is not just growing but is exploding. A recent report issued by the Office of Management and Budget that went largely unnoticed, titled the "Mid-Session Review," paints a far bleaker forecast of the deficit going forward than originally predicted. The illusion of a robust economy has been propelled forward by the sheer mass and sum of economic growth rather than its caliber or quality.

This spending has been exacerbated by the stupidity of Congress passing an Omnibus Spending Bill with little thought as to how the spending would play out. It has now become apparent that over the final weeks of fiscal 2018, the government is slated to embark on a spending spree of historic proportions as federal agencies look to spend $140 billion more than they expected to receive prior to the bill being passed. I concede that rushing to spend this money as fast as possible should bolster things over the near term but may prove extremely wasteful. Circling back to the crux of this article is the fact we have allowed numbers that mean "nothing" to seep into how the gross domestic product (GDP) is calculated, all in an effort to create the illusion of growth.

In 1962, Kuznets, the father of the GDP formula emphasized that we must keep in mind the difference between quantity and the quality of growth. He made clear a distinction exists between cost and returns. This translates into the reality that the number we are spoon-fed and await with such glee has little to do with real growth but often simply mirrors, or is merely a reflection of, monetary pumping. The GDP number fails to highlight a slew of important factors that feed directly into our standard of living and the health of our economy. The landscape of our economic future becomes far more uncertain when putting into perspective how flawed the GDP number is. It is not in any way an accurate forecaster of growth, and should not be considered an indicator confirming a trend or real strength in the economy. It should be noted this is not a problem occurring just in America but across the world.