“Economy grows….stock market tanks!”

Wednesday, July 30th, the first estimate for second quarter GDP came out. Between May and June the U.S. Gross Domestic Product was said to have grown at a 4% annual rate, the best in a decade. Normally such news would send the stock markets to a new record. Instead, the Dow Jones Industrial Average fell 2.5% in three days, with other indices in America and Europe following suit.

One can only conclude that the “good news” is not fully believable, and that the estimate is wildly optimistic. If so, what kind of economy does the country really have?

Let us note that the 4% growth rate comes after a 2.1% contraction in the first quarter, a shift of over 6%. In an economy as large as ours this would require some major event, such as the start of a huge investment program (think of the industrial build-up of WW II). Nothing of the sort is in the works. The January-to-March contraction was attributed to “bad winter weather”. Then spring brought 4% growth. To achieve this, the American consumer must be spending on a massive scale, but stores are not fuller today than four months ago.

So the numbers are too good to be true, which explains Wall Street’s reaction. Rosy numbers usually hide a less pleasant reality. In that case it is prudent to sell, and the market drops as it did two weeks ago.

The reality hidden behind the optimistic numbers is the steady loss of jobs, income, hard assets values and technology that began with the general shift to  “outsourcing” in the 1980’s – the sending abroad of productive work to low-wage, poorly regulated locales such as China.

The outsourcing process does not only affect manufacturing – although up to 8 million full-time jobs have been transferred abroad in that sector alone. Following production-line workers go managers and engineers, accountants and lawyers, corporate buyers and union shop stewards, research and development experts. All these are well-paid, career positions requiring education, training and experience. Those skills are lost together with the salaries, tax income and potential for innovation.

In the U.S. 70% of the Gross Domestic Product is consumer spending. If individual and household income drops economic contraction inevitably follows with a few years delay. A policy of job exports will thus lead to a spiraling recession, with all its negative political consequences. There are several ways to mitigate and or delay such an outcome:

–         Replace productive investment with financial speculation.

–         Compensate for the lost income through maximizing debt and credit

–         Increase government deficit spending

–         Expand existing forms of welfare and develop new ones.

All these policies can, for some time, provide the illusion that the economy is continuing to grow, as well as relieve the discomfort caused by the loss of income. It will be clear to any observer of the U.S. political scene that all of them have been extensively applied since the crash of 2007:

–         Since 2007 federal deficits have averaged one trillion per year. This has been made possible by the Federal Reserve lowering interest rates to near zero, thus reducing interest payments on the national debt.

–         The number of people on various income-support programs has exploded even while the labor participation rate has continuously declined.

–         The financial sector has hugely expanded, creating the new elite of the super-rich.

–         Household debt has reached unsustainable levels, curtailing consumer spending and economic expansion.

The income pyramid has been transformed. The top 20% have enjoyed a large increase in wealth, much of it resulting from ownership of financial assets. This portion of the population has been responsible for nearly all the increase in consumer spending in the post-2008 “recovery”.

Immediately below, the old middle-class is shrinking, with some rising to the top 20% and the majority losing income as full-time jobs become part-time. The aggregate income of this “bottom 80%” has been static for a decade once welfare programs are taken out.

This is an economic system without substance, viable only as long as the Federal Reserve supports it with trillions in printed money. This will not last forever. The current malaise in the markets can be a warning of the approaching end.

Born in Poland, Jacek Popiel was educated in Africa, Canada, and the United States. He speaks five languages. His career spans military and international business development in the Soviet Union, Eastern and Western Europe, North America, and Japan. He is currently a freelance writer and political consultant. His book “Viable Energy Now,” grew out of his military and international business experience and his professional involvement with energy issues.