Composite Leading Indicators point to broad economic recovery. OECD composite leading indicators (CLIs) for July 2009 show stronger signs of recovery in most of the OECD economies. Clear signals of recovery are now visible in all major seven economies, in particular in France and Italy, as well as in China, India and Russia.
– Organization for Economic Co-operation and Development, Sept. 11, 2009
The economists of the OECD are far more serious and credible than the likes of CNBC’s Jim Cramer, who errantly announced the end of the recession in April. And, yet, they are no more likely to be correct about the economic recovery they are now forecasting than they were back in 2007, when they predicted 2008 GDP growth of 2.8 percent in the United States and 5.2 percent for the global economy. This is not to say that their optimism is baseless; there are a number of factors which tend to suggest that the economic situation has reversed and things are on the verge of improving soon.
The stock market has rocketed 50 percent higher from its March lows. France and Germany reported modest but positive GDP growth in the second quarter. U.S. plant capacity use has risen. General Motors has recalled 1,350 workers as part of a second-half production increase. According to the latest reports, retail sales have risen, and the Case-Shiller Housing Index showed higher housing prices. These are the realization of the green shoots that Federal Reserve chairman Ben Bernanke detected back in March. It should come as no surprise, although it will probably be covered as a major one by the financial media, when third-quarter GDP is reported back in positive territory. Therefore, one could be excused for believing that the massive global stimulus program enacted by the world’s fiscal and monetary authorities must have worked, that the worst is well behind us, and that we can safely anticipate a prosperous future of strong economic growth.
Unfortunately, all of this good news is reliant upon a combination of statistical chicanery and a failure to correctly apply the very economic theory upon which the mainstream macroeconomic statistics are based. Both the chicanery and the failure could be expected, as the attempted manipulation of statistics is normal government behavior while the failure is the inevitable result of confusing the map with the land. Consider, for a moment, the composite leading indicators from which the OECD’s economists have drawn their conclusions:
OECD CLIs are constructed from economic time series that have similar cyclical fluctuations to those of the business cycle but which precede those of the business cycle. Typically movements in GDP are used as a proxy for the business cycle but, because they are available on a more timely and monthly basis, the OECD CLI system uses instead indices of industrial production, or IIP, as proxy reference series.
In other words, the OECD’s indicators are a proxy for gross domestic product, which was itself designed to be a proxy for the growth of the national economy based upon the principles of Keynesian economic theory. And over time, refinements to the proxy and the adoption of policies designed to address the proxy rather than the underlying economy the proxy is supposed to measure have enlarged the divide between the two. The focus of Keynesian theory was never GDP, national income or even economic growth per se, but rather employment. Indeed, the very name of Keynes’s magnum opus is “The General Theory of Employment, Interest, and Money,” so the concept of a “jobless recovery” is an intrinsic contradiction in macroeconomic terms.
Due to the way GDP is measured, there are a variety of ways that GDP can increase and perceived economic growth can show up in the statistics without an improvement in the labor market. As I explained in a previous column, imports count against GDP, so if Americans stopped buying imported Mercedes and Nintendos for some reason, this would be reported as incredible economic growth and a vast increase in societal wealth. The reality, of course, is that a complete cessation of import buying would indicate that something has gone seriously wrong with the American economy and the American consumer’s ability to purchase goods and services. Another way is for the government to borrow and spend money, a third way is for the Federal Reserve to increase the money supply, and a fourth way is for the government to provide incentives for Americans to make purchases with consumer loans.
All four of these methods are presently being utilized, which makes the situation appear to be much better than it actually is. Imports are down, government spending is up, the Fed is desperately trying to increase the money supply and Congress created around $20 billion in new loans by handing out $2.75 billion to 611,400 car buyers. All of these results will show up in the macroeconomic statistics, and none of them are going to create new jobs or create legitimate economic growth.
Contrary to the belief of mainstream economists, economics is not a giant confidence game in which the government can fool enough people into feeling sufficient consumer confidence to generate a self-fulfilling prophecy of economic growth. Even as the composite leading indicators and GDP numbers turn positive, real measures of economic activity are pointing in precisely the opposite direction. International shipping has begun to slump again. After a three-month rise spurred by an aggressive stimulus program, steel prices have begun to fall once more in the world’s largest steel-using country, China. Nearly 40 percent of the stocks traded on the New York Stock Exchange are the worthless stocks of four zombie corporations being propped up by the federal government, BAC, C, FNM and FRE. Total U.S. loans and leases are down 4.6 percent for the year, an initial sign that the inevitable deleveraging process has begun. The percentage of failed bank deposits in 2009 are rapidly approaching three times the percentage of failed bank deposits in 1931, and the FDIC has been forced to request a $500 billion credit line from the U.S. Treasury to stave off looming bankruptcy.
The map is not the land. The statistics are not the economy. This is not a recovery; this is the false dawn that precedes the darkness.