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Yes Virginia. This Is A Recession

Economics / Recession May 06, 2008 - 06:10 AM GMT

By: Ronald_R_Cooke

Economics Best Financial Markets Analysis ArticleA preliminary report from the United States Department of Commerce, Bureau of Economic Analysis (BEA), claims American Current-dollar GDP -- the market value of the nation's output of goods and services – increased 3.15 percent or $111.0 billion in the first quarter of 2008 (versus the last quarter of 2007), to a level of $14,185.2 billion. That economic performance equates to an average annual year over year increase of 4.67% against Q1 2007.  


The United States Labor Department, Bureau of Labor Statistics (BLS), reported an average annual increase in the rate of inflation (CPI-U) from Q1 2007 to Q1 2008 of 4.10%.

Real GDP growth from Q1 2007 to Q1 2008 was therefore (in the neighborhood) of .57%. Or to put it another way, although “Real” GDP growth in the first quarter of 2008 was very weak, the American economy is not in a recession.

Nonsense.

The declining value of the dollar increases the price of goods and services. It does not, however, increase the production of goods and services (which is what GDP is supposed to measure). Furthermore, a declining dollar inflates the price of goods and services purchased from foreign nations. In order to trust the BLS numbers, we have to believe they have not been inflated by the declining value of America's currency.

Is that a good assumption?

Ok. For the sake of argument, let us assume the BEA made suitable adjustments for currency anomalies. Can we make the same concession for the inflation data published by the BLS?

No.  People are not buying more. They are just paying more for what they buy. As I pointed out in my essay “CPI: Sophisticated Economic Theory, Terrible Ethics” ( www.tce.name ), the BLS understates both the percentage of disposable income an “average” family spends on fuel and food, and the average prices for the fuel and food they buy. This has the effect of reducing the reported rate of inflation. Apparently the BLS believes high fuel and food prices are “temporary” and thus do not reflect the real world.

Tell that to a mother struggling to find enough money to buy food for her family and suddenly realizing she also has to buy gas with the little bit of cash that's left in her purse.

Farm prices are up.  We can get an indication of the world-wide competition for available agricultural products by looking at the prices American farmers received in February 2008 versus February 2007, and Q4 2007 versus all of 2006. We can also make a projection of average annual prices in 2008 versus the actual prices farmers received in 2006. Higher consumer demand, coupled with decreased production due to crop failures and increasing production costs, have increased the competition for available food grains, sending projected prices up by more than 123%. Higher fertilizer, herbicide, insecticide and fuel costs will push up the price of commercial vegetables, and fruits and nuts. Higher feed costs mean higher prices for meat animals, dairy products, and poultry and eggs.

Prices Received By American Farmers

2/2007 Versus 2/2008
Q4 2007 Versus All of 2006
Projected 2008     Versus Actual 2006
Food Grains
+ 93.5%
+ 75.9%
+ 123.4%
Commercial Vegetables
- 32.1%
+ 31.6%
+ 25.7%
Meat Animals
No Change
-  < 1%
+ 14.6%
Fruits and Nuts
No Change
No Change
+ 6.0%
Dairy Products
+ 29.8%
+ 67.3%
+ 66.2%
Poultry and Eggs
+ 17.3%
+ 28.2%
+ 41.8%

 

Data for the first two columns of this table are taken from the publication Agricultural Prices , which is produced monthly by United States Department of Agriculture's National Agricultural Statistics Service. Data in the projection column are TCE estimates (and probably low). According to the USDA, the average price paid to the farmer for all farm products increased by 13.3% in February 2008 versus February 2007. In order to calculate the change of price paid by the consumer, one would have to add the cost of transportation, processing, manufacturing, distribution and retail sales. Meat animal price projections could be significantly higher than shown because of escalating feed costs, particularly for corn. It should be noted that the price a farmer receives for agricultural products tends to be highly volatile.

Preliminary April 2008 data shows a general easing of pricing pressures. Better weather and increased planting promises to increase the 2008 grain crop. But do not expect prices to come down to 2006 levels. World-wide competition for available agricultural products, coupled with higher production costs, means that people will have to allocate a larger share of the family budget for food. The UN's Food and Agriculture price index is up over 150% from March of 2007 to March of 2008. Over a billion people are in danger of malnutrition or starvation. The competition for available food supplies will be intense for the foreseeable future.

And then there is the pain of rising fuel prices. American gasoline prices were up 32.5% in February 2008 versus February 2007. There is nothing going on in the international oil markets that would lead us to believe these prices will be coming down in 2008. Or 2009.

Except for one little glitch. If America slides further into recession, other nations will be drawn into America's economic malaise. A world-wide recession will decrease the demand for oil, and weaken the pricing power of the producer nations. If the OPEC oil cartel fails to reduce available production, then oil prices will decline.

But not for long.  As I have pointed out many times, although oil prices will continue to be volatile, the long term trend up. Increasing demand means a continuation of international competition for a depleting commodity.

So there does not appear to be anything “temporary” about higher food and fuel prices. They are here to stay. Spending on these two items will decrease the money families have available to purchase clothing, housing, recreation, and so on. This shift of purchasing power is bound to have a lasting impact on employment and GDP.

In my essay “American GDP: Can We Trust The BEA Data?” ( www.tce.name ), I projected  Q4 2007 inflation would exceed 5%, rendering a neutral or negative GDP. I am not aware of any data that would contradict that conclusion. After several hours of research, I have also concluded that Q1 2008 inflation was roughly 5.61%. If so, Q1 “Real” GDP was a minus .94%.

Yes Virginia.  This is a recession.

Ronald R. Cooke
The Cultural Economist
Author:  Detensive Nation
www.tce.name

Cultural economics is the study of how we interact with economic events and conditions. Culture, in this sense, includes our political systems, religious beliefs, psychology, history, customs, arts, sciences, and education. The term "Economics" refers to the extent and process of how we employ capital, labor and materials. If human existence is dynamic, then economics – as a science – must be able to characterize the interaction of culture and economics in contemporaneous terms.

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