GDP figures are not surprising

By DAVID MOON, Moon Capital Management, LLC
February 10, 2013

The Bureau of Economic Analysis announced that fourth quarter US Gross Domestic Product (GDP) declined 0.1 percent, compared to a 3.1 percent increase in the third quarter of 2012. That is, not only did the economy slow in the fourth quarter, it actually contracted.

This should not have been a surprise to educated observers. For the past four years, the federal government has massively increased its spending in an effort to support the economy.

Much of the fourth quarter GDP decrease, however, was a result of reduced federal government spending, only partially offset by increases in personal consumption expenditures.

The only type of sustainable economic growth is organic. It must come from individuals – either by an increase in productivity or population. Borrowed economic improvements are either illusionary or temporary.

In 2012, the increase in total economic output of all sectors of the United States was $600 billion. The increase in our federal debt was $1.2 trillion.

Every dollar of 2012 economic growth was offset or financed by a two dollar increase in federal government debt.

There is nothing immoral about a government’s judicious use of debt, especially in the production or acquisition of long-life assets.

There is an argument that the government has a responsibility to increase its otherwise normal debt in order to combat cyclical unemployment increases and other personal economic hardships.

The problem, however, is that reported increases in economic activity directly resulting from these types of expenditures are not sustainable. They are misleading. It creates a false sense of prosperity.

For 100 years through 1980, US GDP increased an average of 3.4 percent annually. The trend then began to decline and has fallen to 2.4 percent since – a decline of almost 30 percent.

In the 1940s, the United States was practically the only developed country whose infrastructure had not been damaged or decimated by World War II. This gave us a decade-long economic advantage over the rest of the world.

The US no longer enjoys that same massive infrastructure and production cost advantage over the rest of the world.

In 1950, less than 35 percent of the adult women in this country had jobs outside the home. This peaked at about 60 percent in 1995, where it has remained in the years since then. Those production gains are gone.

US population growth has steadily declined from a peak of 1.50 percent annually in the ‘70s to 0.5 percent today.

Waiting for US fertility improvements is not a great investment plan.

Not only are workforce participation rates likely at a secular peak, the amount of hours we work each year is declining. In 1950, the average worker spent 2060 hours per year engaged in production. The average work year today is about 1, 775 hours, a decline of 13.8 percent.

Investors and economic observers must prepare for a new normal. This is a manageable environment, but models based on extrapolating historic growth rates naïve.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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