Self-fulfilling prophecies – GDP revised down again

This morning the U.S. Commerce Department revised second quarter gross domestic product down to 1.6% growth from its previously reported 2.4% figure.

Analysis: Normally I don’t address revised figures on the blog other than to point out that most data are thinly estimated at first and then revised for months, and in the case of GDP years, afterward.  What is important typically is the trend, up or down, and the magnitude, strong or weak.  There isn’t that much difference between up 2.4% and 2.6% in terms of the response from investors.  However, this cycle of revision is interesting to me for several reasons.

1.  This is the second time that second quarter GDP has been revised downward.  This is not a good thing.  What it means is that the businesses, policy makers, and other decision makers that had assumed more robust economic growth have to adjust their expectations downward.  Therefore, there is a bit of a self-fulfilling prophecy in a downward revision.  Because actual economic growth was lower than expected, folks then plan for lower spending going forward, resulting in lower economic growth.

2.  The revision was not as low as was expected by economists.  That group of prognosticators was expected GDP growth to have been revised downward to 1.3%.  What this means to me is that people, even economics and financial professionals are forecasting greater gloom than actually is present.  This also results in a self-fulfilling prophecy and for the same reasons described above.

My point is that the economy, when all is said and done, is usually a reflection of the mood of the people.  And the mood of the people usually results in self-fulfilling prophecies, taking advantage of the cycle I described above.

Economists don’t like to talk about this sort of thing because they have fought hard to be taken seriously as scientists, not as artists.  However, the reality is that when people’s finances are in order they typically feel wealthier.  In our capitalist culture when folks feel wealthier they typically feel better about themselves.  When they feel better about themselves they spend more money.  This simple understanding serves as the basis for how I have been evaluating the economy for the past 18 months.

So going forward what can be done to get people feeling better?  And barring anything approaching that, what can we expect?

For things to escape the vicious circle that we are in right now, there has to be something coming into the vortex from the outside.  A shock of some sort.  Shocks come in all different shapes and kinds.  There are shocks like Hurricane Katrina or September 11, 2001.  Those shocks cause great damage to the psyche and spending habits of citizens to a much greater degree than their actual financial impact.  Other shocks, the kind I am waiting for, come in the form of brilliant inspiration on the part of policy makers.  Here I am talking about politicians and their politics.  Is there anything like this happening?

Unfortunately, the sources of major positive economic shocks to the system seem to be bereft of either room to maneuver or inspiration.  The Federal Reserve has interest rates at the lowest level that they possibly can have them.  Furthermore, they seem unwilling to engage in other policies, like buying up bad mortgages on bank balance sheets, at this time.  So the Federal Reserve cannot be expected to be a source of vortex escape at this point.  The second source would be some sort of New Deal-type economic kick start program.  Yet, the Obama Administration and Congress seem to have their heads up their butts.  No one is talking about anything.  And you know Congress can’t do anything if people aren’t talking about anything first.

The net result of this situation is…is…is…that we are stuck.  Sans positive forces to get us out of the vicious circle of the grumpy U.S. consumer, we are sitting around waiting for bad stuff to happen instead.  That is not a good situation.

One possible mitigating factor: because it is an election year and the Democrats look likely to loose big time to Republicans, the Democrats are likely to amp up the rhetoric of policy miracles to “buy” votes.  So there might be some creative, and actually effective, ideas forthcoming.  But don’t bet on it.  In other words, my feeling about the economy right now is that we are entering a period of attrition.  Not a good thing.

Importance grade: 8.

I hope that each of you has an excellent weekend!

Jason