This article is at The Dismal Science website

The Economy You Just Woke Up To By Craig Thomas 4/30/01 8:30 AM ET

The economy you just woke up to doesn't have a care in the world. How could it after all? With 2% GDP growth now logged in the databases, indications seem to suggest that we were just over-reacting to the downturn all along. Just think, Consensus was calling for 1%, and we got double that. To put it into an everyday context, it's like believing that you bought the 1% low-fat milk at the grocery store, ingesting the contents of the carton all the while noticing that it is not as creamy and satisfying as whole milk, and then looking at the label of the empty carton and finding that it was not the 1% low-fat, but actually the 2% reduced fat milk. I hope that helps you put the gravity of this situation into a proper context (please indulge me, my agriculture background requires me to break things down into smaller, more digestible examples).

This first quarter GDP number may be the most interesting indicator to come out in a long while, and we're certainly going to be taking a closer look at it as the week progresses on the Dismal Scientist. It seems to suggest that the economy isn't as bad as we may have believed. For those who live entirely by the numbers, they are now having to change their story and shift their position on the outlook. For those who are a bit wiser and use NIPA accounting as simply a tool in detecting changes in the economy, they won't be changing their tune, but will be taking a closer look at the underlying detail to see if there is a meaningful trend emerging, or an exogenous fluke in the accounting. One would hope that there is something indicative of a recovery within that indicator, but that seems to increasingly be a long shot.

Anyway, we're talking about the first quarter, and that's more or less ancient history. We live in today's economy, not yesterday's accounting ledger. Also, I know what 1% low-fat milk is, and I don't need a label on the front of the carton to tell me what good milk tastes like. Surging layoffs, rising unemployment, declining confidence, sagging markets, rising bankruptcies, and caving investment are enough proof for me. They can call it 2%, 4%, whole milk or even heavy whipping cream if they want, but the number won't do anything to change the direction of the economy.

It's plainly obvious that the economy is far less robust than it was, and that there are important fundamental reasons why the economy has slowed. Conversely, it is a mistake to believe that the economy has slowed due to an over-reaction on the part of consumers or because of bad monetary policy. There appears to be no slight of hand at all in our current predicament. Inventory adjustments, fuel prices, and industry consolidation are all real economic variables that need to work themselves out. One economic indicator or a sound bite or a good day in a market does not erase the fundamentals.

Speaking of sound bites, there are a few quotes kicking around this morning that are eye-catching, and somewhat reaffirming. No matter how confident one is in their opinion, it's always nice when bright people reaffirm ideas you know are true. These quotes absolutely state the obvious, but they are a breath of fresh air simply because there is so much noise out there spreading nonsense.

On Friday, Fed Chairman Greenspan pointed out a few obvious, but very important trends: the current economic slowdown is apt to result in "a period of weakness in measured productivity", but added that there was no sign that longer-term trends toward faster productivity growth have changed.

Here's another nice Greenspan point regarding debt pay-down to chew on: "In such circumstances, foreign investors may reduce, on net, their holdings of overall dollar assets as Treasury securities are paid down. By itself, such diminution in the demand for U.S. dollar assets would tend to raise interest rates for U.S. borrowers and, conceivably, put downward pressure on the dollar's exchange rate." That’s a thought that you can mull over all week and never get bored with it.

An Economy You Just Woke Up To favorite, Warren Buffett, had this to say regarding long-term investing on Saturday: "Fifteen percent (return on stock investments) is a dream world". That's something you don't hear every day, but used to be common sense.

Unfortunately, it's not all good out there. There is the ongoing price of gold/deflation argument that's been swirling around the Internet for about a month now. I have to admit, I'm absolutely entranced by it. I can't look away.

The argument, I think, is that the Fed is fooling itself by trying to set interest rates by looking at economic variables and anticipate productivity and the like. It should simply look at a price, and adopt whatever stance needed to keep that price steady. Of course, that all-important price is the price of gold. Here's a quote from one of the proponents of this movement. Don Luskin writes on thestreet.com regarding the solution to the deflation problem/Fed dilemma, "That would be for the Fed to announce that it will forget about unemployment, consumer confidence, productivity, the wealth effect and all the other claptrap that seems to go in and out of fashion in the decision-making process".

Here again, it might be my simple agriculture background, but I just don't understand why the price of gold is important to anyone at all. Gold was an important currency standard at one time, but now the dollar has usurped its role there. Shouldn't we look at the value of the dollar then? Even when I break it down into one of my digestible examples, it doesn't make sense. If the Fed were to target pork bellies, which goes into making delicious bacon, I still don't see why "unemployment, consumer confidence, productivity, the wealth effect, and all that other claptrap" is any less important.

-- Guy Daley (guydaley1@netzero.net), April 30, 2001