The recent announcement that the GDP grew in the third quarter at an annualized rate of 3.5 percent was referred to by Treasury Secretary Tim Geithner as proof that the economy is finally improving. But a quick glance at history demonstrates that this is not the case.
Between 1934 and 1937—during the heart of the Great Depression—GDP grew at by an average of 9.5 percent annually. In 1934, GDP grew by nearly 11 percent, but it would be six more years until the depression finally ended. Clearly, GDP growth alone cannot be taken as an indicator that the economy is on the upswing.
It is also disheartening that the two major contributors to GDP growth in the third quarter were housing construction and auto sales, both of which were propped up by government subsidies. Auto sales were boosted by the Cash for Clunkers program, and housing construction was driven by the $8,000 first time home buyer tax credit.
Combine this with other spurious accounting maneuvers used to calculate third quarter GDP, and it begins to appear that GDP might actually have decreased during this period.
In addition to phony GDP growth, there are other signs that the recession is not yet over. Employment during the third quarter fell by over 750,000, and it is expected to fall further still. Employment has been called a lagging indicator of economic health, but when economic health is measured in terms of the financial well-being of the population, employment is not a lagging indicator, it is the indicator.
The recent bankruptcy of CIT Group is another sign that our economic woes are far from over. A recipient of $2.3 billion in TARP funds—deemed likely unrecoverable—CIT Group Inc. filed for Chapter 11 today, seeking protection from $10 billion in debt. CIT finances close to one million businesses, and conducts business with over 80 percent of all Fortune 1000 companies, so there is enormous potential for negative secondary effects stemming from the bankruptcy.
The CIT Group bankruptcy comes on the heels of nine more bank failures on Friday, which brings this year’s total to 115. These bank failures came at a cost of $2.5 billion to the FDIC deposit insurance fund.
There is a clear political incentive for Geithner and others to make efforts to convince us that this economic slump is over. It is unfortunate that these efforts include no actual facts.