Here is how the 3rd quarter GDP was actually reported:

Economy Grows at an Energetic Rate in 3Q – Despite Hurricanes

WASHINGTON (AP) — Economic activity expanded at an energetic 3.8 percent annual rate in the third quarter, providing vivid evidence of the economy’s stamina even as it coped with the destructive forces of hurricanes Katrina and Rita. The latest snapshot of the country’s economic performance, released by the Commerce Department on Friday, even marked an improvement from the solid 3.3 percent pace of growth registered in the second quarter. Growth in the third quarter was broad-based, reflecting brisk spending by consumers, businesses and government.

The expansion in gross domestic product in the July-to-September quarter, the strongest since the beginning of the year, also exceeded many analysts’ expectations. Before the report was released, they were forecasting the economy to clock in at a 3.6 percent annual rate.

Despite the sting of high energy bills, consumers continued to spend, doing their part to keep the economy rolling in the third quarter. Consumers’ boosted spending at a brisk 3.9 percent rate, the strongest pace since the end of last year.

Here is one possible alternative:

Economy Grows at an Energetic Rate in 3Q – Because of the Hurricanes

WASHINGTON (AP) — Economic activity expanded at an energetic 3.8 percent annual rate in the third quarter, providing vivid evidence of dollars flooding the economy in the wake of the hurricanes. Washington flooded the economy with close to $100 billion in relief efforts. The boost is expected to be temporary as is widely known by economists as “The broken window fallacy”.

Benefiting most from these relief efforts were roofers charging the US government as much to temporarily patch roofs with plastic as an entire new roof should cost. Also benefiting from this disaster were truckers hauling ice to nowhere. That ice was never used and either melted or returned to the place of origin. Insurance companies paid out billions of dollars worth of claims and that money was spent as well. Food vendors in Houston benefited by charging extravagant prices to supply food to the refugees.

Gasoline prices skyrocketed, accounting for much of the increase in consumer sales. Despite the string of high energy bills, consumers continued to spend simply because that had to if they wanted to heat or air condition their homes or drive anywhere.

Add it all up and the rise in 3rd quarter GDP was a mirage.

Let’s consider all of the likely alternatives and see how they stack up:

  1. GDP really did rise. It’s a good thing. God bless consumers.
  2. No one really knows what the GDP did as it is so grossly distorted already and hurricane relief made it even more so. For a look at some of those distortions please consider Grossly Distorted Procedures. Besides, GDP is backward looking and the housing slump to which we can look forward to is just starting. The fallout will be immense.
  3. GDP rose because consumers foolishly went deeper debt spending driving savings rates further into negative territory. This can hardly be a good thing.
  4. GDP rose because of a rapid rise of government spending in the wake of the hurricanes. This is not a good thing and is part of the reason for recently rising interest rates.

Which of those are likely?
For anyone that wants to party now and is not concerned about the hangover later, (which is almost everyone, especially the economic cheerleeders on CNBC), the answer is number 1. To those folks, the answer is always “rah rah siscooom bah, gooooooo consumer” and no possible chance to portray things as being better than they really are is ever passed up. If the GDP was down they would be looking ahead to the “recovery” after blaming the weather. The thinking person on the other hand knows full well the answer is a combination of 2, 3, and 4.

Charles Mackay, writing for the WallStreetExaminer touched upon this line of thinking in The Secret Recession. Let’s have a look.

Hidden behind the “strong” GDP figures is an ongoing consumer recession. Buried beneath the mass of heavily manipulated economic statistics, the Bureau of Economic Analysis notes that real* disposable income fell at an annual rate 0.9% in the third quarter. It went from a $8,128.7 billion annual rate in the second quarter to $8,110.5 billion in the third quarter. Already heavily indebted, consumers resorted to draining cash from their bank accounts to maintain prior spending levels. The BEA says the amount of negative savings reached an annual rate of $100 billion in the quarter – or put another way, -1.1% of income. This is duly confirmed by the continuing drawdown in the M1 money supply we have seen for a number of weeks now.

The BEA also issued a stern note of caution about reliability of their GDP figures:

The Bureau emphasized that the third-quarter “advance” estimates are based on source data that are incomplete or subject to further revision by the source agency. The third-quarter “preliminary” estimates, based on more comprehensive data, will be released on November 30, 2005.

Government spending rapidly accelerated to a 7.7% rate in the third quarter. This spending may further add to the misconceptions about just how strong the economy really is.

“May add to the misconceptions” or “Did add to the misconceptions”?
I think the latter. At any rate, thanks for the numbers Mr. Mackay, it helped me put the finishing touches this weekend on a piece I started soon after I heard the noise and saw all the pom-poms waving. As always, it was a sight to behold.

Mike Shedlock / Mish/