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GDP Contracts, Consumer spending rolls off a cliffThe news from the commerce department was not good. Inflation plus a dramatic drop in consumer spending drove a small contraction in the US economy in the third quarter of 2008, and the indicators are that we will get the "two quarters of negative GDP" threshold for everyone to happily call this a recession without looking over their shoulders. In some sense last quarter was made worse by allowing resource inflation to continue longer than was sustainable, but this quarter will face a credit cruch of enormous proportions which will sink numerous people and businesses. The decline was broad based, and centered around a 1.3% - that's annualized - decline in domestic purchases. Much of the growth was in, you guessed it, defense spending, which rocketed up by 18% on an annualized basis. This looks like an attempt to spend freely while constricting the dollar to bring down oil prices that failed. As importantly, it is clear, even to the feebles who run the fed, that inflation had expanded to the broader economy, ex-food and energy, the GDP deflator grew at an annualized rate of 3.1%. This is rear view mirror stuff, in the sense that inflation is not going to be the immediate place where the next stages of the crisis are felt. However what was wrong with the economy at the time the snap shot was taken, will be wrong later: it is gripped in a stagflationary situation, where attempting to stimulate the economy boils away as inflation, without producing a rise in wages or purchases. Stirling Newberry October 30, 2008 - 9:00am
( categories: Miscellany )
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