Tall tales from short men in suits - that’s what this is.

I don’t think most of the hoi polloi mind a little white lie occasionally for the common good. After all, smoothing things out makes the world a bit more bearable.

Unvarnished truth can lead to needless trouble. Once, I tried to tell Pam what I thought of her dress. Never again!

But if you think GDP growth was 4.9%, I’ve got a bridge over the East River I’d like to sell you.

But first, let’s do the basics with GDP. It’s been a while, so let’s refresh our knowledge.

Grossly Deceptive Product (GDP)

GDP, of course, stands for Gross Domestic Product.

GDP is one of those terms that gets thrown around like confetti at a New Year's Eve party, especially by politicians and mainstream economists who seem to worship it as the ultimate indicator of a country's economic health.

But let's cut through the noise and get down to what GDP is and, more importantly, what it isn't.

At its core, GDP is the total value of all goods and services produced within a country's borders over a specific period, usually a year or a quarter.

The formula is simple enough: GDP = Consumption + Investment + Government Spending + (Exports - Imports).

It's a way to put a dollar figure on a nation's economic output. It's often used to compare countries' economic performance or track a single country's economic growth over time.

Now, let's talk about why GDP is a flawed metric.

First off, it measures quantity, not quality. If you spend billions on healthcare because your population is sick, that boosts GDP. If you spend billions on warfare, that also boosts GDP. But are either of these things signs of a healthy, prosperous society? I'd argue not. GDP doesn't distinguish between productive and unproductive activities or sustainable and unsustainable ones.

Another issue is that GDP doesn't account for the income distribution among a country's residents. A country could have an astronomical GDP, but if all that wealth is concentrated in the hands of a few, then the average person isn't necessarily better off. Economic inequality is inherent in a capitalistic system. But a yawning chasm between the rich and the poor is undesirable and a glaring blind spot in the GDP equation.

And let's not forget about the informal economy. From babysitting and bartering to under-the-table jobs, these transactions often aren't reported and, thus, aren't included in GDP calculations. In some countries, the informal economy is a sizable portion of economic activity, and ignoring it gives us an incomplete picture.

How a Government Can Finagle the Numbers

Let's dive into the nitty-gritty of GDP's components, abbreviated with the snappy equation: GDP = C + I + G + (X - M).

It sounds like something from an algebra textbook, but each letter represents a crucial part of the economic puzzle. Understanding these components is like having a decoder ring for interpreting the daily economic headlines that bombard us.

Consumption (C)

First up is Consumption, the "C" in our equation. This is the total value of all goods and services consumed by households. We're talking about everything from your morning latte to your Netflix subscription. Consumption is usually the largest GDP component, making up about 60-70% of the total in advanced countries like Western Europe, Australia, and Japan. In the US, it’s closer to 70%. It's the bread and butter of the economy.

However, let's remember that consumption isn't an unalloyed good.

In a debt-fueled economy, elevated consumption levels often mean people are living beyond their means, racking up credit card debt, and borrowing from the future. Low interest rates and easy credit usually egg on this unsustainable artificial boost.

Investment (I)

Next, we have Investment, the "I" in our equation. This includes business investments in equipment and structures, residential construction, and changes in business inventories. Investment is what allows an economy to grow over the long term. Businesses invest in new machinery to increase productivity, and people invest in homes, contributing to the housing market.

However, not all investment is created equal.

Government policies can distort investment decisions, leading to malinvestment—resources being allocated to projects that aren't the most beneficial for the economy. Think about the housing bubble of the mid-2000s. Much investment went into real estate, driven by artificially low interest rates and lax lending standards. We all know how that ended.

Government Spending (G)

Government Spending is the "G" in our equation. This includes all government consumption and investment but not transfer payments like pensions and unemployment benefits.

While government spending contributes to GDP, it's essential to remember that these funds come from taxation or debt, which have economic costs.

Government spending often involves a redistribution of resources, taking from one group to give to another, or worse, to fund projects that may not have any real economic benefit but serve political ends. You know, the “Bridges to Nowhere.” The more the government spends, the more it infringes upon the private sector, crowding out genuine, market-driven activity.

This quarter, defense spending was up a whopping 8.0%.

Net Exports (X - M)

Finally, Net Exports is represented by (X - M) or Exports minus iMports. If a country exports more than it imports, it has a trade surplus. If it imports more than it exports, it has a trade deficit.

Despite the bad rap trade deficits often get, they're not inherently bad. If a country is a desirable destination for foreign investment, it might run a trade deficit while enjoying economic growth.

However, persistent trade imbalances may be a sign of economic problems. They might indicate that a country lives beyond its means, borrowing to finance its consumption. Or they might reflect a lack of competitiveness in global markets, which could be due to a host of issues ranging from poor infrastructure to burdensome regulations.

What’s Your Point?

My point is this. Maybe the economy did grow by 4.9% annualized… but at what cost?

From The Wall Street Journal:

But there are warning signs underlying the eye-popping numbers. Americans saved less and their incomes, adjusted for inflation, fell over the summer. That could mean the pace of spending will ease in the coming months. Business investment also stalled. Meanwhile, rising long-term interest rates, wars in Ukraine and the Middle East, and the possibility of a partial government shutdown could cause economic cracks to emerge.

The Journal continued:

Americans’ after-tax, inflation-adjusted income decreased 1.0% in July through September, after a sizeable increase during the first half of the year. Their savings as a share of income fell to 3.8% in the third quarter, from 5.2% in the second.

Consumers will have less of a buffer for purchases if they continue to draw down their savings stockpiles. A slowdown in consumer spending would weigh on overall growth because it accounts for most of U.S. economic output.

Higher long-term interest rates could cause a cooling in several parts of the economy.

Residential investment, which was weak earlier in the year, advanced 3.9% in the third quarter. But a climb in mortgage rates to near 8%, the highest since mid-2000, could weigh on that category as demand for homes slides.

The number of small firms reporting that it was harder to access credit edged higher in a September survey from the National Federation of Independent Business. That could portend a pullback in business investment and hiring. Business investment in items such as buildings and equipment was essentially flat over the summer, Thursday’s report showed.

In short, Americans dropped the last of their savings, Biden takes credit for “Bidenomics” working, and we now await a “cooling” rather than a “recession.”

Doubtful.

Income and savings are decreasing as the Fed slows down its moneyprinting. Rate hikes are on hold because the market is tightening, as evidenced by higher long-term rates.

Needless to say, this doesn’t look so good.

Wrap Up

GDP is a flawed metric, a blunt instrument that misses many nuances and can be manipulated for political ends.

The defense spending is up 8%, which shows this is really a spending indicator.

As someone who writes about markets, finance, and economics, I can't stress enough the importance of understanding these components, not as gospel truth, but as part of a broader toolkit for making sense of the complex, messy reality that is the global economy.

Keep questioning, keep digging, and don't take any economic indicator at face value. After all, in the world of economics, the only constant is change.

Have a wonderful weekend!