The Real Private Economy Growing ~3%

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The Real Private Economy Growing ~3%

Private Economy is doing well

“Davidson” submits:

The Real Private Economy is the Real GDP minus Government Expenditure & Investment. When viewed long term with either a mathematical regression line(DOTTED BLACK LINE) or a line drawn with my experiential judgement(DASHED BLUE LINE), the Real Private Economy Growth looks fine. We are in line at ~3%. A declining trend line should be no surprise since the US economy has grown more than 10x since 1947 and larger entities tend to have slower growth rates.

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Private Economy

I drew the end point(2016) of the DASHED BLUE LINE slightly higher than the DOTTED BLACK LINE to counter the 2009 dip as an artificial effect of rule FAS157(mark-to-market accounting rule). I also  lowered the starting point(1947) slightly as the data series began at the high side of the previous business cycle. Economics derive from human activity, our work, our play, our defense, our desire for safety nets and etc. We change the rules of when we think we can make things operate better and sometimes we make mistakes and reverse the rule as we did FAS157. Mathematics treats all points of data as equal. In science this works to our advantage. In economics, the study of a human system, it takes someone with experience to judge with care if some points should be ignored.

 

Considering the precision of economic measurement and the constant fiddling various political agendas have attempted since WWII, the Real Private Economy has performed very consistently and continues to do so today. This history and trend lines reveal that the present trend shown in US Real GDP vs. Total Govt Expenditure & Investment of 2.99% is very much in line with historical trend.

Private Economy
Private Economy

It seems that all analysts take GDP as a given and compare present with past periods. The significant variation over time in Government Expenditure&Investment  which is a component of GDP and the fact that inflation has also varied requires that any analysis of today’s economy vs. the past must compensate for these effects before one makes conclusions.

 

The investment advice so varied today reminds me of the Indian parable of the blind men describing an elephant: https://en.wikipedia.org/wiki/Blind_men_and_an_elephantEach examined a different part of the elephant and came to different conclusions as to what it was. Their conclusions differed wildly from fact. This is what we have today when experts present views on our economy, markets, valuations, and then provide forecasts.

Since Descartes’ time, the effort has been made to pull humanity out of the shadows of human biases of misperception, suspicion and myth by using scientific investigation. We have benefited greatly in medicine and science. This is known as the scientific approach and for the most part it has worked in nearly every area in which it has been properly applied. Mathematics, the tool of scientific inquiry, is free of human bias. Proper application of mathematics comes from knowing the validity of what the data represents. The phrase ‘Garbage in, Garbage out’ dates from 1957,https://en.wikipedia.org/wiki/Garbage_in,_garbage_out  but Charles Babbage wrote:

“On two occasions I have been asked, “Pray, Mr. Babbage, if you put into the machine wrong figures, will the right answers come out?” … I am not able rightly to apprehend the kind of confusion of ideas that could provoke such a question.”—?Charles Babbage, “Passages from the Life of a Philosopher

The same issue exists today. GDP has components which vary with time and circumstance and does not as such represent an actual measure of economic activity. Stock market prices represent investor perception of value and economic activity but not the values themselves nor are prices a measure of economic activity. The Purchasing Manager Indices(PMI), which are surveys, are sentiment indicators and not measures of economic activity. Analysts mix and compare one data series to another without sensing that different data types do not carry similar relevance and ignore the fact that some data like GDP are not only composites but impacted by inflation. What is missing from much of today’s approach to analysis is a ‘numbers sense’.

 

Numbers which come from various measures of our economy are taken as facts even if they are not useful facts and thrown into computers with analysis believed as fact. They are assumed to carry useful economic information even if they do not. It is assumed that computers will separate fact from fiction. The basic assumption in using mathematics to identify viable trends is that the input must carry the measure of what it is one wants to analyze. In the instance of GDP, if one wants to understand our economy one needs to isolate economic from government activity and further adjust all for inflation. Making the correct adjustment is required to be able to compare past with present. Not doing so will always mislead. Confusing sentiment readings like the PMI with economic measures further misleads.

 

Only by making sure one carefully selects the data which represents the actual activity in which we are interested can one come to viable conclusions about that activity. Our current economy looks on trend historically. Things are not as bad as many say!!

Private Economy

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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