MONEY & INVESTING

Give me a C, an I, a G! And what have you got? GDP! Louder!

GDP!

Alas, if only this tweaked version of the football battle cry could work and GDP could skyrocket. Then we would all be standing on U.S. 41 shouting, “Louder!” and waving cardboard signs urging honking as an energetic affirmation of the same. Such silly thinking for such a serious subject. So let’s get serious.

C+I+G= GDP is an economic equation widely accepted. “C” (personal consumption) plus “I” (investment spending) plus “G” (government spending) equals “GDP” (Gross Domestic Product or all spending from all sources).

If one variable increases and all others remain constant, then GDP will increase. If one or more decreases, then a larger and offsetting increase in the third variable is needed to get growth in GDP. That’s easier said than done.

What sounds like a simple math equation (almost like a baking recipe) is simple under most economic situations. “Most” being defined as economic environments of the past 70 years, but not our current environment. If you make a small mistake in a baking recipe, you can cover it up — balance it with other ingredients. But it is pretty hard to bake a cake with widely distorted proportions of ingredients and virtually impossible if other cooks added some ingredients and, worse, you do not know what was added or how much. That’s also true with this formula. Let’s look at it letter by letter.

“C” was the lifeblood of our economy for many years. A lot of consumption was disposable “things” not made in the U.S., not adding to our manufacturing and employment base; things not adding to our longer term, personal welfare. Some “things” (cars and houses) were overbought and caused problems. U.S. consumers have been known to not be the wisest, most-disciplined spenders.

“I” has long been considered to be the single-best way to grow an economy. Why? Because business spending generates growth that generates more growth. It is a platform on which capitalist countries build. It is a rational allocator of capitalboth human and monetary capital. An

example: a car manufacturer intends to build a new style of car. This requires purchase of land, construction of plant, purchase of raw materials, etc.

Investment spending has come under fire as being an inefficient allocator of capital in some industries (e.g. the auto, financial, etc.). Sub-optimal allocation for many years resulted in the present day non-competitive auto industry. “G” or government is thought to be a poor allocator of capital. “Pork” always gets into the spending bills and government expenditures are far from optimal. When consumption and investment are falling off a cliff or projected to go into deep freeze (fall 2008 and winter 2009), then government has to step up to the plate and swing for the bleachers. Too bad its batting average is so low.

In a normal state (something like the past 70 years), the variables could be nudged; GDP fairly easily projected; and recovery/growth in GDP realized. The problem for government, the Fed, economists, etc., is that, in our current state, the variables are gyrating — mostly along a downward slope except for G, which is skyrocketing.

The real sobering stuff is not the aforementioned generalities; it is the current numbers behind these letters, what the numbers mean and where these numbers are headed. In sum and substance, “C” ain’t lookin’ good. There continues to be a decline in consumer confidence (September’s index was 53.4 percent and declined to 47.7 percent in October); consumer credit peaked in third quarter 2008 and has since dropped $116 billion on a $2.5 trillion consumer credit base); and unemployment is not getting better.

“Give me an I,” you say. Well, everyone would like that but “I” ain’t lookin’ good either. Business capital expenditures peaked in second quarter 2008 at a $1604 billion annualized rate. First quarter 2009 saw a drop of 39.2 percent, down to $1321 annualized; second quarter saw another drop of 9.6 percent to $1280 billion. In these numbers are cuts for computer spending, which, since the mid-1990s, had been growing at better than an 18 percent annualized rate.

Bottom line: The C and I factoids look ugly and they will only turn when credit destruction ends — when capital is made available and borrowers are somehow incentivized to invest. Until then, the Fed’s money spigot will remain open in hopes of credit expansion and the government rightly or wrongly, efficiently or not, will take up the slack to make the equation work.

All of this may mean something (or it may mean nothing) to your course of action. Let it be a topic with your adviser(s) and have frequent dialogues with them as the world turns. 

— Jeannette Rohn Showalter is a Southwest Florida-based chartered financial analyst, considered to be the highest designation for investment professionals. She can be reached at jshowaltercfa@ yahoo.com.