Q3 GDP increased 5% in the U.S.  This is great news and indicates that the U.S. economy is taking the world by storm.  If this was the case, then why do interest rates fall under such good news?  Also, after falling 0.2% in the same quarter, why are wages not climbing either? Both interest rates and wages should be rising during a period of such robust growth.  

Let’s take a closer look at the GDP numbers.  First off, our neighbour’s love of defence and war spending continues to add 0.80 basis points (bps) to GDP.  However, the largest gain came from personal consumption (221bps), which is great news.   But the largest growth came from spending on services, which accounted for 115 basis points.  Of this amount, 15 bps was non-profit spending, while the remaining was divided between Healthcare spending and Financial Services/Insurance.  In short, 85% of the contribution to GDP from household spending came from Obamacare, rather than spending on tangible goods that create jobs such as TV’s and cars.  With this in mind, is the U.S. economy really taking off? 

Trade between China and the U.S. finished 2014 off with imports and exports declining 10% and 15%, respectively.  Overall, how can growth in an economy be legitimate if imports and exports declined? 

A dysfunctional American government does not help.  At $18.1t, their government debt is out-of-control.  If they ever want to tackle their liabilities, which appear doubtful, it will take generations to put their finances back in order.  Washington appears happy that they have given their corporations the highest taxes in the world.  It’s odd that they can’t figure out why so many companies have sheltered trillions of currency offshore. 

Shale oil has proven to be a boost to the American economy.  It has created jobs and less imported oil, yet it has had no influence of the country’s trade deficit.  We estimate that after 2018, America will have to increase oil imports.  America is into its 43^rd year of consecutive monthly trade deficits.  This is hardly a sign of a healthy economy.

Boeing and the farmer are the only two segments of the economy keeping the trade deficit from being a complete disaster.  Boeing is conducting robust business delivering new aircraft.  The company has a huge backlog that will keep the company busy well into the next decade.  Soon, Boeing will begin building a revamp version of the 737.  It is worth noting many parts of Boeing airplanes are made in Canada, benefiting mostly Ontario, which needs all the help it can get. 

The Baltic Dry Index, which tracks ocean shipping rates, is trading at its 25-year low.  This is indicative of a weak world trade.   The CRB Index is also sliding.  At today’s level, off 16% from a year ago, it means we have entered deflation.  The lower this index goes, the more damage deflation will do to the economy.  Deflation is a job killer and destroys wealth that is backed by debt (aka real-estate). 

We hate being the bearer of bad news but the U.S. economy is nowhere near as robust as their metrics lead us to believe, nor will it be able to pull the world economy from driving into the ditch.  We still need to eliminate the excesses of commodities, real-estate, and nearly every other good we created over the past two decades before new organic growth can take place.  We cannot see this taking place until 2018, at the earliest.