You may have heard media reports recently about how the economy is slowly improving. The stock market has been pointing upward, consumer confidence is growing and profits for most companies have exceeded expectations. Is the "recovery" real, or is the government creating the illusion of prosperity at the expense of future generations?

There's enough evidence to suggest that the economy is being artificially propped up by monetary and fiscal policies that aren't sustainable. These policies have skewed the economic performance data published regularly by the government, such as unemployment and GDP.

SEE: Austerity: When The Government Tightens Its Belt

Unemployment
The unemployment statistics may not portray an accurate snapshot of the true job picture in the U.S. The unemployment rate is calculated by dividing the number of unemployed workers by the total labor force.

The unemployed are defined as those who are jobless, looking for jobs and available for work. Those who have stopped searching for a job or are otherwise unavailable to work are not counted, which artificially lowers the unemployment rate by an estimated 7%.

Another reason the rate runs into a shortfall is because jobs are being paid for with deficit spending. The deficit for FY2011 was $1.3 trillion and nothing has been done by the federal government to reduce spending to control future deficits. That money is flowing into the economy and paying for jobs that wouldn't exist if the budget was balanced.

For example, suppose the number of jobs paid for by the FY2011 deficit can be estimated by dividing the total deficit by the average cost per worker. The annual worker cost of $160,000 includes salary, benefits, office space, materials and supplies.

Divide the deficit of $1.3 trillion by $160,000 and the result is that deficit spending is paying for about 8 million jobs. If all those jobs were added to the unemployment rolls, the rate increases another 5%.

In summary, the current unemployment rate of 8.3% is understated by at least 12% (7% + 5% from above). The estimated total rate of 21% is higher than the 18% average experienced during the decade of the Great Depression.

Gross Domestic Product
GDP is the measure of economic output and includes government spending. The GDP for FY2011 was about $15 trillion. Government deficit spending comprised $1.3 trillion of that amount, so the "true" GDP was actually $13.7 trillion. That's a reduction of 9% from the published value, a drop that some would classify as depression-level. Thus, subtracting government deficit spending creates a different portrait of the health of the economy.

Three-quarters of GDP is now a function of consumer spending that has been fueled by epic levels of personal debt. Consumer demand has pulled back because of unemployment and credit tightening, even though interest rates are at historic lows. If rates are hiked because of inflation, then demand will take another significant hit, further depressing GDP.

There are other reasons to be concerned about GDP. Over the past several decades, the U.S. has transitioned from a production-based industrial economy to a consumer-driven service economy. This has not resulted in a GDP decline because of the way "production" is calculated. For example, if you take care of your child at home, that's not counted as GDP, but paying for your child to attend day-care is counted. The result is that all these service industries inflate GDP because we now pay for many services that we previously did ourselves.

The current GDP calculation is masking decreases in real production over the past several decades. As factories and other manufacturing facilities have closed, they've been replaced by more services that don't create real wealth. This is one reason why millions of manufacturing jobs have moved overseas with no apparent reduction in GDP.

The Bottom Line
The U.S. economy is growing increasingly dependent on escalating levels of debt, with 10% of tax revenues going to debt service this year. The remaining revenues are only adequate to pay for national defense, Social Security and healthcare. Every penny beyond that is either borrowed or printed. The strain on entitlement programs continues to grow as averages of 10,000 baby boomers retire every day.

Unfortunately, the government will continue to borrow and print money to create the illusion that the economy is recovering. It's analogous to giving a compulsive gambler who is short on change more money in the hope that he will use it to pay his bills and debts, rather than spend it on gambling. It won't seem like he's broke now, but when he gambles away that money too, who will give him more?

Related Articles
  1. Mutual Funds & ETFs

    The 3 Best Vanguard Funds for Value Investors in 2016

    Find out which of Vanguard's value funds are the best for building a solid core-satellite value investing strategy for your portfolio.
  2. Fundamental Analysis

    Is a U.S. Industrial Recession on the Horizon in 2016?

    Find out why the industrial economy may be teetering on an industrial recession and what could prevent it from going over the cliff.
  3. Investing Basics

    5 Questions First Time Investors Should Ask in 2016

    Learn five of the most important questions you need to ask if you are a new investor planning on starting an investment program in 2016.
  4. Mutual Funds & ETFs

    The 4 Best Fidelity Funds for Growth Investors in 2016

    Find out which of Fidelity's growth funds are the best funds for building a solid core satellite growth investing strategy for 2016.
  5. Mutual Funds & ETFs

    The 5 Best US Small Cap Value Index Mutual Funds

    Find out which index mutual funds do the best at investing in small-cap value stocks for higher potential returns at the lowest cost.
  6. Mutual Funds & ETFs

    The 5 Best T. Rowe Price Funds for the Income Seeker in 2016 (TROW)

    Find out which T. Rowe Price mutual funds to use to create a diversified income portfolio for current income, income growth and capital preservation.
  7. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  8. Stock Analysis

    The Biggest Risks of Investing in Lockheed Martin Stock (LMT)

    Learn about defense contractor, Lockheed Martin, its leadership within its industry, and how the company can stay on top as the defense landscape changes.
  9. Investing News

    What's the Fed Going to do in 2016?

    Learn about the factors that contribute to increases in the federal funds rate by the Federal Reserve and key economic indicators for 2016.
  10. Retirement

    Warren Buffett's Investment Lessons for Retirees

    For those in retirement, Warren Buffett's clear, timeless advice on investing is worth a look.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  3. Is Russia a developed country?

    Though it once reigned alongside the United States as a world superpower, Russia is not classified as a developed country ... Read Full Answer >>
  4. Is North Korea a developed country?

    North Korea is one of the poorest and least developed countries in the world. It is far from a developed country. Because ... Read Full Answer >>
  5. Is Mexico a developed country?

    As of 2015, Mexico is not a developed country. However, it beats the majority of its peers in the developing world on most ... Read Full Answer >>
  6. Is China a developed country?

    Despite having the world's second-largest economy and third-largest military, China is still, as of 2015, not classified ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center