President Barack Obama

At  its peak level of GDP, the U.S. economy depended on the American consumer for more than 70% of its output of goods and services. It has been the deleveraging of the American consumer, and to a growing extent his/her unemployment, that has been the catalyst of the U.S. recession. And not only America; the centrality of the U.S. consumer to the overall global economy has meant his pulling back on a debt induced shopping spree has sparked a worldwide synchronized recession.

The vast amount of money that Uncle Sam has borrowed to fund a nearly $800 billion economic stimulus program is supposed to substitute for the falloff in consumer demand, stop the avalanche of job losses and in the process regenerate consumer spending. The perception that this policy response was beginning to bear fruit has been the foundation of a recent flurry of statements emanating from the Federal Reserve, intimating that the recession was winding down, with recovery just around the corner. Both the Fed, Obama administration and Wall Street fully expected that the July retail sales figures would reflect a return to growth in consumer spending, juiced up by a taxpayer funding “cash for clunkers” gimmick aimed at kick-starting auto sales.

When the official sales figures were released by the Commerce Department, jaws dropped right through the floor. Instead of the .7% rise that was expected, July’s retail sales figures revealed a decline of .1%. However, the reality was much worse than even the posted decline, for the July figures were artificially inflated by a large increase in automobile related products due to “cash for clunkers.” Without the engineered car driven increase in consumer purchases, the actual retail sales contraction was .6%.

The ugly truth is that no matter how manipulated official economic statistics are, including the U3 unemployment number, the reality is that total consumer purchasing power, reflecting the number of hours worked multiplied by average wage, has declined to a level that makes it virtually impossible to recreate vigorous economic growth. Despite the happy talk from Washington,  I think it would be surprising if the Obama administration does not ask Congress for a second massive stimulus package before the end of the year.

Should a second stimulus package be proposed by President Obama, he may encounter stiff resistance from Republicans and fiscally conservative Democrats over concerns about the exploding national debt. However, it is likely that the Obama administration will place a higher priority on going into the 2010 mid-term elections with the ability to claim they have reduced unemployment rather than positioning themselves as fiscally responsible.

Higher deficits, however ,create the danger of inflation and much higher interest rates. Escalating interest rates will serve as a brake on economic expansion, defeating the purpose of deficit  funded stimulus programs. Now, in that situation, one can always resort to monetary policy, with the Federal Reserve reducing interest rates. However, in this unique economic disaster our planet is currently navigating its way through, the Fed, as with many central banks throughout the world, has already reduced its funds rate to close to zero.

Could the Obama administration be running out of options? If fall retail sales continue to plummet and unemployment rises, things could get even more ugly for the problematic American economy.

Karl Denninger, a frequent guest on CNBC and commentator for a website with a sceptical take on the economy, Market Ticker, has offered a convincing rebuttal to those who stand by the official claim that Q2 witnessed a decline of a mere one percent in the U.S. economy’s GDP. Here are the salient points of Denninger’s critique of the numbers that came out of the Commerce Department’s Bureau of Economic Analysis.

In Q2, Denninger points out, the government’s spending grew by 10.9%, contributing to a positive movement of 3.3% in the second quarter’s reported GDP. Remove that 3.3% from the equation, and the actual Q2 data for the consumer economy witnessed an overall contraction of -5.2%, a figure substantially worse that the official government Q2 report.

The statistical argument raised by Karl Denninger warrants careful consideration by all those who are seeking an accurate gauge of what is actually transpiring in the real economy. Furthermore, the track record of both the Commerce Department and Labor Department under both Bush and Obama has not been exactly stellar with regard to its statistical accuracy in measuring the impact of the Global Economic Crisis on the American economy. Simultaneously with the release of reassuring Q2 numbers, the Commerce Department also admitted it had gotten its evaluation of the recession’s affect on the U.S. economy’s GDP from its onset in Q4 of 2007 through the latter part of 2008 stupendously wrong, now conceding that the actual contraction was -1.9 percent instead of -0.8%, as previously reported.

There is only one flaw with Karl Denninger`s analysis; it is based on logic, a principal that seems irrelevant to any measurement of the economy derived from official government sources.