The GDP (Gross Domestic Product) and You (If the economy is so good, why don't we feel it?) - *Ernest Nounou

Last week's announcement that GDP (the most popular measure of economic health) grew by an inflation-adjusted 4.3% in the 3rd quarter has the administration and economic pundits in a dilemma: If the US economy is doing well, growing faster than Europe's and Japan's, and created 215,000 jobs in November, why can't everyone take a victory lap for a job well done? The administration wants higher poll numbers for its handling of the economy; economists are puzzled by the prevailing anxiety amid the good news.

Rather than talking to people and learning the obvious, two explanations are offered: 1) The Iraq War overshadows other news; 2) The administration has failed to communicate the good news. Certainly events in Iraq are alarming, but that hasn't been news for over a year. Nor is pessimism a function of the administration's poor salesmanship. Average Americans are pessimistic out of real concerns for their future prospects. These include stagnant wages, job insecurity, rising health care cost, and shaky retirement outlook. Absent specific solutions that address their concerns, they won't be persuaded by salesmanship.

For those who forgot their Economics 101, GDP is a gauge of economic activity measured by the formula GDP = Government Spending + Investment + Exports (net) + Consumption. The Government Spending component of the GDP (including all military and non-military expenditures) went up, but that's never a robust contributor to economic growth. Investment (for factories and equipment) went up a bit in the building industry, but little else. Instead, GM, Ford, Merck, and Pfizer, to name only the most recent ones, have announced plant closings and major layoffs. Corporate America is sitting on its highest cash piles in memory; so why aren't they investing it in new factories and capacity?

The Exports (net) provides no help and is an actual drain, because we export far less than we import. That leaves Consumption, which now represents over 70% of economic activity, and indeed continued to grow stronger than expected. This is largely why the economy grew by inflation adjusted 4.3% - Americans consumed more! Will more consuming really make Americans more optimistic about their economic prospects? And as for the "inflation-adjusted" part, any resident of South East Massachusetts knows the official inflation measures are understated. So in reality that 4.3% is overstated.

Historically, 4.3% GDP growth would be a cause for celebration, because companies would be encouraged to increase investment ("I") and create more jobs. In a globalized economy, that no longer happens to the same degree (a topic for another time). To the extent new capacity is required, even high skill companies such as Intel announce new facilities in India and China, not in America. That wasn't supposed to happen; only low-end jobs would go overseas. Economists note high corporate cash positions means great prospects for the economy. They further cite increased dividends, stock buy-backs, and corporate mergers as evidence of corporate optimism. But is it?

Until recently, American companies paid low dividends. Corporate mantra was that they could get higher returns for the cash than their shareholders could. Now corporations are returning money to shareholders via higher dividends and stock buybacks, because they can't find more productive uses for that money. That's better than wasting it, but what does it say about how corporations really view their future prospects? And when they merge with other companies, a round of cost cutting and layoffs occurs. Good for shareholders, not so good for the workers involved, and questionable for future economic prospects.

In the face of the administration's inevitable sales pitch, wise Americans will make their own assessment of their economic realities. Some are doing well and can invest prudently in conservative stocks of companies such as General Electric that has announced a dividend increase and huge share buy back plan. Share buy backs help support a company's share price.

Average Americans have reasons to be anxious about their future prospects; and it speaks volumes that the administration and economic pundits can't understand why. Rather than abstract concepts such as 4.3% inflation-adjusted GDP growth, Americans need tangible reasons for optimism, such as new factory openings, a slowdown in the steady drumbeat of layoff news, affordable healthcare solutions. Otherwise, cheerleading alone will not change their reality.

*A graduate of Wharton, Ernie is a Founding Partner of Catalytic Group, Inc., a Technology consulting and execution firm. A former banker he enjoys writing on business topics and can be reached at ernie@catalyticgroup.com.