Growth At Last
Not that anyone is truly surprised, given the discussions of the past few weeks, but today’s news that the economy grew by 3.5%, at annual rates, during the third quarter is welcome nonetheless. It breaks a string of four consecutive quarters of decline – five of the last six quarters saw a decline – and marks the end of recession, at least for now.
The growth was in areas we all expected:
- Personal consumption added + 2.4%
- Business and real estate investment added + 0.3%
- Inventory adjustments added + 0.9%
- Trade worsened, subtracting – 0.5%
- Government spending added + 0.4%
These are the amounts each sector contributed to the overall growth in the economy. I have rounded them off for ease of use.
Th important point to make is that the recovery has some of the aspects of a ‘normal’ recovery: that contribution of 0.9% from inventories is one of the most highly anticipated figures in recent economic history. All the signs had been pointing towards a significant lift from inventory adjustment, so it no surprise to see it add so much to the overall picture.
The figures for personal consumption are not surprising either when we dig below the surface. Sales of motor vehicles gave the economy a solid lift, largely on the back of the infamous ‘cash for clunkers’ program. Of the 2.4% gain in consumption a full 1.1% came from auto sales. Most other areas of consumption saw some sort of an increase, with only recreation declining. The big issue going forward, of course, remains just how much momentum there is in non-auto consumption: these are the big categories of expenditure that we need to see growing in the 0.5% to 1.0% range if we are to begin to establish a self-sustaining recovery. Right now none of the major types of consumption rise to meet that criterion, so we have a long way to go yet.
Equally expected was the negative turn in net exports – exports minus imports. Both grew in the quarter but the pick-up in imports more than offset for the recovery in exports. The recent decline in the dollar should limit the impact of this shift over the next few months, although in the past few days the dollar has stopped its decline as the stock and bond markets seem to be taking a breather. Broadly speaking as the economy recovers there will be an initial pull on imports as foreign sourced inventories are re-stocked. Then, naturally, as the economy gets going we will start to import more resources such as oil to support that growth. One of the major priorities worldwide in the next decade will be to reduce American imports and likewise reduce the dependence of countries such as Germany, Japan, and China on exporting here. They will all need to become more self-sustained by boosting domestic demand and drawing in more American goods. This adjustment will take a while and so its benefits on American GDP will be slow to show up.
Lastly, but definitely not least, the effects of government spending show up vividly in that 0.4% boost to growth last quarter. This is clearly not the full extent of the stimulus: the impact in consumption is unmistakable too. But, as we all know, the stimulus is a temporary phenomenon and has to be replaced by organic, rather than stimulated, by early next year.
We cannot tell from this data what our chances are for getting a self-sustaining recovery in place by mid-2010. The recent run of news has not been too encouraging: it is all too mixed still to detect a solid positive trend. Right now the fourth quarter looks as if it should produce growth of around 2.5%. After that the first half of next year seems also in that 2.0% to 2.5% range. It is the latter half of next year we should be worried about. Once the stimulus wears off and the inventory adjustment has ebbed away growth could well slow quickly and even fade altogether.
To prevent a stall we need employment to stabilize and begin to turn around more dramatically than this morning’s slight evidence – from the 1,000 decrease in first time unemployment assistance claims. This improvement is simply toosmall to rely upon and could easily be a function of the seasonal adjustment used to smooth the data out. The drop of 6,000 in the four week moving average is more solid and indicates that the job market may be in marginally better shape than it was a couple of months ago. But for the economy to perk up strongly we need to get from ‘marginal’ improvements to ‘strong’ improvements.
And that seems a way off.
So for now we can breath more easily. The rot has stopped. Now comes the hard part, and that’s much more problematic.
