GDP Growth Surges … Or Does It?
Calm down everyone. Today’s report that GDP grew at an annual rate of 5.7% in the last quarter of 2009 is a very misleading statistic. Yes, the economy grew, and, yes, growth was a little higher than in the third quarter, but the growth trajectory is a lot lower than that 5.7% suggests.
Here’s why:
Look at the sources of growth …
- Consumption added 1.4% to the overall figure
- Investment added 0.4%
- Trade [exports minus imports] added 0.5%
- Government spending was flat i.e. added 0.0% [ A drop in state spending zeroed out a gain in federal spending]
- Inventory adjustments added 3.4%
What leaps out from these numbers are two things.
First state and local government cutbacks are offsetting the federal level stimulus. That will come as no surprise to those of you who read my comments regularly. I have been warning that we have 50 small Hoovers at work trying to undermine the national economy by cutting expenditure – mainly by cutting jobs – in order to maintain balanced budgets. I have argued against those locally imposed constitutional amendments forcing the states to balance their books over the years, and today’s report offers up a great example of the calamitous effect such ideas can have. In order to balance their books the states are plunging themselves deeper into trouble by eliminating jobs and therefore reducing the capacity of their local populations to consume or save. Worse still: their collective miserly approach is now reducing almost to zero the beneficial effects of the federal stimulus. This is yet more evidence that the federal stimulus should have been much larger and should have included aid to the states in order to forestall their negative actions.
It takes no brilliance to foresee that the sum of all this local thrift is combining to harm the union as a whole.
Oh well at least I tried.
The second major theme to jump at us from the report is that inventory adjustment figure. 60% of the entire GDP growth comes simply from an inventory shift as firms restock shelves. Final sales – the bit of growth that is sustainable or likely to be repeated contributed only 40% of the total. That is the big story today, not the headline number.
Given that the inventory adjustment is probably now over, we should subtract its effect if we want to project the likely course of GDP over the next few months and quarters. Once we do that we reduce our forecasts to the 2.0% to 2.5% range, which is where the bulk of commentators have been all along.
So the story is this: the economy is clearly growing. This is the second quarter with safely positive numbers. Inventories have added a short term boost right through the last six months of last year. It is doubtful that inventories will contribute anywhere near that much going forward so growth will have to rely on ‘recurring’ activity – consumption, investment, and trade – during 2010 and beyond. Right now the combination of those activities is creating a growth trend of between 2.0% and 3.0% a year. Lastly, as noted above, state budget cuts are hurting the national economy and are likely to stay as a negative influence for a while.
What does this all mean to the average person. Not a heck of a lot.
Until growth is reflected in more optimistic forecasts at the business level it will seem to be an abstraction rather than as reflecting reality. More upbeat business expectations will drive renewed hiring and thus will cause unemployment to drop. How many successive months or quarters of growth businesses need to see before they turn up their hiring is anyone’s guess. As with anything incorporating something like ‘expectations’ business hiring goals are immune to precise prediction.
I think it is safe to say that there will be a steady improvement all year long, but that with growth stuck at low levels and therefore with the margin for error so fine, businesses will be very hesitant to add to their workforces. They will more probably try to squeeze extra productivity from their existing workers. So the best guess outlook is still one of slow growth along with a very slow improvement in unemployment. Ironically, as I have said here many times, the longer that unemployment stays stuck at elevated levels, the more risk is associated with those growth predictions. I think we can rule out a double dip style recession for the immediate future, but most of the risks to the outlook remain on the negative side.
Look for GDP growth of 1.5% at the low end; 3.0% at the high end; and a most likely of between 2.0% to 2.5% for this year.
