GDP Revised Sideways; Jobs Edge Up

Todays has seen a little flurry of news, so lets’ just take a look:

The latests revision of GDP was released, and showed practically no change. At 1.7%, GDP growth was mediocre in the second quarter to say the least. The details are worth looking at because they give us insight into the probable course of the third quarter.

• Personal Consumption contributed +1.5%
• Investment contributed 2.9% [Fixed Investment being +2.1%; Inventories being +0.8%]
• Net Trade contributed -3.5% [Exports grew 1.1%; offset by Imports growing 4.6%]
• Government Expenditures contributed +0.8% [Federal growth being +0.7%; State growth being +0.1%]

The clear story here is that consumption is growing slowly, certainly not enough to push the economy out of the doldrums, but enough to prevent the onset of renewed recession. Add in the growth in investment, particularly in fixed investment, and the basic private sector is chugging along at a slow but decent pace. One spot of concern is that we have reached the end of the inventory cycle, so the addition to growth from that activity is declining quite sharply from the levels we saw at the end on 2009. That’s fine as long as fixed investment takes up the slack as it appears to have done in the second quarter, but we need to keep close watch on this in the coming months.

The other big news was the big shift in trade. Exports ticked up moderately which reflects the recovery going on around the world. Unfortunately there was a very large growth in imports that swamped exports and took a lot of the steam out of GDP overall. A couple of things seem to be going on there. One is that importers of finished goods appear to have brought in an unusually large amount of goods, possibly to re-stock shelves in anticipation of growth, all at once. Another is that the pick up in GDP generally always has the effect of sucking in things like oil: as the economy moves up a notch, so too do such imports. I doubt that the surge in imports will be repeated in the third quarter, so that alone will tend to boost GDP beyond its second quarter level.

The last factor to note is that government spending at the state level shifted into a positive gear, albeit at very low levels. One thing I try to point out relentlessly is that government spending at the Federal level is stimulative – its adds growth – but at the state level it has been negative as states try to balance their budgets. So much of the stimulus that attracts the eye of voters and media alike has been offset or neutralized by this state level contraction. In effect the states have worked against the Federal government and its effort to get the economy going. This is one reason that I have advocated allowing states to run deficits and have the Feds write checks to pay for them. That way local services and jobs are not sacrificed, and the national stimulus is not neutralized. I doubt that the positive shift at the state level can be maintained for long and thus expect the local drag on the economy to re-assert itself either this quarter or next.

Overall, this report is a sideways revision from the last release of data. We learned very little we didn’t know already. The economy is not declining, nor is it brimming with health. Most importantly there is no sign of sufficient health to get job creation out of its cellar dwelling existence.

Speaking of which:

Today’s release of the weekly numbers on new claims for unemployment assistance was a modest pleasant surprise. New claims declined by 16,000 to 453,000. While the absolute level is still way too high for this point in a recovery, we should acknowledge the modest progress. This is the third week of very slight improvement, which is better, obviously, than the alternative.

Nonetheless, businesses are now reporting weaker sales forecasts and are reacting by downgrading their hiring expectations. This is just awful news.

The entire outlook hinges on business expectations. As long as the prospect of weak demand lingers, so too will the prospect of a poor job market. Eventually the two interplay with each other and the poor job market creates the conditions in which businesses see poor sales. The economy is operating well below its potential, which is based upon the amount that could be produced were we at full employment and businesses were producing at or near full capacity. The gap between where we are and where we could be is now between 6% and 8% of GDP. That’s almost $1 trillion in lost wealth this year alone. Assuming that it will take us a while to get back to close to potential, this recession will end up costing us more than $6 trillion in lost wealth. We should be willing to spend, and borrow if need be, in order to reduce that lost wealth total. That’s one reason why people who wring their hands about the cost of the stimulus are wrong: they are looking only at the cost. They ignore the payback from that debt. The payback being the decrease in wealth lost as we recover.

The social benefit of stimulus far exceeds the social cost. We should think of it as an investment in our future. As long as the job market stays in its current funk we should be willing to endorse any plan to get it moving. If that means borrowing, so be it. The benefits outweigh the costs. By a lot.

I am tired of saying this: we need more stimulus.