The Economy Grows! So What?
The enormous sigh of relief we heard this morning when the GDP figures for the third quarter were released is absurd. I realize I am being a tad curmudgeonly here, but: so what?
For the record this is the first, or “advance”, estimate and will go through two revisions before becoming final. Even after that it could get revised as the government geeks sift through their piles of data. According to this release GDP grew at a 2.5% annual rate in the third quarter, up from the miserable 1.3% of the second and the appalling 0.4% of the first.
Hurray.
Unfortunately this figure is less than the numbers being tossed about last week by the experts who had all been taken in by the more upbeat nature of recent piecemeal reports. The consensus had settled at growth of around 3.0%, with individual forecasts ranging as high as 3.5%. I saw no reason to budge from my less optimistic predictions of between 2.0% and 2.5%. Thus my ongoing view of malaise seems vindicated.
That’s not good.
Here’s the breakdown of the numbers, as usual I express it as contributions to the overall 2.5%:
- Personal Consumption contributed positively at +1.72%
- Private Investment added +0.52%
- Net trade [exports less imports] added +0.22%
- Government spending was flat, adding 0.00%
Add those up and you get growth of 2.46% which the government press releases all round up to that 2.5% number.
As you can see, the big story is that consumption ran at a decent pace, although it is still considerably down from the pace we saw a year ago. It has bounced up from the second quarter’s terrible showing and is at least in the black, but it is not a strong figure by any stretch of the imagination. Digging beneath the surface we find two major contributors: health care spending, which produced 0.61% of the overall 1.72% I mentioned above; and spending on autos, which added 0.31%. So over half of the uptick came from just to parts of the economy. The rest was spread thinly across the rest of consumption, with no one area showing either notable strengths or weaknesses.
This is a decent but not great quarter. There is no need to get particularly excited about it. Except: at least we are not headed downwards into another recession, but I never thought we were. Indeed, in my opinion, all the talk of double dips over the past two or three months represented a complete misreading of the data. The economy is sluggish, not imploding. Demand is weak – as today’s figures confirm – but it is not trending down.
The private sector investment numbers would have been much stronger were it not for the ongoing unwinding of inventories. Fixed investment added 1.6%, but inventories chipped -1.08% off this figure. As you all know, inventory swings can distort the overall investment figures, and this quarter is no exception. A key question we need to ask, as always, is what motivated the inventory swing? Was business de-stocking shelves because it anticipates less sales this winter? Or was the reduction involuntary because businesses misjudged the slight surge in consumption? Or was it weather related? This conundrum always plagues the proper interpretation of the data. If the de-stocking is accompanied by a strong uptick in sales then we could spin it in a positive light. If not, then the more likely interpretation, and my current preference, is that business is still cautious and is thus keeping inventories at a minimium. It will be interesting to watch this aspect of the report as it goes through revision over the next two months.
There isn’t much of a story behind the trade figures. Both exports and imports grew, with exports comfortably outpacing imports. One slight oddity to report is that imports of services grew at exactly the same rate as exports of services. This is unusual. Under normal circumstances the US is a net exporter of services which thus make a steady contribution to GDP and the growth of exports is usually higher than that of imports. So the third quarter was something of a quirk. That is, of course, in terms of rate of change. In absolute numbers exports of services still dwarfs imports by about a 5:3 ratio.
Lastly, government spending was neither positive nor negative. I have mentioned many times that the impact of the 2009 stimulus has worn off, and the third quarter is a good example of this. Federal spending has grown about $10 billion in inflation adjusted terms over the past six months, but non-defense spending has contracted by $10.3 billion over that same period. Yes, government spending, other than defense is shrinking – contrary to what you might hear in our political dialog. That $10.3 billion contraction was offset, obviously, by a surge in defense spending of $20.3 billion. Furthermore, and to add to my constant drumbeat, spending at the state and local level continues to decline as states trim their budgets. This is a hidden aspect of the total story of government spending, and is why I have advocated federal aid to the states. In the past six months the contraction of local spending cut about $15.2 billion out of the economy, following a contraction of $27.2 billion in 2010. So austerity at the state level has eroded, very significantly, the effectiveness of federal stimulus. Which is yet one more reason why I thought the original stimulus was way too small and ill-conceived. But that’s an old story.
So, what does this all mean?
Bear in mind that these numbers will be heavily revised, so we should be careful in our interpretation. Still, I think we can conclude that the economy is growing, not contracting; it is not robust by any means; growth is well dispersed throughout all sectors, but nowhere is it a source of strength. Thus the picture is one of malaise. I cannot see a reason to move towards predicting stronger growth any time soon. All the basic building blocks are in place for more of the same. yes, we may see a quarter of higher growth, but I don’t think it will signify a break out to a sustainably higher level. We need household debt reduction to work its way through, wages to increase, and unemployment to fall before we can argue for a return to “normal” growth of 3.0%+.
We are firmly stuck in no man’s land. None of these important factors will be resolved quickly as long as we potter along with mediocre growth. And yet unless they are resolved we can only expect mediocre growth. The case for stimulus is clear. But it isn’t being heard. Hence my view of more, and possibly intractable, stagnation.
So, don’t get carried away by the third quarter. It was nice. Nicer than a decline for sure. But not that nice. It doesn’t solve anything.
