James Pethokoukis

Politics and policy from inside Washington

So-so growth for 2010?

January 29, 2010

That is how IHS Global calls it:

The fourth-quarter GDP surge was produced by a sharp turn in the inventory cycle. Firms still cut inventories in the fourth quarter, but much less severely than in the third. That led to increased production, which boosted GDP. Final sales growth, a better guide to the underlying path of the economy, was much more sedate, at 2.2%, but that was still an improvement on the third quarter’s 1.5% pace.

The best news in final sales was on exports and business spending. Exports surged 18.1%, their second strong increase in a row. And there was a 13.3% increase in business spending on equipment and software (two-fifths of which came from computers). The improving trend in capital goods orders suggests more gains in equipment spending ahead. If firms are feeling confident enough to raise their equipment spending, they’re probably confident enough to start hiring again. That will support consumer spending, which showed a moderate 2.0% gain in the fourth quarter.

The weakest spot was business structures spending, down sharply again as the commercial real estate crisis took its toll.

We must be careful in drawing implications for the future from today’s release. There’s more help to come from the inventory cycle, since inventories were still falling in Q4. But we won’t see a boost as big as 3.4 percentage points again. And we’re doubtful that foreign trade can continue to be a plus for growth, as we expect imports to rebound.

The Q4 GDP surge doesn’t change the view that growth is likely to be subdued by historical standards, in the 2.5-3.0% region for 2010.

Comments

1. the economy turns around when enough businesses reduce enough costs to become profitable again
2. the GDP includes government spending, and Obama bucks have flooded the economy. So no surprise GDP went up. But what will happen when the Obama bucks have to be paid back?
3. the underlying problems of a horrible economy are still there: huge debt, looming taxes, looming inflation, government interventions for the sole purpose of expanding government, a new bubble in the stock market, huge uncertainties resulting from an economically illiterate administration.

They can force the GDP up by spending borrowed money, but the economy won’t get better until the criminals in Washington are washed away.

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