James Pethokoukis

Politics and policy from inside Washington

So-so growth for 2010?

Jan 29, 2010 15:26 UTC

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.

COMMENT

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.

Posted by proreason | Report as abusive

5.7 percent 4Q GDP growth … then a slowdown

Jan 29, 2010 14:31 UTC

Or so says RDQ Economics:

The recovery from the Great Recession firmed in the fourth quarter as real GDP increased at its fastest rate since the third quarter of 2003.  However, also as expected, a sharp slowing in inventory liquidation accounted for 3.4 percentage points (or 60%) of the 5.7% increase in real GDP.  We are particularly impressed by the 13.3% increase in nonresidential investment (upside risk in this area was flagged by yesterday’s durable goods report).

We were also pleased that none of the growth came from government spending, which fell by 0.2%.  From the Fed’s perspective, however, this report does not bring a rate hike closer.  First, the unemployment rate rose from 9.6% in the third quarter to 10.0% in the fourth (raising upside risk to the estimates for potential growth).  Second, the GDP deflator increased by only 0.6% (although, perhaps counter-intuitively, this modest gain was due to the subtraction effect of higher import prices, which surged 16.3%—the price index for domestic purchases rose 2.1% in the fourth quarter, which is a measure of what people and businesses paid, whereas the GDP price index measures the price of what the U.S. produced).

Nominal GDP growth was a robust 6.4% in the quarter (and 0.8% year-over-year).  As the addition to growth from inventories fades somewhat, we see growth in the first quarter of 2010 at around 2½%

COMMENT

Laffer says the numbers will be better than expected this year because businesses will pull income into 2010 to avoid the tax hike in 2011. Then 2011 will be very bad.

It rings true.

Posted by proreason | Report as abusive

How does the U.S. economic recovery compare to past ones?

Jan 4, 2010 19:57 UTC

This handy chart comes courtesy of David Rosenberg of Gluskin Sheff:

recovery010410

COMMENT

Mr. Pethokukis,what is your take on your ancestoral place’s debt problems whether it is due to capitalistic or socialistic policies?Is excessive debt necessary for long term growth?

Posted by schadha100 | Report as abusive

One more reason why 2011 looks bad

Dec 28, 2009 15:34 UTC

Interesting analysis from Deutsche Bank, especially the last part which I put in bold (via Econbrowser):

Based in part on CBO estimates, we expect the combined positive effects on the level of real GDP of the tax cuts, transfers, and spending increases in the ARRA package to peak around the middle of next year and then to begin to diminish. Translating these level effects into impacts on the annual rate of growth of GDP yields a boost of 1 to 2 percentage points to GDP growth through mid-2010. That growth effect then drops to zero and eventually turns negative during the second half of the year, subtracting about a percentage point from growth during 2011. This is a key reason why we see growth receding somewhat in 2011 relative to 2010. We have not assumed that a major portion of the Bush tax cuts will be allowed to expire at the end of 2010, but that does pose a downside risk to the forecast.

Me: And here is all that in chart form:

chart

COMMENT

One additional comment: the expiration of the Bush tax cuts in 2011 should actually prove to be a stimulus for the economy in 2010, because it gives individuals and business an incentive to accelerate income, and to realize capital gains and reinvest the proceeds in projects with better returns on investment.

Political impact of surprisingly weak 3Q GDP

Dec 22, 2009 14:32 UTC

First, the Commerce Department:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.2 percent in the third quarter of2009, (that is, from the second quarter to the third quarter), according to the “third” estimatereleased by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent. The GDP estimate released today is based on more complete source data than were available for the “second” estimate issued last month. In the second estimate, the increase in real GDP was 2.8 percent.

Me:  And, of course, the original estimate was 3.5 percent. Now  a few thoughts;

1) After such a nasty recession, the US economy should grow in the 6-8 percent range. The first seven quarters after the 1981-82 recession saw 7 percent average GDP growth.

2)  If that doesn’t happen soon, another sign that this recovery/expansion will different. And by different, I mean weaker than is typical.

3) And a weaker recovery, means weaker job growth. To drop unemployment by a full percentage point next year, it will take 4 percetn GDP growth generating 250k a month.

4) High unemployment and weaker growth means a higher level of danger for Democrat incumbents in the 2010 midterms. My working model translates 3 percent growth into typical losses of 25 seats in the House, 2 in the Senate. If growth comes in at closer to 2 percent, that is when you get the 1994-esque scenario with 40+ losses and 5+ Senate seats.

COMMENT

Not a bad deal if it means getting rid of a bunch of lefty politicians and shifting Nobama to the right. That’s what Bill Clinton did in 1994, and ya can’t argue with success.

Posted by gotthardbahn | Report as abusive

Goldman Sachs still believes in the New Normal despite rosier growth forecast

Dec 15, 2009 13:58 UTC

Goldman Sachs has boosted its 4Q GDP outlook to 4 percent from 3 percent, yet continues to believe in the gloomy New Normal. Here’s why:

By our estimates, fiscal policy contributed around 2½ percentage points (annualized) to real final demand growth in the second half of 2009. …  The conclusion thus seems to be that fiscal policy has been responsible for most, if not all, of the growth of final demand in the second half of 2009.

While fiscal policy will remain supportive to growth for most of 2010, the size of this boost is set to decline, modestly in the first half and sharply in the second half. (Indeed, our current estimates imply a negative impact in the fourth quarter, although this is obviously subject to new congressional initiatives as the midterm elections approach.) This means that we need an underlying improvement in final demand just to offset the impact of policy through 2010. While we do expect such an improvement, we believe it will be U-shaped rather than V-shaped and hence insufficient to produce an acceleration in final demand growth once the fiscal pattern is taken into account.

Me: Moreover, the firm still thinks job growth will only average 100k a month, not counting census temps. If that number shot up to, say, 250k a month — a level that would really start lowering the unemployment rate, the firm said it might change its view that the private economy was still muddling through at a 2 percent GDP rate without government steroids.

Obama’s bad economic bet may ruin Democrats

Oct 29, 2009 18:19 UTC

The anemic third-quarter U.S. GDP report is another indication that President Barack Obama’s economic gamble may yet fail to pay off. And that could be terrible news for Democrats heading into the 2010 midterm elections.

While the new report showed the economy shifting into recovery mode, it looks like a pretty anemic expansion. As the economics team at IHS Global Insight see things, temporary factors such as cash for clunkers (accounting for nearly half of the past quarter’s growth) and the homebuyers tax credit artificially inflated growth during the past three months. The firm puts underlying growth in the economy at closer to 2 percent than the 3.5 percent.

See, back at the start of 2009, the new White House team wagered that it could construct a stimulus plan that would both boost the economy, helping Democrats in the 2010 midterms, and serve as a significant down-payment on its long-term policy agenda in areas like clean energy and education. That would help Obama in 2012.

It’s a lot to ask of one plan, even a $787 billion one.

Of course, the task would have been easier had the administration gone with a $1.2 trillion stimulus option suggested by White House adviser Christina Romer. But worried that the deluxe option would stall in Congress while also spooking global bond vigilantes, Team Obama went with the mid-sized approach.

The administration didn’t count on the recession being far worse than it anticipated, driving the unemployment rate toward double digits. So while the stimulus plan was effective enough to help nudge the economy away from depression in the second quarter — it’s tough to spend a trillion dollars with absolutely zero short-term impact — and into mild recovery mode during the third, it wasn’t nearly powerful enough to ignite a V-shaped recovery.

Indeed, during the first quarter of the last 10 economic recoveries, real GDP rose a far more impressive 5.8 percent on average. For instance, the first five quarters of the Reagan Boom coming out of the 1981-82 recession showed GDP growth of 8.1 percent, 9.3 percent, 8.1 percent, 8.5 percent,  and 8.0 percent.

There was another, better path Obama could have taken. In a new study, Harvard economists Alberto Alesina and Silvia Ardagna conclude that fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. The Obama stimulus was two-thirds spending and one-third tax cuts or credits. And of course tax cuts thought more permanent by Americans could have produced a large impact on working, savings and investing – and powerful economic growth.

Romer herself has conducted research showing the economic oomph that tax cuts produce. And there’s research from economist Robert Barro who found that “a one-percentage-point cut in the average marginal tax rate raises the following year’s GDP growth rate by around 0.6 percent per year.”

As it is, Democrats are saddled with an economy that may not grow fast enough over the next year to substantially bring down the unemployment rate, if at all. So now there is a new wager in Washington: Just how bad will Democrat losses be next year?

COMMENT

Another Kudlow idiot-supply side has ruined this country

Posted by paul nelson | Report as abusive

And after the GDP report ….

Oct 29, 2009 17:37 UTC

Some cold water via economist Dean Baker of the liberal Center for Economic and Policy Research:

While the growth shown in this report allows us to pronounce the recession ended, it does not provide much basis for optimism about the future. Consumption spending is virtually certain to shrink in future quarters. The same is true of structure investment and state and local government spending. We are unlikely to get much boost from the trade sector or much further boost from defense spending. The only sector that is likely to be a source of substantial growth in the next year is inventories, as the rundown eventually reaches an endpoint. However, with so much weakness elsewhere in the economy, inventories fluctuations will not turn the economy around.

America’s Potemkin Economy

Oct 29, 2009 14:34 UTC

That the US economy has stopped shrinking is certainly good news. But what kind of recovery is this? Strip out Cash for Clunkers and 3Q GDP growth came in at 1.6 percent. Also strip out slowing inventory cuts and GDP would have been just 0.6 percent. Then you have a report that the WH has overestimated the number of jobs created by the stimulus.

More from economist Robert Brusca:

1) But the fact is that inventories are still being cut, not being built up. Although less inventory cutting is a technical boost to GDP the fact of cutting tells us that the economy has not yet turned any corner very sharply.

2) Consumer spending spurted at a 3.4% pace this quarter, spurred important by cash for clunkers. But that program has come and gone and spending levels have SUNK BACK. So consumption is not yet on a strong sustainable expansion path.  … Cash for clunkers carried the quarter. It’s gone in Q4 and spending levels will recede, with GDP growth taking a hit. Will other spending pick up and compensate?

3) Business investment spending was a net negative this quarter and commercial real estate is under pressure – it will be no source of growth. Still business spending on equipment and software turned positive for the first time in six quarters.

4) Government spending rose by 2.3% the fifth highest rise in the last seven quarters. This is not a very good return on our stimulus monies spent. About three-quarters of a trillion dollars has been spent and with no discernable impact on GDP or on jobs.

COMMENT

We won’t enter a real recovery until we move from consumption mode to production mode. We produce little if anything of any real value. We make nice nick knacks but that’s about it. We can’t cure Cancer, AIDS, dementia, or anything else with a “financial product”. But we can sure watch others out perform the US in these areas with stunning clarity on a nice plasma screen tv made over seas.

We are magnificent killers. Our military is probably the best in the world. But that’s pretty much the only thing we’re any good at. Or at least, that’s the only thing we show the world we’re good at.

How’s the private sector doing?

Oct 1, 2009 17:32 UTC

Not so good. As this GDP chart from my pal Donald Marron shows:

marronchart

COMMENT

Unemployment is rising.

Posted by Camron Barth | Report as abusive
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