The GDP Number Is A Good Start, But…
When last quarter’s GDP showed a small decrease, I ripped it to shreds, pointing out that by nearly every measure, things were worse than anticipated. Sure the headline number was alright, but only because of a massive 11% increase in government spending, and a massive reduction in imports (imports subtract from GDP) which I viewed as bad since it signaled economic activity was decreasing.
This number was expected to be between 3.0%-4.0% and we landed right in the middle at 3.5%. I’m not surprised about that, but I thought that it would be largely due to statistical flukes that had little to do with reality, namely how inventories are calculated. That view is expressed here. My second concern was that the majority of increase in consumer spending would be due to cash for clunkers and other one time events. Indeed, Reuters notes:
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS, NEW YORK:
“The GDP report was what people expected as of a week ago, but since then everyone had lowered their forecast.
“There are two important aspects of this report. One is that consumer spending was artificially strong in the third quarter, up 3.4 percent, because of the cash-for-clunkers auto buying incentive program, because of spending related to home buying linked to the new home-buyers tax credit, and due to a drop in the savings rate.
“Most people think there was some borrowing — in terms of consumer spending — in the third quarter from the fourth quarter and that the underlying consumer spending number is probably closer to 2 percent.
“The second takeaway from the Q3 GDP report is that there is still very large inventory liquidation, but it wasn’t as much as the second quarter and that added a percentage point to growth. So even though the headline number is 3.5 percent, it feels like the kind of number that, at best, would keep the unemployment rate unchanged: more like 2 percent GDP growth. So growth was soggier than it looks.”
See how he noted that inventory was still declining, but it added 1%? That’s kind of GDP math that makes no sense to me.
On the plus side, digging into the data there is room for optimism. For instance:
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.6 percent in the third quarter, compared with an increase of 0.5 percent in the
Real personal consumption expenditures increased 3.4 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. Durable goods increased 22.3 percent, in contrast to a decrease of 5.6 percent. The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, “Cash for Clunkers” Program). Nondurable goods increased 2.0 percent in the third quarter, in contrast to a decrease of 1.9 percent in the second. Services increased 1.2 percent, compared with an increase of 0.2 percent.
Real exports of goods and services increased 14.7 percent in the third quarter, in contrast to a decrease of 4.1 percent in the second. Real imports of goods and services increased 16.4 percent, in contrast to a decrease of 14.7 percent.
Real federal government consumption expenditures and gross investment increased 7.9 percent in the third quarter, compared with an increase of 11.4 percent in the second. National defense increased
8.4 percent, compared with an increase of 14.0 percent. Nondefense increased 6.8 percent, compared with an increase of 6.1 percent. Real state and local government consumption expenditures and gross investment decreased 1.1 percent, in contrast to an increase of 3.9 percent.
This is the opposite of last quarter. The price deflator was 1.5% which is good because some people were worried we’d get 3.5% growth with a 0.5% deflator (the deflator is subtracted in order to try to get “real” GDP, not just effects of inflation) so that gives more credence to the numbers. Exports rose a lot, but less than imports — which leads to a subtraction from GDP when it comes to trade — but overall I’d take increasing trade activity as a positive sign, even if mathematically it “hurt” us. And while cash for clunkers is huge, there was an increase in other areas as well. Overall, I agree with the conclusion that this report is “solid” 2% growth which is really about the target for an economy like ours.
Well, normally. Two percent is considered what is needed for maintaining the situation, it isn’t enough for new job creation or overall wealth improvements. Thus, I’d say in the last quarter we just treaded water. Now we have to bottom out before things can improve, so if you look at it that way there is a lot of optimism, or you could be pessimistic and point to the fact that there was tons of one time stimulus, that the federal government stimulus had its max impact according to the White House (not necessarily maximum spending, just the first derivative was largest so it had most contribution to GDP) and blah blah blah.
More worrying to me is the fact that the government isn’t counting on 2% or even 3% growth over the next few years, they are counting on 4%-4.5% growth! That is going to be extremely hard to do unless there are sustained job increases. Going forward that will be the prime number to look at.
This report really gives fuel to both sides: those that claim that all the government intervention worked to stabilize and we have bright days ahead should be reaffirmed, and those that claim that it will be hard to keep treading water and that at best we will see no real improvement “on the street” also are supported. As much as I hate the cliche, the next six months are critical to determining which is the real path.