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Posted by on Oct 29, 2009 in Economy | 16 comments

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.

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  • DLS

    “they are counting on 4%-4.5% growth!”

    Haven’t we seen such rosy (optimistic, unrealistic, perhaps dishonest) assumptions or presumptions before?

  • tidbits

    NPR is reporting much the same about the GDP numbers being inflated by stimulus programs, and that consumer spending and durable goods numbers in particular are probably not short term sustainable in an economy not stimulated by C for C or the home buyer’s tax credit. NPR’s take…listening briefly in traffic this a.m….is that there is some hope in the numbers, but they are exaggerated by unique events and should not be taken at face value. You are in good company, Mikkel.

  • Roy

    And we’re just supposed to trust these Government “reports”?

    How can they say we’re out of a recession when home foreclosures are surging still (see http://www.foreclosure.com) and auto repossessions are skyrocketing (see http://www.repofinder.com)?

    I’ll trust my magic 8 ball over Government “reports”.

  • DLS

    “NPR is reporting much the same about the GDP numbers being inflated by stimulus programs,”

    It’s a welcome relief that NPR is healthily skeptical rather than robotically obedient to Team Obama.

    What has been neglected is to what extent the economy has been temporarily propped, and a continued downward slide postponed (until after the 2010 elections, people should be suspecting), due to the stimulus money, which often has been [mis]spent on filling current state government deficits and otherwise [mis]spent on prompt needs or wants rather than on long-term growth projects that would be better associated with not only a sustained recovery but with greater future prosperity. What happens when the credit card bomb finally explodes, or the unemployment benefits expire, or worse deficits in state government finances materialize next year (a concern already in Michigan, where stimulus funds are being [mis]spent to fill in this year’s budget deficits), and there is no stimulus or other bailout money to foolishly expect to [mis]spend? What happens When The Music Stops?

  • tidbits

    Damn, DLS, other than the irrelevant, gratuitous and unnecessary swipe at NPR, I actually agree with your comment. That’s twice in three days! I really need to spend less time in the sun.

  • DLS

    “That’s twice in three days! I really need to spend less time in the sun.”

    Watch out — the cool season is almost on you, in earnest. You’ll even see leaves change color around Christmastime (before the buds start opening and flowering within six weeks later).

    As far as my swipe at NPR, you can even stomach that if you realize that it used to be true, and was made because yes, I often listen to NPR. (“Morning Edition” or “All Things Considered” would be the perfect program for retired people to listen to in a greenhouse…)

  • StockBoySF

    “NPR is reporting much the same about the GDP numbers being inflated by stimulus programs…”

    So the stimulus programs worked! Better than the economy completely going downhill. I think MIkkel’s characterization of “treading water” is most accurate. The stimulus was sort of a life preserver to keep the economy from completely going under but at some point the economy will eaither be rescued or will start sinking.

  • DLS

    I’ll be sure to hit the road and tune in to NPR this afternoon.

    So far, the stimulus has fizzled, Stockster — saving or “creating” many fewer jobs than originally claimed. The real questions relate to how the money has often been used by state governments, not for job creation or growth or development, but simply to fund current expenditures, and “fill deficit holes” (which won’t be guaranteed to be possible next year, and are projected to be worse here, in Michigan, for example).

    “The stimulus was sort of a life preserver”

    I believe it has been used this way, but that it never should have been intended, or used, this way.

    • Anna

      Yet, you would’ve also complained had the Federal government dictated to the states how to spend that money…yelling “State’s Rights!” at the top of your voice along the way. I guess there’s just no pleasing some people…

  • casualobserver

    I’m pleased to continue to be holding the contrarian position here at TMV. I am happily redeployed into global emerging markets equities to the tune of about a third of the portfolio and am over 60% recaptured since Oct 08. I am especially proud of some picks that are now trading above their precrash values.If my portfolio “V” holds its curve, I will be back into total black by early next year.My Dean Witter key word whisper to those interested….labor productivity stats. Human capital without a substantial intellectual capital component is not worth investing in.

    • mikkel

      As long as people keep buying our debt that’s not a bad strategy…we’re exporting a hell of a lot of inflation to emerging markets, and they are helping to keep the dollar artificially propped up…so you’d get the upside from the inflation raising asset values there and don’t get the downside of depreciation killing you.

      You just have to hope you don’t get caught in another flow of funds reversal.

  • DLS

    “My Dean Witter key word whisper to those interested….labor productivity stats.”

    Instead of transmission uprating and new construction, what is being proposed? “Smart meters,” as an example of a smart grid. No, a distribution service-point labor-saving proposition is more like it. (Fewer meter readers required, is the real issue, not how it helps the homeowner manage and conserve energy.)

  • DLS

    “you would’ve also complained had the Federal government dictated to the states how to spend that money…”

    I probably would have, without shouting, as you incorrectly surmised. There is no hypocrisy in such a case, and it’s illogical to complain about it when referring to the obvious short-term, short-sighted misconduct by the state and local governments (which is independent of where they get the stimulus money — no different than if they were to raise taxes and spend money nominally on “stimulus” measures within each of the states or counties).

    You don’t seem to care to note the obvious, be it to defend mismanagement by the states (any spending is OK, perhaps, to you), or for other “reasons.” Correctly: I guess there’s just no pleasing some people.

    • Anna

      That’s quite a stretch for you to surmise that just because I only focused on your “damned if they do, damned if they don’t” attitude towards the administration as my defense of mismanagement by the states…in fact, it’s a logical fallacy.

      I do think the stimulus was necessary to keep us from going over the cliff but maybe next time the states should check with you first to make sure they’re spending their stimulus money in the way that you approve of. /snark

  • DLS

    “As long as people keep buying our debt that’s not a bad strategy.”

    So far we haven’t had to worry about a federal debt trap. So far. What about interest rates, before then?

  • DLS

    “I only focused on your ‘damned if they do, damned if they don’t’ attitude towards the administration ”

    Which is what you illogically assumed as a matter of course, though it is incorrect, as you said,

    “you would’ve also complained had the Federal government dictated to the states how to spend that money…yelling “State’s Rights!” at the top of your voice along the way. ”

    to which I responded logically.

    Enough said.

    * * *

    “I do think the stimulus was necessary to keep us from going over the cliff”

    I supported the decision to attempt a real stimulus, complete with ambitious spending and even large temporary debt goals. (Not the facile recent re-discovery of Keynes we see in the media, but accepting the idea of defying prudence and sensibility as a temporary measure, which might well work, in theory.)

    “but”

    Good-bye, again, logic. This ought to be good…

    “maybe next time the states should check with you first to make sure they’re spending their stimulus money in the way that you approve of. /snark”

    I’ve listed ways not only that make sense to me, but to others, such as Democrat ally Zandi at Moody’s, of “bang for the buck list” fame (his well-known assessment of what’s effective and what isn’t as effective). But who cares what thoughtful people are thinking, if panic prevails or reason otherwise is rejected?

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