America’s Economy Expanded. Did Yours?

Frids Kowmbon 30 January 2010

The United States economy grew at its fastest pace in over six years at the end of 2009,” announces The Times’s Catherine Rampell, “Gross domestic product expanded at an annual rate of 5.7 percent in the fourth quarter, after growing at an annualized rate of 2.2 percent in the previous quarter … the strong growth in the fourth quarter capped a year of the biggest contraction since 1946, when the country was still cooling off from World War II.”

So, is it time to think about giving the Great Recession the Long Goodbye? Not everybody — in fact, nobody — seems to think so.

The fact is, companies clearing out their warehouses boosts G.D.P., but doesn’t do much for those out of a job.

Matt Yglesias of Think Progress leads the applause, but ladles on the caveats:

5.7 percent is a very good number. If we could sustain something like that for a little while then we’d start to make progress on the labor market. But the worrying thing here is that so much of the growth represents inventory shifts. The recession left firms with large excess inventories, then we had a few quarters in which inventory draw-down impeded growth, and what we saw in Q4 was the end of that process. You could imagine a bit more good inventory news in the future as firms restock, but it’s bound to be a transient thing. Real personal consumption grew at a modest 2 percent and given how much debt everyone’s got you’re unlikely to see that reach a much higher figure. Government expenditures aren’t going to give us a boost in the future, thanks to the phase-out of ARRA and the “spending freeze,” unless we manage to start a war with Iran.

So we’re basically left hoping for growth to come from the export sector. Q4 saw imports grow and saw exports grow even faster, which is pretty much what we should be hoping for from trade.

“The bad news is that the 5.7% number, while obviously heartening, may be a little misleading,” adds Steve Benen at Washington Monthly. “Expect to hear a lot about something called an ‘inventory bounce.’ ”

You can hear all about it from Steven Mufson at The Washington Post, who writes:

Ed Yardeni, president of Yardeni Research and the former economist at Deutsche Bank, noted that even if there were no change in final sales of goods, the GDP figures would show a 4 percent increase simply because businesses that were emptying their warehouses a year ago are now buying enough goods to keep stockpiles steady.

“A lot of it is the arithmetic of inventories,” said Yardeni, who had been expecting a 6.5 percent jump in the GDP number. “Even if there is a very strong number for the fourth quarter, if it’s [all because of] inventories, it will raise real questions about the strength of the economy in 2010.”

Christina Romer, the White House’s top economic soothsayer, wants to nip those questions in the bud: “Inventory bounce, though likely to be transitory, is a normal part of healthy recoveries. As firms’ confidence in the future increases, their desire to run down inventories wanes. This change in behavior is often a powerful force for growth early in a recovery.”

Who’s buying that? Not Ian Pollick, an analyst at TD Securities. “All things considered, this was a very strong report and is the first GDP report in 2009 to really elicit any semblance of a ‘wow’ factor,” he tells The Wall Street Journal. “Having said that though, it is quite obvious to us that the rebound during the quarter was not a function of some new-found economic dynamism, but rather it was the slowing pace of inventory liquidation that really dealt the winning hand. The fact that sixty percent of growth can be attributed to this correction suggests the pace of GDP growth going forward will fail to keep pace, though that is not to say growth will stall altogether.”

“Surprisingly, federal, state and local government spending fell (-0.2%) which means the economy’s growth last quarter was powered by consumers and private industry,” writes Stuart Hoffman of PNC at the Journal’s round-up, showing once again that two economists can have three opinions. “More Federal fiscal stimulus is in the pipeline for the first half of 2010, but the fourth quarter GDP data shows that the necessary “hand-off” or transition from government stimulus to private sector spending is underway which is essential to sustain the economic expansion!”

“There’s a ‘cup half empty’ and a ‘cup half full’ way to view these figures,” adds Dave Schuler at the Glittering eye, proving that you don’t even need two voices to have a debate. The good news is that 5.7% is a very solid growth rate, an expanding economy is better than a contracting one, and things, e.g. motor vehicles, that were subsidized did well. The bad news is that things that weren’t subsidized, e.g. computers, contracted, which still shows weakness. I should also point out that strong growth in the face of declining employment indicates rising productivity. As long as productivity is rising, outputs are increasing, and the future is as uncertain as it is will we see an increase in employment?”

Back to the the cup half empty side. “The national unemployment rate stubbornly remains at 10 percent, with states such as California, Rhode Island, Michigan and South Carolina suffering from even higher local unemployment rates,” writes Newsweek’s Nancy Cook. “If people lose their jobs or feel insecure about their futures, they spend less money or opt to save more cash. Either way, they’re not buying as much stuff. Increased consumer spending is one roadmap economists see as a way to pull Americans out of this recession.”

Hot Air’s Ed Morrissey also thinks the other shoe has yet to drop.

These are all preliminary numbers, of course. Commerce first estimated 2009Q3 GDP at a 3.5% annualized rate of growth. Later it had to revise that number downward twice, to the same 2.2% that remains in Q4 after eliminating inventory manipulation. In a month to six weeks, look for that number to slide downward again, although not as much as in Q3, which was an unusually high correction. It also looks like the inventory accounting will be a one-time deal, which won’t help the numbers in the next quarter.

Politically, this could not come at a better time for Obama. He wants to move forward on jobs in the same direction as Porkulus, and these numbers will lend credence to his argument that his policies are the correct cure for the economy. But a 2.2% rate of real growth won’t be enough to get capital back in the game, especially under the business conditions set by the high-spending, high-regulating, high-taxing agenda in Congress.

Next month’s unemployment report will have more impact on the economic policy debate, I’d guess, than the GDP number.

Edward Harrison of Credit Writedowns also recommends holding our applause: “There will be a lot said about this number. But, your takeaways should be: cyclical agents like inventory changes will drive the uptick near-term. This is being bolstered by stimulus. And the end result is higher disposable personal income. We should still look at DPI and retail sales for signs of sustainability.”

Megan McCardle of the Atlantic doesn’t seem to think even G.D.P. sustainability is all that important. “Man cannot live by GDP alone,” she writes. “I’d argue that the better measure of whether the economy has returned to health is employment — at least, that’s when the improvement starts to translate into improvements in peoples’ real lives. Prolonged unemployment is one of the most crippling things that can afflict people in the modern world. Yet despite a second consecutive quarter of growth, prolonged unemployment is what we’re stuck with. The number of long term unemployed has shot up relative to the people who find jobs relatively quickly.”

McCardle thinks that “to some extent, this is normal for a recession” because “employment tends to be a lagging indicator, as cautious employers use existing workers to fill rising production orders, rather than taking on more employees that they might have to later fire.” But she sees a worrisome historical shift:

The last two recessions were characterized by lingering unemployment–the infamous “jobless recovery” under Clinton and Bush. One theory for why this is true comes from a paper by Erica Groshen and Simon Potter, which suggests that increasingly, America’s unemployment tends to be structural rather than cyclical. In the old economy, aggregate demand collapsed for some reason, and workers got laid off, then called back to work when orders recovered. These days, it is more likely that your job and industry has gone away entirely … As jobs have gotten more skilled, more human capital is specific to firms, industry, and job classifications. That means it’s going to take longer to transfer those workers into other areas of the economy. Either they need to search harder to find a job that meets their skill set, or they need to get new skills. Either way, that high unemployment number is probably going to be very stubbornly persistent well into next year.

In the end, the blogger who ends up being perhaps the most convinced that the economy really has turned around is Paul Mirengoff, of the conservative site Power Line. Of course, politics being politics, he’s not necessarily happy about it. “If the economy is headed for a healthy recovery, Republicans should perhaps be a little less triumphalist about President Obama’s current difficulties,” he warns. “To non-ideological voters (i.e. most of the electorate) nearly everything political looks different when we go from bad times to good, or visa versa … Think also about the State of the Union Obama would be capable of giving if the unemployment rate fell to close to half of what it is now. I submit that the demagoguery that was so easy to shrug off on Wednesday would be considerably more threatening in that context. The Republicans should have good November 2010 notwithstanding the recovery … It’s what might happen in 2011 and 2012 in light of a recovery that Republicans should start thinking about.”

We’d all like to think about a recovery next year, I’m sure. But what does it mean that the only blogger who finds it imminent is one who, in the political sense anyway, probably considers it bad news?

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