Kudos to Rosie for dissecting and exposing the deceptive GDP number.
By Daniel at 1 February, 2010, 10:05 pm
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Abelson from Barron’s also quoted Rosie:
” WHEN WE TALK ABOUT GOOD NEWS, often as not, we’re tempted to put quotation marks around that heartening phrase. For on closer inspection, the news in question is somewhat less good than it appears at first glance.
Take, by way of example, Friday’s report by the Commerce Department that gross domestic product grew at 5.7% in last year’s final three months, the best quarterly showing since the July-September stretch in 2003. Poking into the details reveals something much less ebullient, an OK but not great performance by the economy.
For more than half of that 5.7% gain — 3.4 percentage points, to be exact — came by virtue of a palpably slower pace of inventory reduction.
As sharp-eyed Dave Rosenberg of Gluskin, Sheff points out, the change in inventories did not represent the start of a new cycle but, rather, an adjustment, a transitory realignment of stocks of merchandise to sales. Except for the $100 billion-plus decline in inventory reduction, fourth-quarter GDP would have weighed in at a nothing-to-write-home-about 2.2% annual rate.
It’s quite unusual, Dave observes, for inventories to chip in such a hefty part of GDP at the same time import growth is cut in half, as it was in the December quarter. Strip out inventories and the foreign trade sector, he notes, and growth in domestic demand dwindles to a paltry 1.7%, from 2.3.% in the previous quarter. “Some recovery,” he mutters.
Moreover, according to his calculations, demand growth in light of all the massive doses of fiscal and monetary stimulus should be running at a better than 10% annual rate, not shuffling along at 1.7%. So, Dave contends, the real question that nobody seems to ask is, why has demand remained so muted more than two years after such an unprecedented gusher of stimulus?
The answer, he suggests glumly, is that “this epic credit collapse is a pervasive drain on spending and very likely has another five years to play out.” Comforting prospect, eh?
Dean Baker, of the Center for Economic and Policy Research, in his latest commentary also offers some worthwhile observations on aspects of the GDP report. He cites the 15.4% decline in non-residential structures and, in view of the “enormous overbuilding” in that sector, he expects spending to extend its mournful contraction through the first half. And he warns that although residential investment grew at a 5.7% clip in ’09’s final quarter, recent declines in home starts and sales indicate spending on housing will level off or even dip this year.
“While the economy is now growing, it’s striking,” he muses, “how much damage was caused by the recession.” Net domestic product (GDP minus depreciation) was 0.3% lower than in the fourth quarter of 2006. And the drop in net domestic income has been even more dramatic. Such prolonged downturns have not occurred, he relates somberly, since the Great Depression.
Nor can he see much to cheer about in the outlook for jobs: “With final demand growth remaining weak, there is little prospect for a turnaround in employment in the near future.” Sigh.”
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