Saturday, January 30, 2010

5.7% Economic Growth and What It Means, Time to Watch Wisconsin?

The Recovery Becomes Official, What's Next?
The Bureau of Economic Analysis on Friday released it's quarterly report on the performance of the United States Gross Domestic product, which included the preliminary estimate of economic growth in the 4th quarter of 2009. The US Economy grew at an annualized rate of 5.7% in the 4th quarter of 2009, the fastest rate in over 6 years. This, following the revised 2.2% growth rate for the third quarter of 2009, marks two consecutive quarters of positive economic growth. For all intents and purposes, we can declare that the "Great Recession" ended in the summer or fall of 2009, although an official pronouncement won't be made until long after the fact.

So what exactly does this mean and how does this jive with the current 10.0% unemployment rate and the even more scary "underemployment rate" which counts those who are unemployed, those who are no longer classified as unemployment because they have given up looking for work and those who are working part-time but are seeking full-time work, of 18.3%?

First, let's take a step back and remember what these numbers mean.

The Gross Domestic Product of the United States is the value of all goods and services produced in the United States within a year. This is a very important bottom-line economic number as the the value of all the goods and services produced directly correlates to the standard of living people have as all goods and services produced here are either consumed here or exported, with the value of the exports used to buy other goods. A very good metric for the overall standard of living in a country is its Per Capita GDP, that is the Gross Domestic Product divided by the population. This is how many goods and services the average person can expect to receive. This explanation is a little over-simplified, but generally true.

The US population is not static. It is growing at a rate of about 2% per year. Therefore, the GDP has to grow at a rate of 2% per year just to maintain the existing standard of living. When growth falls below 2%, even if it does not go negative, living standards decline. When it exceeds 2%, living standards increase.

The chart below shows the quarterly GDP growth rates since 2007. The green line is the actual GDP growth rate. The blue line is the "gap to 2%", that is the amount by which the standard of living in the United States is below where it was before the recession started.

There are two key lessons that I believe that you can glean from this graph.

(1) Economic performance under President Obama has been remarkable good
It's an odd thing to say with unemployment extremely high, but if you look at the growth curve, the economy was in utter free-fall in the 4th quarter of 2008 (before the President took office) and in the 1st quarter of 2009 (after the President took office, but before any reasonable impact from his economic policies could take effect.)

Of course, giving him full credit for the recovery would be silly. The actions to stabilize the financial system taken by the Bush administration in its last days, as lacking as they may have been in terms of proper accountability, was critical in preventing an even greater slide. The natural economic cycle obviously also plays into this -- economies go up and down to a certain extent irrespective of government policy. The Fed has also been critical, slashing interest rates to their lowest levels ever and providing large amounts of liquidity by taking on a large balance sheet.

Still, it's hard to deny the impact of President Obama's policies. Cash for Clunkers and the First Time Homebuyer credit spurred auto sales and arrested the free fall of home prices. Tax credits stabilized consumer spending. Infrastructure spending spurred construction employment, albeit not at a fast enough pace.

The bottom line is, in just three quarters, the rate of economic growth went from a pace of 6.4% contraction to a pace of 5.7% growth, over a 12% swing.

(2) How Far We Still Have to Go
If you look at the gap to 2% growth, the economy is still 5.8% smaller than it needs to be just to restore the standard of living prior to the recession. That may not sound like a lot relative to a 5.7% growth rate, but it is. Let me explain.

Keep in mind that going forward, the economy will continue to have to grow at 2% just to hold its ground, so a year of 5.8% growth wouldn't restore the standard, it would require a year of 7.8% growth, 5.8% to fill the hole and 2.0% to account for population growth. Nobody thinks 7.8% growth is going to happen.

So, based on more realistic scenarios, how long before we get back to where we were?
At 5% growth, it would take 2 years to get back to where we were at the start of the recession -- in other words we wouldn't be back to where we were until the end of 2011.

At 4% growth, it would take 3 years, or the end of 2012.

At 3% growth, it would take 5.75 years, or the fall of 2015.

And the 5.7% growth number includes a lot of inventory recovery - businesses restocking inventories following holding them at historic lows during the recession, growth that is not repeatable. 4% is probably a pretty rosy scenario. Which means that we are going to see elevated unemployment for some time to come.

So, in the end, the news is good, but we have a long way to go. The Fed will have to balance growth with controlling inflation and will ultimately need to increase interest rates to more normal levels if economic growth continues. There is still anxiety and depressed consumer spending thanks to high unemployment. But it's hard not to feel a lot better than we did a year or nine months ago.

Stimulus Spending and the Proposed "Jobs Bill"
The latest government report shows that stimulus money continues to slowly go out the door. The latest figures:
Tax Cuts: $92.8 billion spent out of $288 billion (32.2%)
Spending: $195.6 billion spent out of $499 billion (39.2%)
Total: $288.4 billion spent out of $787 billion (36.6%)

Given that 63.4% of the stimulus money remains unspent, why is President Obama saying that a "jobs bill", also known to those of us paying attention, as another stimulus bill, should be the top priority of congress this year?

Clearly part of it is political, the President is trying to pivot to an economic focus after the bloody fight over health care sapped his public approval. This is understandable. The Democrats want to be seen as doing something with people still hurting under the scourge of unemployment.

But authorizing more spending may not be the best course to chart. The best course is probably to focus on effectively deploying the almost half a trillion dollar already available under the stimulus package, working to close out TARP and collect remaining outstanding loans to the financial services industry, chart a course back to private enterprise for GM, which may well earn a profit this year and chart a plan to deficit reduction that will prevent future economic growth from being impaired by massive amounts of investment capital being absorbed through government bonds.

That work isn't as sexy, but is probably what is needed. Hopefully that will all happen in the background. But we are probably going to get at least a token jobs bill in the meantime.

Feingold at Risk?
A theoretical Rasmussen poll matching incumbent Senator Russ Feingold (D-WI) against popular former Republican Governor and former Secretary of Health and Human Services Tommy Thompson, shows Thompson leading Feingold by 3%. This is a theoretical poll as Thompson has not indicated that he is going to run. Still, it is a worrisome number for Feingold, as it shows that he IS vulnerable this November. It is enough to move Wisconsin from a Likely Democratic Hold to a Lean Democratic Hold.

Other polls released this week showed the GOP continuing to lead in North Carolina and the DEM's continuing to lead in California, but neither was significant enough to move the rating of the races, which were both already listed as leaning in those respective directions.

The GOP is slowly chipping into one Democratic seat after another. Is this just a low point for the DEM's and will the ultimately recover or hold on and win Wisconsin, Indiana, California, New York, Pennsylvania, etc.? Or is this the start of a GOP November rout, where the GOP finds an improbable way to secure 10 seats and control of the Senate.

No one can know at this point. We'll see what the polls do in the next few days in the aftermath of the State of the Union speech.

If you like this site, tell your friends.

No comments: