October 29, 2009
Q3 GDP IS UP, BUT THE WAR FOR GROWTH HAS ONLY JUST BEGUN
It's official: the U.S. economy expanded by 3.5% in the third quarter, the Bureau of Economic Analysis reports today. Encouraging as that is, it's neither a surprise nor anything near to closure for the financial and economic hurricane of the last year or so. But it is a step in the right direct, albeit a tentative and not-yet fully confirming step that the walk ahead will be equally brisk.
Nonetheless, good news is worthy of celebration at this point, if only for a moment. After four straight quarters of retreat, a gain in GDP is no trivial change. All the more so when we dive into the numbers and learn that the expansion was broad based. All the major categories that factor into the final GDP calculation posted healthy gains in Q3. That is, personal consumption expenditures, gross private domestic investment, exports and government spending were higher during the three months through September. That compares with red ink on those ledgers in past quarters, save for government spending and a mild rise in consumer spending in Q1 2009.
Otherwise, this is the first time in more than a year (or two, depending on your perspective) since the GDP report showed unambiguous growth across the board. If there's a single report that confirms that the economy has dodged a bullet—i.e., avoided a deeper, prolonged contraction—today's update is it. Thanks largely to Bernanke's Fed, the central bank's great mistake in the 1930s—keeping monetary policy too tight after the economic slump—has been avoided this time. GDP's Q3 report tells us so in no uncertain terms.
Indeed, it's no small trick to elevate consumer spending in the wake of the deepest economic recession since the Great Depression. And yet the numbers in our table below show that Joe Sixpack has been pulling out his wallet and spending across the board. This is no free lunch, of course, and so there'll be a price to pay for juicing consumer spending at a time of mounting debts and default. But the bigger risk, albeit temporary risk, was allowing spending generally to seize up. We've avoided that trap, at least for the moment, although we fear that we've traded an large acute problem for a modest chronic one that lingers.
In short, there are caveats lurking behind today's sunny GDP report. Many caveats. For now, we'll simply note one. The jump in durable goods, for instance, was assisted in no small way by the government's cash-for-clunkers stimulus program that boosted (or seemed to boost) auto purchases in recent months. That was a one-shot deal, of course, and it's not clear that the additional spending generated by the plan didn't simply transfer future spending activity into the present. Indeed, a report by Edmunds.com, via The Christian Science Monitor, charges that the cash-for-clunkers program gave money to consumers who would have bought a car regardless of the government's efforts.
The fact that the Fed has been effectively giving money away for much of the past year, combined with various fiscal stimulus efforts, insured that liquidity would be spilling over into every nook and cranny of the economy. Some of this liquidity was destined to show up as new consumption. If you print it, they'll spend it, at least some of it.
Helping the process along has been the snapback effect. Early in 2009, the economy was going to do one of two things: collapse or bounce back. The Fed's efforts helped tip the scale by more than a little to the latter, and we continue to see the effects. Indeed, the clues leading up to today's news of GDP's Q3 rise have been bubbling for some time, as we've been noting for months, including here.
But the snapback effect has limited reach, as do the government's various stimulus efforts. The true judge of the post-apocalyptic world of last autumn can't be judged—shouldn't be judged—by the Q3 GDP report alone. Yes, we've learned the lesson of how to manage monetary affairs in the immediate aftermath of a severe financial crises/recessions. But the lessons, and the solutions, for the period beyond that early post-crash period remain much more of a gray area with less-obvious policy responses, if any.
We're now moving into uncharted territory. Yes, we've arguably laid a foundation to provide the economy with a fighting chance of maintaining stability. Fostering growth, on the other hand, remains a challenge of some magnitude, with no easy answers, as the ongoing slump in the labor market reminds. Part of the problem is that there are so few periods to study in recent history. Japan in the 1990s and the U.S. in the 1930s are the main precedents, and neither offers compelling insights beyond the immediate snapback period.
Regardless, the U.S. economy faces a number of challenges, few of which are of the garden variety, starting with debt. Another is the labor market, which was showing signs of strain well before last year's debacle. As we pointed out earlier this month, the labor market rebound following recessions over the past 25 years has been increasingly mild. Given the context this time around, there's little reason to think the trend will abate. If anything, it seems likely to accelerate.
So, yes, let's cheer today's GDP report. But let's reserve judgment on whether we won the war or merely survived the first battle.
Posted by jp at October 29, 2009 9:31 AM