Positive GDP does not Signal End of the Depression
Posted by Michael A. Kamperman on October 29, 2009
The third quarter GDP rose by 3.5%. Media outlets and economic pundits have hailed the report as irrefutable evidence the recession is over. It is not over. Consider that 1% of the gain came from a decline in the decline of inventories. The country shrank inventories at an annualized rate of $130 billion in the third quarter. But because that was an improvement over the second quarter the alchemists consider this negative a positive. A careful reading of the GDP report shows that 1.66% of the gain came from an increase in auto production. This is attributable to a combination of the cash for clunkers program and of GM and Chrysler restarting production that was totally shut down for parts of the second quarter as they went through government controlled bankruptcy proceedings. In September auto sales fell back to depression levels once the cash for clunkers program ran its course. Residential fixed investments increased 23.4% in the third quarter after decreasing 23.3% in the second quarter. But in September sales of new homes fell 3.6%, while sales of existing homes rose 9.4%. This is due to the first time home buyers tax credit. The discrepancy between existing homes sales and new home sales is because in order to qualify for the credit a buyer must close on the home by November 30 and new home cannot be built in less than 90 days. This indicates that just like the cash for clunkers program as soon as federal government stimulus is removed from the marketplace depression level final demand resumes. There is a real possibility a new home buyers tax credit will be extended in some form. However, it will probably not juice sales as much as the last tax credit since everyone who was waiting to buy a home ran out and bought one to take advantage of the tax credit. In other words in both situations demand was pulled forward. The collapse in consumer confidence in October and the persistently high rates of weekly jobless claims indicate the underlying fundamentals of the economy have not materially improved. The banks are still tightening lending and as long as that continues the depression will continue.
The GDP report revealed some stark weaknesses in the economy that will eventually drag the whole economy down again. First and foremost state and local government expenditures shrank by 1.1%. The decrease in tax revenues means local government spending will remain weak for an extended period of time. Also, non-residential spending decreased by 2.5%. The commercial real estate market is flat on its back and will only continue to contract going forward. Finally, disposable personal income decreased by $20.4 billion in the third quarter. This means the 3.4% increase in consumer spending is not sustainable, especially if the consumer remains unable to borrow their way to prosperity.
The real tragedy about the 3rd quarter positive GDP report is the high fives at the Whitehouse and Federal Reserve will prevent much needed economic assistance from Washington making its way to Main Street. The real measure of economic growth is jobs. Unless the federal government statisticians again drop hundreds of thousands of people out of the workforce the unemployment rate will rise to 10%, or higher in next Friday’s report. If not for the federal government dropping 1.5 million people out of the labor force in the last few months the official unemployment report would already be close to 11%. The Obama administration can only hide their heads in the sand like Ostriches for so long. If the new Hoover administration doesn’t get their act together by creating millions of jobs soon they will be looking at a Republican controlled Congress in 2010.
