With unemployment benefit claims above expectations, durable goods orders below them, new home sales sharply off and the stock market down 2.9% for the month, today’s estimate from the Dept. of Commerce that the annualized fourth quarter 2009 gross domestic product soared 5.7% capped off a week of mostly bad economic news with something hopeful. The rise was well above expectations, the best growth in six years and a far cry from the 6.4% plunge in the first quarter of 2009.
Real GDP fell 2.4 percent in 2009 over 2008, the worst drop in a single year since 1946. This compares with an increase in 2008 over 2007 of 0.4%. Today’s GDP estimate is the first of three, with revisions based on more complete data coming in February and March.
Few, if any, analysts believe the fourth-quarter number can be sustained. But if all four quarters of 2010 average even somewhat less than half that percentage, at least 2.3%, the history of previous recessions indicates a job recovery may soon be under way, with perhaps only one or two months more of net job losses. See New Deal dem’s analysis of this here. If hiring does exceed layoffs starting in February or March, that alone might improve morale for the millions who have been seeking work without success for six months or more.
What’s uncertain, however, is whether half of today’s percentage can be averaged in 2010. One reason is that GDP was held down in previous quarters because businesses sold goods in their inventories but didn’t order new goods. The pace of fourth-quarter growth was heavily driven by a slowing of this inventory liquidation. Which means that businesses, whether they were dealers in software or motor vehicles, ordered new goods to restock their shelves. Thus, 3.39% of the GDP total for the fourth quarter came from this inventory cycle. In the third quarter, private inventories came in at just 0.69%.
But an increase caused by the inventory effect is temporary unless demand picks up. The big engine of GDP, consumer spending, rose 2% in the fourth quarter of 2009, compared with 2.8% in the third quarter. But that figure, too, was a little higher than expected. The consensus was for 1.8%. If you accept what economist Paul Krugman discussed here and here, today’s GDP number may be just a "blip" concealing a fragile economy that may worsen in the next few months. It all depends on a rise in consumer demand. On that, signals are mixed.
Earlier this week, the Federal Open Market Committee said: "Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit." Consumer debt also remains a factor.
It’s not that the economy isn’t pointed in a better direction than it was a year ago. Most indicators, as they have for months, show an upward trend. But they also continue to suggest a tepid recovery overall. And a minority of economists still say a double-dip recession is a possibility, just as they have for months. Contributing most to their analytical angst is the fact that consumer spending has risen over a year ago, but it remains exceptionally weak. Moreover, in all but a few states, revenue shortfalls are making the situation miserable for both citizens and public employees because of layoffs and service cutbacks. Still, the double-dip is an outlier. What’s not on the fringes is the potential for another of those horribly named "jobless recoveries."
That’s what happened in the shallow recessions of 1990-91 and 2001. It took a relatively short time for GDP to recover to the same level it was before those recessions began, but the job recoveries were far more drawn out than in previous recessions since World War II. The counter-argument is that the current recession has been deep and steep and, typically, a recovery rises quickly in such cases; hence, the touted "V"-shaped recovery.
Without a much stronger GDP performance than most analysts have been predicting for 2010, we’ll be lucky to see restored a fourth of the 8 million jobs lost in the past 25 months. If something along the lines of the timid jobs bill that passed the House in December gets an OK from the Senate, it may provide modest relief, just as the small business tax incentives and export initiative President Obama outlined Wednesday may do. But these are simply not enough. The beneficial impact on growth from the existing stimulus package is already fading, even though more than half of the $787 billion remains to be spent, as explained here.
Needed now is some fresh fiscal policy with punch. Direct job creation, via a modernized Civilian Conservation Corps or Works Progress Administration, perhaps combined with a temporary payroll-tax holiday for the immediate impact, along with a massive, long-term job-generating plan, such as green-powered high-speed rail for the whole country along the lines of the Interstate Highway Act of 1956. But with the deficit hawks honing their talons, anything robust to speed up job growth is likely to be picked off and shredded before ever reaching the President’s desk.