Thursday, October 29, 2009

GDP Up 3.5%! Good News?

This morning, the Gross Domestic Product (GDP) measure was up 3.5% (Click to See Full Story: "U.S. GDP rises 3.5% as stimulus kicks in"). For a country in recession, this is good news because it shows that the economy is growing again. But, before the champagne is uncorked, you have to put some things into perspective.

First, you have to understand that an economy isn't really considered to be out of recession unless there are two consecutive quarters of growth. Two quarters is important because, quite often, an economy might sputter again after having had one good quarter. Some of that has to do with the seasonality of business, the extent of business inventories, and some has to do with what the government is doing.

That brings me to the second issue: Government spending. In this last quarter, the government artificially pushed the economy with two major programs (1) Cash for Clunkers and (2) The First-Time Home Buyers Tax Rebate. As a consequence, there might be as much as 2.5% in that 3.5% number that has been artificially spawned by these two programs. But, what's worse, those two programs may actually hurt the upcoming 4th Quarter GDP because they may have stolen sales that would have naturally occurred in that 4th Quarter. For example, in the Cash for Clunkers program, there was a $3 billion spurt that has since created a substantial slack period for auto sales. Consequently, auto sales in the 4th quarter may actually be lower than they were in the 2nd Quarter; before the "clunkers" program. On the Tax Rebate for first-time home buyers, there was, again, a substantial spurt of sales before mid-September in order to effectively take advantage of that rebate and be able to close on a house before the program was set to expire at the end of October. Even though Congress has just passed legislation to extend the program through April of 2010, the impact on the home sales might have peaked as people scrambled to take advantage of the original program. Again, hurting sales going forward.

Lastly, GDP is a relative number. It is a measurement of business activity from the prior quarter. But, you need to really put that into perspective. Business activity in America is down 50 to 60 percent or more from where it was in 2008. So, to have 3.5% growth still leaves us a very long way from getting back to where we were in 2008. Think of it in terms of being in an elevator that had once made it to the 100th floor. Last quarter it finally stopped going down and made it to the ground floor. This quarter we went back up 3-1/2 floors. But, we still have 96-1/2 floors to go before we get back to where we were in 2008 at the 100th floor.

I personally think that this 3.5% rise in GDP is extremely overstated and my guess is that we might only see a meager 1% growth for the next quarter. Anyone who really takes the time to take a hard look at details of this GDP Report would have seen that business investment was still negative. And, that fact, to me, shows that the economy is still faltering.

On the political side of things, you can expect the Obama Administration to hype this "recovery (?)" to the max; especially with two critical gubernatorial elections pending in Virginia and New Jersey. In fact, this good number on the economy might actually help Corzine to retain his Governor's job in New Jersey; seeing that he was already so close in the polls.

I still think we could possibly see a double-dip recession in 2010 if foreclosures and unemployment continue to rise and if inflation kicks in. Right now, foreclosures are still on the rise and we just had 7 more banks this last week that went belly-up and had to be taken over by the FDIC. Jobs are still being lost and that leads to further reductions in consumer activity. The true home building activity is for apartments -- to house all those people who have been foreclosed on -- and for condos and starter-homes being built for those people who want to take advantage of the first-time home buyer tax credit. But, down the road, we are going to have a glut of condos, apartments, and cheap starter-homes as people start to move back into the homes that were once foreclosed on.

Remember: Everything in economics has a short-term upside and an ultimate and even bigger downside when the government tries to jury rig the economy.

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