Wednesday, December 23, 2009

An Economy Stuck In Neutral

Two months ago, when the first pass for Gross Domestic Production (GDP) for the 3rd Quarter of 2009 was announced, the economists -- especially those who work for the White House -- were eager to get to the microphones and declare that the economy has turned the corner. At that time, the GDP growth for the 3rd quarter was being reported at a surprising 3.5%.

As the number went through its normal revisions, it was downgraded in last month's report from the preliminary (first pass) number to a growth of only 2.8%. Not nearly as exciting as the 3.5% that had caught everyone's eye the month before, but still an acceptable growth number.

Yesterday morning, the final take on that 3rd Quarter GDP number was announced and it was reported at an abysmal 2.2% (Click to See Full Story: "US third-quarter growth revised down to 2.2%").

To put it into perspective, we have a population growth that is about the same as that 2.2% in GDP growth. So, in theory, the growth in GDP is only keeping up with population growth. Since domestic output or production directly correlates to jobs and job creation, at best, we're only adding enough jobs to cover the new workers who are being added. That, in turn, means that we are not creating any new jobs for those millions of unemployed -- that 10 percent of us who are completely without jobs.

In the last two years, our economy has shed more than 14 million jobs. We need substantial GDP growth to get all those people back to work. If we continue at this 2.2 percent rate, people could be out of work for years. If we achieve an annualized 3% growth per quarter next year, it may take as long as 3 to 4 years before those 14 million get back to work. At a 3.5% GDP growth -- it may be 2.5 to 3 years to get back to where we were in 2007.

This is why most economists are projecting a long period of time before our currently high unemployment rates finally disappear into a normal 5 or 6 percent. And, for sure, 2.2% GDP growth isn't cutting anything. We are literally stuck in neutral.

Lastly, in October I said this when the original 3.5% number was released: "I personally think that this 3.5% rise in GDP is extremely overstated..." We know know that it was overstated; and, overstated by almost 70%. I went on to say that I thought the next quarter might only see a 1% rise because, for a lot of reasons, the Third Quarter GDP was being artificially driven by government programs that would dry up. I am still holding to that belief.

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