Economic Notes: Bottom-Bumping
11/02/2009
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
"The report of my death was an exaggeration.” ~Mark Twain
Gross Domestic Product (GDP), the broadest measure of economic activity, rose for the first time in a year according to the advance estimate of the Bureau of Economic Analysis. (The data will be revised twice in the coming months.)
The 3.5% annualized gain was driven by stimulus-induced increases in spending by consumers and businesses. This was bolstered by an increase in homebuilding, after 14 consecutive negative quarters, and a deceleration in the rate of inventory depletion.
The impact of the stimulus program was readily apparent. Approximately 60% of the increase in consumer spending was attributable to auto-related expenditures, owing largely to the cash-for-clunkers incentives.
The pickup in homebuilding and household furnishings, which together equaled the jump in auto spending, was due in part to the first-time homebuyer tax credit. And even though the clunker incentives have expired and the homebuyer tax credits will, even if extended, have a diminishing impact, there is more stimulus spending to come.
While the third quarter’s gains are welcome news, it is premature to declare the recession “over.” Historically, as severe recessions have neared their end, GDP has recorded an “early” positive quarter followed by one (or more) negative quarters. Such a period of bottom-bumping cannot be ruled out as this contraction runs its course.
This recession’s damage to confidence and balance sheets will not be quickly undone. A weak labor market, diminished net worth, and stagnant incomes continue to restrain consumer spending. To be certain, personal consumption expenditures were up in the third quarter, but declined in September when employee compensation fell and the incentives ended.
Although the consumer is unlikely to take the lead in an economic rebound, there is, as noted above, far more stimulus in the pipeline than has been spent to date. Further, the business sector appears to have completed its inventory correction and is ramping up production. This will be amplified by growing global demand for U.S. products, which a devalued dollar has made more attractive.
GDP is only one of several factors involved in determining whether a recession has come to an end. Of the others, industrial production is definitively positive; but incomes and merchant sales are flat, and employment conditions remain negative.
On the data, while the recession is drawing to an end, reports that it has passed are, like those of Twain’s death, an exaggeration.
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