Economic Notes: The Triumph of Hope Over Experience
11/23/2009
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
“The triumph of hope over experience." ~Samuel Johnson on second marriages
Gross Domestic Product’s (GDP) 3.5% expansion in the third quarter (Q-3), the economy’s first positive performance in a year, prompted some to conclude that the Godot recovery (see: "The Godot Recovery") has begun. That may be the hope, but does it reflect experience?
The Census Bureau reports that retail sales rose in October, after having declined in September. The monthly fluctuations in total retail sales reflected the yo-yo-like response of auto sales to the cash-for-clunkers incentives.
Net of cars, retail sales have been rising – if only grudgingly. October’s gain was 0.1%, meager and trending in the wrong direction (August’s gain was 1.0%, September’s 0.5%). The University of Michigan’s index of consumer sentiment fell in November – due to a weak labor market and stagnant incomes – suggesting tepid spending during the holiday season.
Homebuilding was off 10.6% in October, the second consecutive monthly decline. Given the drop in September’s new home sales, the slowdown was to be expected as builders continue to control inventories rigorously. Despite the two-month pullback, current and planned starts remain above April’s cyclic nadir.
But the view here that the housing sector has stabilized was called into question by Mortgage Bankers’ report of rising distress in prime mortgages (i.e., prudent loans made to creditworthy borrowers). Another consequence of the loss of 8 million jobs and a doubling (to 9.2 million) of involuntary part-time employment.
Industrial production rose for the fourth consecutive month. Like retail sales, however, the monthly gain (0.1%) was below the average (0.9%) for the prior three months. The rise in capacity utilization – also up for the fourth consecutive month – is a precursor of increased employment in the goods-producing sector, which has accounted for half of all jobs lost during the recession.
The Q-3 rise in GDP was certainly welcome, but more recent data have evidenced the anticipated seesaw pattern (see: "Kids on a Seesaw"). While the economy is near (perhaps at) its cyclic bottom, sustained growth is not yet apparent. In other words, pronouncements that recovery is underway reflect the triumph of hope over experience.
***
The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.