Jan 28 2012

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The Stubborn Facts on Q4 GDP

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Calling "All The Kings Horses....."

Yesterday, the Commerce Department announced surprisingly good news regarding the core measure of US economic growth; the quarterly Gross Domestic Product (GDP).

In Q4 of 2011, the US economy grew at a rate of 2.8 percent; a large improvement over the 1.8 percent growth of Q3 and the largest spurt of quarterly growth in the US economy in eighteen months.

The positive news in announcement fits neatly with President Obama’s emerging narrative of a US economy on the mend, where the President emphasizes 22 months of economic growth and three million new jobs.

But does the President’s narrative pave the path for a robust US economy in 2012?  The details of the Commerce Department release paint a different picture.

For instance, more than 2 percent of the 2.8 percent gain in Q4 was related to businesses restocking depleted inventories.

Inventories had grown modestly in Q2 and investment in inventories actually fell in Q3, requiring companies to restock. But this is a solitary event, not reflective of sustainable economic growth. Specifically, if you look at real final sales of domestic product – actual activity – less the change in private inventories, the gain in GDP for Q4 is only .8 percent.

 This kind of sustainability is a question across the spectrum.

In an economy where consumer spending makes up nearly 70 percent of economic activity, personal outlays were up a healthy 2.5 percent in Q4.

However, during the same period, disposable income increased by only 1.5 percent.

That means that to make up the difference, Americans either had to borrow on credit or dip into savings, an unsustainable practice when the bills come due amidst continued, stagnant wage growth, a depressed housing market with upside down home values, and stubbornly high unemployment.

A better overall measure of current American economic health would bethe complete GDP figure for all of 2011.

In that period, the US economy grew by only 1.7 percent.  So, while the US economy did grow in 2011, it did so just barely.

In past economic cycles, a growth rate of 3 percent or more – year over year – has been required to generate the numbers of jobs that will bring unemployment down in a meaningful way.

With this in mind then, for all the hope and hype associated with the Q4 number, the reality is that US economy actually slowed down year over year from 2010 to 2011 – from 3.0 percent growth in `10, to 1.7 percent in `11.

As for hope for the future, based on the transient and unsustainable components that contributed to Q4 growth, economists are now predicting that US GDP will be fall to an anemic pace again in Q1 of 2012 and perhaps Q2 as well. The coming budget debate and national election – not to mention the uncertain future of EU debt crisis and the slowdown of the Indian and Chinese economies will have an impact as well.

In sum, there is little good news hear that would be worthy of champagne toasts.

Thus, while the paper increase in Q4 GDP fits President Obama’s election year economic narrative, the actual facts undermine his argument that the US is on a path for virtuous or sustainable economic growth.

That’s not talking down the economy.  Its just calling the President on his economic “three card Monty.”







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