The following is a weekly commentary written by Scott J. Brown, senior vice president and chief economist at Raymond James & Associates.
The advance figure for fourth quarter growth surprised to the upside, although the story was largely as anticipated. The GDP data will be revised at the end of February and again in late March (and in perpetuity, in annual benchmark revisions). Don't get too wedded to the numbers.
However, the story is unlikely to change much in revision. The fourth quarter data tell us little about what to expect for the current quarter and beyond. Still, the monthly figures suggest an unevenness and lackluster momentum heading into the new year. That doesn't mean that the recovery is in doubt. Rather, improvement is likely to be gradual in the face of so many headwinds, building over the course of the year. That's good news relative to where the economy was a year ago, but it's bad news for those hoping for greater and more immediate improvement in the labor market.
Real GDP rose at a 5.7% annual rate in the advance estimate for 4Q09. More than half of that was due to a slower rate of inventory reduction. Consumer spending growth was moderate. Business fixed investment was mixed, but mostly positive.
The one major surprise in the data was net exports. Exports continued to improve, as anticipated. That's good news for the U.S. economy. However, imports rose more slowly than anticipated. The result was that net exports added 0.5 percentage point to the headline GDP figure rather than subtracting a moderate amount. The Bureau of Labor Statistics had to make assumptions about December trade, so these figures are almost sure to be revised. The trade deficit still widened significantly in nominal (current-dollar) terms, but it's the real (inflation-adjusted) figure that matters for GDP growth.
The government also had to make assumptions about December inventories. However, revisions should not change the story much at all. Inventories fell sharply in 2Q09, subtracting significantly from overall GDP growth, and the pace of inventory decline was somewhat slower in 3Q09. The monthly figures have suggested that the inventory completion is nearing an end. Inventories fell much more slowly in 4Q09. The level of inventories is now more in line with the pace of final sales – and should begin rising more or less with the pace of final sales over the next few quarters (adding moderately to overall GDP growth). The end of the inventory correction is good news, but it's not enough to fuel stronger GDP growth going forward. That will depend on improvement in underlying demand. A strengthening in job growth will be critical to that.
Last week, President Obama proposed a new stimulus package. Congress, reflecting the will of the American public is dead set against further stimulus. However, this is an election year and it will be very difficult to vote against a “jobs” bill. The jobs bill will create new incentives for firms to hire new workers and the bill is expected to include some efforts to improve the flow of credit to small businesses, which typically account for a third of net job creation during economic expansions. The sticking point will be how to pay for it.
The package will add to the budget deficit, but that should not be a worry in the near term. The bigger concern is the long-term budget outlook. There will be plenty of time to put the country on a course toward a more balanced budget (which will entail some very tough choices in terms of taxes and spending) once the recovery becomes well entrenched.
In the near term, the economy will continue to face a number of headwinds: a continued hangover in the housing sector (with a possible fading in government support), troubles in commercial real estate, great strains on state and local government budgets, and legislative uncertainty (which may be restraining business investment). The recovery will remain susceptible to a major shock, such as a natural disaster or a sharp rise in oil prices. However, despite the current headwinds, the outlook for a gradual economic recovery, building over time, remains in place.
For more weekly commentaries by Dr. Brown, go to raymondjames.com/monit1.htm.
