By Tony Lima[1]
November 6, 2009
Copyright 2009 Tony Lima. All Rights Reserved.
Real GDP grew by 3.5 percent in the third quarter. Based on this figure, productivity grew by an astounding 9.5 percent. I don’t believe those numbers and neither should you. The central issue is the estimated growth rate of real GDP. Productivity growth is calculated by subtracting the growth of worker hours from the growth of real GDP. The Bureau of Economic Analysis has pretty accurate estimates of worker hours. It’s the numerator that’s questionable.
The good news is the economy is improving, better news than we’ve heard in quite a while. But there are some serious issues that one simple number obscures. These include:
- This is the advance estimate. It will be revised twice before the end of the year.
- A full one percentage point out of the 3.5% was caused by the “cash for clunkers” program.
- Another half percentage point was due to residential investment. This was at least influenced by the first-time homebuyers’ tax credit.
- Exports increased 1.5 percent while imports fell 2 percent. With the dollar weakening we should expect this trend to continue in future quarters.
First, this is the “advance” (formerly “preliminary”) estimate for the third quarter. At the end of November, the Commerce Department will issue a “second” (formerly “revised”) estimate for the third quarter. At the end of December they will issue the “third” (formerly “final”) estimate. These revisions are often large. So let’s not get too excited until we get more data.
For example, consider the second quarter of this year. The advance estimate was -1.0 percent.[2] The second estimate was also -1.0 percent.[3] But the third estimate was -0.7 percent, quite a difference.[4] For the first quarter the advance estimate was -6.1%,[5] the second estimate was -5.7%,[6] and the third estimate was -5.5%.[7]
Second, spending on new cars boomed in the third quarter. But that’s mainly due to the “cash for clunkers” program which is now over. I hope the increased spending will increase incomes and have something of a multiplier effect on the economy. But I’m worried that most of these sales came from existing auto inventories. If that’s true, then we must hope that the decrease in inventories causes auto makers to ramp up production. The inventory numbers seem to bolster the argument that the increased spending on cars caused an increase in domestic auto production. (Remember, GDP measures production, not spending.)
The GDP numbers say inventories rose by 0.9 percent. Fundamentally that means production exceeded spending during that quarter. But compared to the previous quarter’s 1.42 percent decline in inventories,[8] any inventory change near zero sounds like a good thing.[9]
Probably the best news in these numbers is the increase in residential construction spending, even though the increase was an anemic 0.5 percent.. In the second quarter, residential construction spending fell by 23.3%.[10] And that’s part of a long series of negative numbers dating back to the first quarter of 2006. That’s 14 consecutive quarters of decreasing spending on residential construction.
This is actually similar to the capital investment cycle the economy experienced at the end of the “dot bomb” boom of the late 1990s. Businesses bought excessive quantities of computer hardware during that episode, then unloaded it on eBay. One executive of a computer hardware manufacturer stated that his company’s main competition wasn’t other manufacturers, but eBay. Once the over-accumulation of capital had been worked out, growth continued. The housing boom of the last few years produced a large inventory of houses for which there are currently no buyers. Houses are not computers. It will take considerably more time to work through the excess housing inventory. The Obama administration’s “first-time home buyer’s tax credit” gets credit for some of the increase. But that won’t last forever and there will still remain a large stock of housing with no buyers. Perhaps a solution is to allow a number of wealthy immigrants into the country with the provision that they must buy a house within three months of their arrival.
Exports rose but imports rose even more. So what else is new? Export growth contributed about 1.5% to growth but imports grew by 2%.[11] The net impact was a decrease of 0.5 percent. The good news is that the U.S. dollar has been depreciating against many currencies, so the balance of trade will probably improve in future quarters.
So 3.5 percent growth is better than zero. But let’s not declare the end of the recession quite yet. Temporary government programs have ended and the big stimulus plan is still not ratcheting up fast enough.[12] Every economist worthy of the name predicted that the stimulus didn’t have enough spending soon enough to do the job.[13] When economists agree to this extent it’s a good idea to take what they’re saying seriously. Paul Krugman has it wrong on this issue.[14] The economy doesn’t need another stimulus bill. What it needs is to get the existing stimulus funds spent considerably faster.
[1] Tony Lima is professor of economics at California State University, East Bay. This analysis represents Prof. Lima’s opinions only and not those of CSUEB or any other entity. Contact Prof. Lima at tony.lima@csueastbay.edu or 510.885.3889.
[2] http://www.bea.gov/newsreleases/national/gdp/2009/gdp2q09_adv.htm
[3] http://www.bea.gov/newsreleases/national/gdp/2009/gdp2q09_2nd.htm
[4] http://www.bea.gov/newsreleases/national/gdp/2009/gdp2q09_3rd.htm
[5] http://www.bea.gov/newsreleases/national/gdp/2009/gdp109a.htm
[6] http://www.bea.gov/newsreleases/national/gdp/2009/gdp109p.htm
[7] http://www.bea.gov/newsreleases/national/gdp/2009/gdp109f.htm
[8] http://www.bea.gov/newsreleases/national/gdp/2009/txt/gdp2q09_3rd.txt
[9] The 1.42 percent decline in inventories during the second quarter was caused by a sharp decrease in production that was not matched by a similar decrease in spending.
[10] http://www.bea.gov/newsreleases/national/gdp/2009/txt/gdp2q09_3rd.txt
[11] Since GDP measures production, exports are added and imports subtracted from total spending.
[12] One oft-quoted statistic is that only 25 percent of the $1.2 trillion stimulus package had actually been spent by the end of October, 2009.
[13] The exceptions are economists who work for the Obama administration, undoubtedly because of the requirement that they have half their brains removed as they cross the beltway into Washington, D.C.
[14] Prof. Krugman has been lobbying for another stimulus bill in his regular column in the New York Times. With all due respect to his well-deserved Nobel Prize, Prof. Krugman is just plain wrong on this one. What the economy needs is the government to spend the existing funds faster, not more funds.
