Smith Faculty Opinion Article
February 25, 2010
Friday's GDP Report
Friday, the Commerce Department will issue a revised estimate for fourth
quarter GDP growth. The advance estimate issued in January was 5.7 percent, and
the consensus among forecasters is for no change. My estimate is 5.6 percent,
owing to some revisions in the export and import statistics.
Fourth quarter GDP growth was pumped up by a slower place of inventory draw
down--in the arcane world of GDP accounting a slower pace of depletion adds to
Demand for U.S.-made goods and services--the key to sustainable growth-added
only 2.3 percent to growth. Domestic demand--less a bump in net exports that is
not likely to be sustained-added only 1.8 percent.
Looking ahead, data are not encouraging.
A bullwhip effect on inventories will add to first quarter growth--restocking
a different selection of goods and services for a scaled back consumer, home
buyers and auto buyers. However, retail sales indicate sustainable domestic
demand is growing slowly, perhaps at an inflation adjusted rate of 2 percent.
Auto demand has recovered, pushing up production, but further increases are
New home sales and starts have been trailing down the last six months,
commercial construction remains very weak, and businesses are not investing a
lot other than in technology goods and software. Soundings from suppliers in the
construction trade and small manufactures are simply not encouraging, outside
the auto patch and high- technology manufacturing.
Weekly new jobless claims remain above 450K, when below 350K is considered
healthy. Manufacturing is showing some ginger, thanks to stronger car production
and leaner methods in technology-intensive industries. However, new car sales
are not strong enough to drive further expansion of production, and factories
appear able to make do with existing workers or even few workers in other
industries. These days it takes a lot of new demand to cause anyone to hire.
Uncertainty about President Obama's health care and tax plans, as well as
Secretary Geithner's inability to grasp and address real weakness among the 8000
regional banks and the adverse effects of China currency peg and resulting U.S.
trade deficit, are causing great unease. Fear is gripping many smaller
businesses, belying indicators reporting sentiments of larger firms and
Overall, significant and substantial improvements in two areas--trade and
bank performance--are needed and do not appear to be forthcoming.
Businesses need customers and capital and without an improvement in the trade
deficit, they won't have more customers. The regional banks have too many
troubles to make many new loans. Geithner does not seem focused on these issues
or effective where he is focused-for example, China's repudiation of meaningful
revaluation of the yuan and Congressional rejection of the Volcker rule.
Most of second half GDP growth that was not attributable to the inventory
adjustment went to bank bonuses. Those profits were earned with inexpensive
Federal Reserve credit and represented financial churning more than real growth.
Peter Morici is a professor at the University
of Maryland School of Business and former Chief Economist at the U.S. International