Smith Faculty Opinion Article

By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

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 growth.

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 unlikely.

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 multinationals.

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 Trade Commission.