Smith Faculty Opinion Article

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

July 30, 2010

What Today's GDP Report Says

The White House is pumping sunshine--the economy is in tough shape

Fourth quarter GDP numbers show the economy is not growing fast enough to create jobs and bring down unemployment.

Of the 2.4 percent growth reported, 1.1 percent was an increase in inventories-essentially businesses rebuilding and adjusting inventories from recession lows and to accommodate more price-conscious consumers.

This indicates actual demand in the economy is growing a scant 1.3 percent a year. Businesses can accommodate up to 2 percentage points through higher productivity and without adding workers.

Unless spending picks up (and indicators are that is not happening), once businesses stop piling up unsold goods, layoffs will outnumber hires, unemployment will rise with a vengeance, and the economy will head into a second dip. That will not likely happen until after the election. It will show up in fourth quarter data.

Consumers and business have been spending but too much is going into imports-the trade deficit subtracted 2.8 percent from growth. Put another way, had exports and imports grown by the same amount, economic growth would have been in the range of 5.2 percent.

Almost the entire trade deficit is oil and China but the president is not doing enough about either.

We get out by dealing with China on the trade deficit-either it revalues the yuan or we revalue it by taxing or licensing dollar yuan conversions. Create a Savings and Loan Crisis era Resolution Trust.

Start building many more gasoline efficient vehicles-the emphasis on electrics is nice but their large impact is many years away

Develop more domestic oil and gas.

Even with those problems addressed, small and medium sized businesses are not doing well because they can't get credit from regional banks. An audit of U.S. banks by the IMF says the four largest banks have adequate capital but the regional and small banks need another $19 billion-all those toxic assets that did not get cleaned up.

Do expect to hear the President talking about this out on the hustings this weekend.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.