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Popular Economics Weekly

The first reading of third quarter Gross Domestic Product growth (July-September)—the government’s main estimate of U.S. economic growth—soared 3.5 percent. This was a massive reversal of 4 quarters of shrinking growth, the longest decline since World War II and the Great Depression.

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Does it mean the end of this, the greatest recession to date? Probably so, as other indicators—such as the Conference Board’s Index of Leading Economic Indicators, and the Institute of Supply Manager’s industrial and service sector surveys—show growth into next year.

But what kind of growth will it be? Most prognosticaters believe it will be tepid at best. Why? Because the main driver of an economic expansion is employment, and that might not improve for years. It actually took 4 years to recover all the jobs lost from the 2001 recession. But that was a special case where very little actual government stimulus spending was injected into the economy.

It took the National Bureau of Economic Research (NBER) Business Cycle Dating Committee over a year and half after the 2001 recession ended to call the trough of the cycle. And it took 21 months after the 1990-1991 recession ended for NBER to date the end of the recession.

We believe, however, employment—and the economy—will recover sooner this time for just the opposite reason. A massive amount of government spending is targeted at not only creating and retaining jobs, but supporting crucial industries. This is economist and Vice Presidential advisor Mark Zandi’s estimate of the government’s contributions to growth. He is saying that most of its effect will be in this year, even though it will contribute through 2010. He does not say why it could be a drag to growth in the last 2 quarters of 2010.

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The ingredients of a sustained recovery are in the Q3 report, in other words, such as:

  • Residential investment was up at a 23.4 percent annualized rate, breaking a streak of 14 straight quarterly declines, and contributing 0.53 to the percent change in GDP.
  • Personal Consumption Expenditures (PCE) was up at a 3.4 percent annualized rate, and contributing 2.36 to the percent change in GDP.
  • Investment in Equipment & Software was up slightly at a 1.1 percent annualized rate.
  • However, non-residential structure investment was down 9.0 percent at an annualized rate. I.e., businesses are not yet expanding their facilities.

The main driver was personal consumption expenditures in this consumer-driven economy. Consumer spending bottomed out in December 2008, and has been stable or rising since January.

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That is the most hopeful sign that consumers will be able to afford this recovery. But household incomes will have to rise for it to be more than a hopeful sign, and that has not yet happened.

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Disposable personal income (after taxes) has been basically flat since a big plunge in May-June 2008, which is coincidentally when the unemployment rate jumped from 5 to 5.5 percent. So once again, the key to income growth, and so economic growth, seems to be jobs. We will therefore have to see some improvement in the jobless rate in the coming months, before a sustainable recovery is certain.

Harlan Green © 2009