View From Down Under

The Commerce Department released their latest figures on GDP last week – up 5.7% in the fourth quarter.  Big contributors were inventory additions (3.4%) and personal expenditures (1.4%).

Most economists I’ve read suggest we treat this with caution because of the high contribution from inventory growth, which is clearly not sustainable.  As true as this cautionary note is, the numbers are also full of upbeat results.

Personal expenditures are up.  This is in spite of a drop of 0.57% in motor vehicles (against a strong third quarter boosted by Cash for Clunkers).  Clothing and footwear spending is up for the first time in six quarters.

Overall fixed private investment is up for the first time in ten quarters.  You have to go all way back to June 07 to find the last up quarter in private investment.  This has been driven by growth in equipment and software.

Government spending was down 0.2% during the quarter as the stimulus spending stopped growing.  We should expect this to continue to decline as the stimulus plays out.  Remember the GDP numbers measure change quarter to quarter, not absolute level of spend, so as the stimulus spend starts to slow the impact on GDP growth will be negative.

The last bit of good news is that I think this number is likely to be revised up in the next month.  After getting the last one so wrong (initial announcement of 3.5% growth with a revised number of 2.2%), the BEA analysts have likely taken a very conservative view on their estimates this time.

The economy has not “recovered”, and there is a long way to go before the 7 million people who lost their jobs will be back at work.  But I continue to doubt the double dip thesis, and remain bullish on the prospects for the US economy in 2010.

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Sometime in the next few years, the Business Cycle Dating Committee will determine when the 08/09 US recession ended.  The View From Down Under is that it ended last quarter.

The US economy reported its first quarter of growth since June 2008.  The world’s major economies are also improving.  The UK, although still down slightly in Q3, is recovering.  Europe is also recovering, led by France and Germany.  China expects 8% growth in 2010, back to pre recession levels.  ASEAN growth forecasts continue to move up.

The index of leading indicators was up in September for the sixth straight month.

The pessimists say the growth will not continue, but I disagree.  Not just because of my wonderfully optimistic nature, but mainly because of the data now coming in.  Four data points for this post:  inventory reductions, monetary policy, fiscal policy, and economic history.

The economy grew despite inventory reductions. The growth in the September quarter came against backdrop of continuing drop in inventories (US$130.8b drop v 160.2b drop in 2Q).  Destocking is a ‘one off’ kind of adjustment, and a trend that can’t be sustained.  When businesses start building inventories again, (or even just stop reducing them) it will be a strong boost to future growth.

Interest rates will remain low. The Federal Reserve reiterated its commitment to keep borrowing costs low for “an extended period”.  After what Bernanke and his colleagues have been through the last two years, they will be in no hurry to raise rates.  Low interest rates will continue to provide economic stimulus for some time to come.

Stimulus keeps on coming. Government fiscal policy is still strongly stimulating.  According the government’s recovery website, 26% of the $787 billion stimulus has been paid out as of 30 Oct, leaving 74% still to be spent.  Much of the rest will be paid out over the next 12 months, providing continued strong economic stimulus.  Cash for clunkers may have finished, but there is much, much more to come.

History hates a W recession. Since WWII, there has never been a period where 3 or more consecutive quarters of GDP contraction was followed by a W.  The closest the US has come in the past was in 1980-82.  This was a very short and mild recession in 1980, followed by a strong recession in 1981-82.  The impetus for the 81-82 recession was government policy of extended high interest rates designed to kill inflation.  There is no similar government policy looming this time.  History also shows that deep recessions tend to be followed by strong recoveries, not moribund growth.

Next post:  why this creates such fantastic opportunities.

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