Viewpoint - Growth….Finally

By Scott Howard, Economist, Macroeconomics, RISI

BOSTON, MA, Nov. 2, 2009 (RISI) - After contracting for four straight quarters, the US economy actually grew in 3Q09 at an annual rate of 3.5%, which was half a percentage point higher than our estimate. The Wall Street Journal's Real Time Economics ran the headline "Don't Break Out the Champagne Yet: Cause for Concern in GDP" following the release of the third quarter number. I say you can break out the bubbly, just make it a pretty cheap Californian version and not your 1996 Krug (as if anyone who owns stocks of that vintage spends their free time reading my blog).

I choose the cheap sparkling wine because, well, it's nice that the recession is over and for many people and businesses, the third quarter was far better to them than the first or second quarters of this year. But in order to assess the near- and medium-term future, it is more important to remember the more than 7 million US workers who have lost their jobs since the beginning of the recession and the 768,000 jobs that fell off payrolls just in 3Q09 alone.

The point, of course, is that we are not out of the woods yet. Unemployment is still on the rise and household incomes are falling. Initial claims for unemployment insurance are still running above half a million per week, which is hardly a signal that the labor market is improving, and we expect the unemployment rate to reach 10% by the end of this year. If everyone who reads this article takes my advice and buys Californian sparkling wine, then at least we will help a state whose unemployment rate reached 12.2% in September.

The third quarter numbers showed strong consumer spending growth of 3.4% that was only made possible by considerable government stimulus measures (i.e., "cash for clunkers" and the first-time homebuyer's credit). The "cash for clunkers" program ended and auto sales dropped off the map. The first-time homebuyers credit is expected to expire at the end of November and we can only speculate about how negative that might be for home sales and related purchases (if the credit is not extended or expanded).

Third quarter data did see a revival in residential investment after many consecutive quarters of double-digit declines. Residential fixed investment climbed at an annual rate of 11.4% in 3Q09, which is good news for many in our industry. However, residential investment now accounts for just a 2.5% share of GDP compared with a 6.3% share at the peak of the housing boom. Again, let's celebrate with the cheap stuff.

The trade picture improved considerably in that goods started moving. Net trade detracted from headline growth because imports rebounded stronger than exports, but we expected that would happen since the rebuilding of US inventories requires imports, and growth abroad is not strong enough to support an export-led recovery in the US despite the weakening of the dollar.

Do we expect the US economy to contract again during this "recovery"? No. I wouldn't suggest any sort of celebration if that was our baseline scenario. Growth, however, will slow over the next two quarters before reaccelerating in a meaningful way. Think of it this way, that good champagne will taste better in 2011 (when we celebrate the return to GDP growth near potential) than it would today.