Brian SullivanGDP last quarter grew 3.5%, more than the consensus estimate of economists. That's good. Any positive GDP print is better than a continued drop in the economy.
Before we break out the party hats, keep in mind a few key points that may make that 3.5% gain much less than the headlines suggest:
1. Dollar-for-dollar we're losing money. Instead of thinking in percentage terms, think of GDP in dollar terms. The 3.5% growth is from a jump in total seasonally-adjusted output from $12.901 trillion dollars in 2Q to $13,014 trillion last quarter. In other words, the economy added approximately $112 billion dollars in output quarter-over-quarter. Yet we have spent $173 billion worth of the $787 billion dollar stimulus plan so far.
In other words, the stimulus plan is 'returning' just 65-cents for every dollar spent.
Factor in future interest on the stimulus debt or the reduced buying power of a dollar once the money-printing stokes inflation and that 'return' may fall even more.
As FTN Financial economist Chris Low states in a note to clients this morning, "the economy is entirely dependent on federal deficit spending at the moment." Government consumption rose 2.3% with non-defense spending increasing 6.8%. Non-defense spending has risen on average about 3.5% per year over the past decade, so this near doubling of the 10 year average shows that spending from the stimulus plan is a big part of the increase. Financing growth today at the expense of greater debt tomorrow is a slippery slope. If one borrows $100 dollars today at 4% interest and has (like most government bonds) a 10 year loan, we may have 'gained' $100 today for immediate needs but will end up paying $140 over the length of the loan.
There is still much time - and hundreds of billions in stimulus left to spend - for Americans to see a better return on their investment. But let's hope that future spending results in a better 'return' on our stimulus investment than 65-cents on the dollar.
2. The job market remains weak. Unemployment claims came in at 530,000 last week. Worse, as Miller Tabak's Dan Greenhaus points out, revisions to prior data means the total number of people filing for some form of continued unemployment insurance rose above 10,000,000 for the first time ever during the week of October 3rd. While fewer people may be losing their jobs, America isn't adding jobs either. Everything is about jobs. Unless the unemployed can find work and those working feel more secure in their jobs, we are unlikely to see any sustained recovery. 10 million people collecting unemployment insurance is a huge drag on state and local budgets. The President admitted today that job recovery will be slow, but the growth better occur soon or the benefits to those 10 million out of work Americans will soon drain and require the government to print or borrow more money to fill the hole.
3. Consumption is up, but much was driven by temporary incentives. Personal consumption rose 3.4% last quarter, with durables posting a massive 22.3% jump. Durables are the big ticket items (cars, etc) that have largely been driven by artificial incentives to spend. Cash for Clunkers, tax credits for energy efficient appliances and other temporary programs drove consumers into showrooms. More succinctly, of the $112 billion increase in seasonally-adjusted GDP, $36.2 billion of that - or about 1/3rd - was auto sales.Those programs, while helpful to car dealers and appliance stores, are not only temporary but there are many, such as auto sales analysis firm Edmunds.com, who estimate that programs like 'C4C' end up costing taxpayers more than they bring to the economy. The idea being that the credits do not result in 'new' money being created, but are rather a transfer to certain consumers' pockets from a growing American federal debt load that ultimately must be paid back or continually refinanced through more debt sales. What happens to consumption and sales when the incentives end remains a huge unanswered question.
4. Housing helps but can it last? The whopper in the GDP was residential spending activity, which rose 23.4% and adding more than a half-percent to GDP after being a drag for nearly three years. That's good news, but like the example of consumer durables above, one wonders if we are growing now at the expense of an economic drag later. The National Association of Realtors argues that nearly half of the jump in home sales this year was directly attributable to the tax credit. Also recall that the National Association of Home Builders, a group which ostensibly supports any program that helps sell homes, has itself estimated that if the home buyer tax credit is extended through November 2010, would cost about $30 billion in lost tax receipts while generating tax revenues for federal, state and local governments of $11.6 billion. That's a spend of nearly three dollars for every dollar raised. So while the tax credits are great for buyers, realtors and others in and around the housing market, it is money that is coming at the expense of greater long-term federal deficits.
5. The weaker dollar isn't doing what we keep hearing it's supposed to do. We are told over and over by proponents of a weaker U.S. dollar that it's good for America because it will help companies here sell their goods around the world. I have often argued this is a fallacy for two reasons: 1) when the dollar falls, other countries can borrow dollars and more cheaply finance capital projects in their own country, and 2) the Chinese yuan is pegged to our dollar and as we fall, the yuan falls, resulting in a similar net difference in currency valuations and maintaining China's massive labor cost advantage. The GDP report seems to confirm that view, as imports actually grew faster than exports, meaning more non-U.S. goods are flowing into America than the other way around.
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