Monday, November 02, 2009

Like the Nobel Peace Prize, Q3 GDP Report was Undeserved

By Vahan Janjigian - Economists hoping for signs of an economic recovery were not disappointed when the third quarter Advance GDP report showed 3.5% growth over the second quarter on an annualized and seasonally adjusted basis. Perhaps the biggest surprise was the 3.4% jump in personal consumption expenditures. Despite rising unemployment and a shorter average workweek, consumers somehow managed to find the resources to go shopping.

However, this GDP report felt like the Nobel Peace Prize—somewhat undeserved. It turns out that taxpayers subsidized much of the shopping. Spending on durable goods surged 22.3%, but that was in large part due to the “cash for clunkers” program. Unfortunately, for the United Auto Workers, most of those sales went to foreign manufacturers. As a result, imports jumped 16.4%. That outweighed the 14.7% rise in exports. Now that every person who entertained the idea of buying a new car in the next year or two has probably done so, auto sales in the current (fourth) quarter will no doubt plummet.

Furthermore, the rise in exports is probably due to the 20% plunge in the U.S. dollar over the past year. Economic adviser Lawrence Summers argues that exports are key to an economic recovery. That may be so, but debasing the currency to boost exports does not sound like sound economic policy. Summers insists that the White House is committed to a strong dollar policy, yet I suspect that at least some members of the Obama administration are not too upset to see the dollar lose its value.

While government subsidies helped boost car sales, the $8,000 first-time homebuyer tax credit appears to have been less effective. New home sales had risen five months in a row through August, but they unexpectedly fell to just 402,000 in September. One prominent economist who advises the White House in an unofficial capacity said he was surprised to see how weak the figure was. No doubt, it would have been worse without the controversial tax credit, yet the fact that it was this bad is a sign that the housing market is still very sick. Although the 20-city composite S&P/Case-Shiller Index, which measures housing prices, is up four months in a row, it continues to fall on a year-over-year basis. According to the latest figures, housing prices were 11% lower in August than they were a year ago.

These are just some of the reasons why I suspect this recovery lacks legs. The recession may have indeed ended sometime during the third quarter, but I fear the chances are good that a second (double-dip) recession is on the way. While I realize that employment is a lagging indicator, I do not see how an economy as dependent on consumer spending as ours can grow in a long-lasting manner until consumers feel secure about their jobs. As I recently pointed out on my blog, small businesses are still having trouble accessing capital on reasonable terms. Because they account for most of the job growth in this country, the employment picture cannot improve until small businesses start hiring again. The long-awaited sell-off in stocks has not yet arrived, but I still advise maintaining a conservative asset allocation for the time being.