Tags: economic | recovery

Recovery Still Has a Ways to Go

By Hans Parisis
Monday, 31 Aug 2009 10:34 AM Current | Bio | Archive

Now that the first revision of the second quarter GDP is in, we see that in the second quarter, real GDP growth contracted 1 percent after declining 6.4 percent in the first quarter.

The GDP contraction, on a quarterly basis, is now the longest and deepest in the post-war period. But, here are the main points of second quarter GDP:

  • Real final sales that is the GDP-change in private inventories, rose 0.4 percent.

  • Private inventories subtracted 1.39 percent from second quarter growth.

  • Real personal consumption fell 1.0 percent as households saved the tax cuts.

  • Private investment declined by 24.4 percent, led by a 13.5 percent decrease in fixed investment, a 22.8 percent decline in residential investment, and a 10.9 percent fall in business investment.

  • Government expenditure rose 6.4 percent.

  • Exports fell 5 percent, imports fell at a faster pace of 15.1 percent, which resulted in a positive contribution of net exports of 1.60 percent to GDP growth.

    Nevertheless, the four economic indicators that the National Bureau of Economic Research considers for calling the end of a recession are still very weak.

    They include: Personal income less transfer payments, in real terms; employment; industrial production; and the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.

    We now see the impact of stimulus on personal income, and retail sales have started fading. Auto industrial production is still weak and job losses have eased since April, yet they are comparable to past recessions.

    Despite improvement in asset markets, bank credit is still contracting. Home prices showed slight improvement in June, investment is declining at a slower pace, and fiscal stimulus has begun to increase government spending. Monetary measures and fiscal deficit are causing inflation fears.

    I see inventory adjustment and policy measures will temporarily drive growth to positive territory in the second half of 2009 and early 2010. But sluggish private demand and structural factors like large public debt and private-sector deleveraging might pose the risk of below-potential recovery or even a double-dip recession in late 2010 or early 2011. If that occurs, it will impact potential growth.

    Yes, things are always what they are and most of the time they’re not what we would like they should be.

    Here, I would like to quote Professor Alan Blinder of Princeton University and former vice chairman of the Federal Reserve Board: “History will be written that the recession ended in the summer of 2009 … If things feel terrible to you, you’re not hallucinating. Economic conditions are dreadful at the bottom of a deep recession. Jobs are scarce. Layoffs abound. Businesses scramble for penurious customers. Companies go bankrupt. Banks suffer loan losses. Tax receipts plunge, ballooning government budget deficits. All this and more is happening right now, in what looks to be this country’s worst recession since 1938. At such a deep bottom, few people have reason to smile. What’s more, GDP is not terribly meaningful to most people. Jobs are — but they will take longer, maybe much longer, to revive … unemployment rate won’t fall until job growth rises “above trend” (say, 130,000 net new jobs per month). That’s a long way from where we are today … The bottom of a deep recession leaves the nation in a deep hole.”

    We’ll see what the new personal income and outlays numbers will show us.

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    Now that the first revision of the second quarter GDP is in, we see that in the second quarter, real GDP growth contracted 1 percent after declining 6.4 percent in the first quarter. The GDP contraction, on a quarterly basis, is now the longest and deepest in the post-war...
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