November 2, 2010
The economy grew at a tepid 2% annual rate from July through September 2010, the government reported recently, slightly better than before, but not strong enough to reduce unemployment. The 2% annual rate in the third quarter was slightly stronger than the 1.7% revised rate for the previous three months, the Bureau of Economic Analysis reported. That rise in the gross domestic product, the broadest measure of U.S. goods and services, couldn’t budge the stubbornly high 9.6% national unemployment rate, though.
“The GDP numbers show that the economic recovery remains intact, but is very fragile,” said Mark Zandi, the chief economist for forecaster Moody’s Analytics in West Chester, Pa. “Two percent growth is not sufficient to generate enough jobs to even forestall a further increase in unemployment, which is drifting higher.”
Another reason for concern: The drivers of growth in the newly released data—businesses replenishing inventory and federal stimulus spending—will fade in coming months.
Yet there was modest good news.
“The good news in the report is that exports and business fixed investment in equipment and software remain sturdy,” Zandi said. “These are the key to the nation’s long-term growth prospects.”
Another bright note: Consumer spending rose at a 2.6% annual rate in the third quarter, up from 2.2% the previous three months. That’s a sign that people are loosening their purse strings. It was the fastest quarterly growth in consumer spending since 2006.
“Slowly but surely, worries over job security and future income growth have subsided and households appear to be more at ease about shopping. This augurs well for the upcoming holiday shopping season,” Bernard Baumohl, the chief global economist for the Economic Outlook Group, said in a research note.
There are other reasons for cheer, he suggested.
“Once again, outlays on durable goods remain robust, and this has significance. Durable-good purchases tend to be expensive (cars, refrigerators, furniture), often require financing and are considered more on the discretionary side of spending. It is therefore extremely sensitive to how consumers feel about their financial security,” Baumohl wrote.
The Federal Reserve is expected to take the highly unusual step of purchasing anywhere from $100-$200 billion in long-term government bonds, and perhaps buying more later.
The step, called quantitative easing, hadn’t been tried before the Great Recession. The Fed hopes that the move, similar to its purchases of more than $1 trillion in mortgage bonds in 2008 and 2009, will drive down interest rates and impel investors to move their money from government debt to other investments that support economic activity.
Touring a plant in Beltsville, Md., President Barack Obama tried to put a happy face on the new numbers. “We’ve had nine consecutive months of private-sector job growth, after nearly two years of job loss,” the president said. “But as we continue to dig out from the worst recession in 80 years, our mission is to accelerate that recovery and encourage more rapid growth, so that businesses like this one can continue to prosper and we can get the millions of Americans who are still looking for jobs back to work.”
Some analysts were cheered by the details hidden in the numbers.
“For the second quarter in a row, the underlying details of the GDP report have been significantly stronger than forecasters were expecting,” RDQ Economics, a New York forecaster, said in a research note.
It said GDP growth would have been higher if the rising demand for goods hadn’t also resulted in a huge growth in imports. Imports subtract from the GDP, which measures domestically produced goods and services. Imports grew at an annualized rate of 33.5% in the second quarter and 17.4% in the third quarter.
“The only moderate gains in real GDP that resulted from this strong demand growth were a consequence of surging import growth,” RDQ said. “As a result, domestic demand growth over the last two quarters has outpaced real GDP growth by the widest margin since 1948.”
The sizzling pace of import growth is likely to put even more pressure on the Obama administration to press China for greater access for U.S. exports and a revaluation of its significantly undervalued currency.
Some analysts expect the final quarter of the year to show stronger growth. Historically, the stock market usually fares better at year’s end, and the unresolved issue of whether to extend the Bush-era tax cuts may spur spending by wealthier Americans. Congressional Democrats and Republicans have been unable to agree on whether to extend some or all of the reductions, which are scheduled to expire at the end of this year.
David Malpass, the president of forecaster Encima Global in New York, said he thought that corporations would pay their executives bonuses in the final quarter this year rather than in the coming year, allowing them to enjoy the current tax treatment. That will give those wealthier Americans extra income sooner to spend or invest. “It is pent-up demand and the timing of the bringing forward of income,” Malpass said.