Not Yet a Boom

29 October 2010



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US Economy Grew 2% in Third Quarter

The US Commerce Department just released the US GDP figure for the third quarter of 2010, which ended on September 30. The American economy got 2% bigger in that period. That's an improvement over the 1.7% figure for the second quarter. The momentum is in the right direction, but this is insufficient growth to really put America back on track. At the same time, consumer spending rose 2.6% suggesting that the psychology of Americans has recovered from the battering of the last couple of years.

The report showed that there is no threat of inflation in the American economy. Indeed, there isn't enough. A key figure here is employment costs, where the Labor Department's index rose a weak 0.4%. The rate of growth for paychecks was the lowest in a year thanks to a record decline in wages and salaries for state and local government employees (police, teachers, firefighters, EMS technicians, etc.). Meanwhile, retailers are reducing prices ahead of the holiday shopping season. As a whole, the Personal Consumption Expenditures (PCE) index (excluding volatile food and energy prices) was up just 0.8% in the third quarter, compared to 1.0% in the second quarter. Core PCE is the second lowest figure seen since 1962.

Grounds for pessimism lie in two other numbers: inventories and imports. Business inventories climbed by more than two-thirds to $115.5 billion in third quarter 2010, up from $68.8 billion in the second quarter of 2010. That boosted GDP by 1.44%. The question is whether that increase comes at the expense of fourth quarter output. As for imports, the message is mixed. Imports satisfied most of the new demand, knocking just over 2% off GDP. At the same time, that is better than the 3.5% imports diverted from second quarter 2010. Nevertheless, the trade imbalance continues to hurt America, and the trade imbalance is largely due to an undervalued Chinese currency, meaning the solution is political not a function of markets and economics.

Above all, though, the American consumer has started buying again. About 70% of the US economy is consumer spending. Having tightened belts and reduced debt (and even started saving again), American consumer spending rose 2.6%, which is the largest increase since fourth quarter 2006 (way back when there was a Lehman Brothers). This added 1.79% to GDP and comes on the heels of a 2.2% increase in second quarter 2010. With the holiday shopping season a couple of weeks away, this is quite positive.

For the next month or so, politics rather than economic issues will determine what happens to GDP for the fourth quarter. The Republican Party will pick up seats in both houses of Congress, but one remains unconvinced that their success will undo the first two years of the Obama administration. What will happen is the prevailing sense of uncertainty will evaporate, and with US corporations sitting on $1 trillion in cash, things should at very least continue as they are if not improve. Moreover, the Fed meets Tuesday and Wednesday, and one expects quantitative easing to keep borrowing costs low.

If this entire analysis holds true, 2011 will confirm that the worst is behind the US economy

© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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