Friday, April 30, 2010

Today's GDP Report shows clearly that the Obama Boom is underway.

This morning, the US Government announced its estimate that the economy (GDP) grew at a 3.2 annual rate in the first quarter of this year.  http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.  This marks the third consecutive quarter of growth and the second consecutive quarter of strong growth.  There is no longer any doubt at all that the Great Recession of 2007-2009 is well and truly over.

Let's walk through what this report means.  At first glance, this is actually a weak report.  Following the Great Recession, in which GDP declined by 2.4% in 2009, the most in any year since the 1940s, and in which unemployment skyrocketed by more than at any time since the Great Depression, one would expect a strong recovery.  That's what happened in 1983-1984, following a sluggish start to that recovery.  This is the economic boom which Reagan claimed was "morning in America" and led him to a 49 state reelection landslide in 1984. 

3.2% growth in the first quarter of this year is not a strong recovery, by any stretch of the imagination.  3.2% would be fine if the unemployment rate were say 6%, but at 9.7% it is weak.  However, when you look closely at the GDP report, it is clear that the Obama Boom has in fact begun.

First, and foremost, consumer spending, which makes up around 2/3 of the economy, and which has been hit very hard by the soaring unemployment rate, grew at a 3.6% annual rate in the first quarter, as compared with a 1.6% rate in the 4th quarter of 2009.  This was true because consumers have a lot of pent up demand, for cars, certain electronics, and many other things for which purchases were put off in the last few years.  It is most unlikely that the 3.6% growth rate in consumer spending will increase much until unemployment comes down substantially, which will take time, but I also think that it is unlikely that this growth will slow very much.

The housing sector was VERY weak in the first quarter, shrinking at a 10% annual rate!  Paradoxically, the housing sector is the main reason that this report was in fact a strong report.  Surprisingly, housing construction is only about 5% of GDP.  http://www.nahb.org/generic.aspx?sectionID=784&genericContentID=66226

However, even at such a small share of GDP, a 10% decline in 5% of the economy means that housing dragged down economic growth by .5%.  This is not the full story.

I agree with the general consensus that it is all but impossible for the economy to recover strongly while housing is in the tank.  This is because when people buy a house they buy furniture, televisions, and all sorts of other things.  The National Association of Home builders States that, "housing services have averaged between 12 and 13 [% of GDP.]"  Thus housing overall is a very significant portion of the US economy.

So if housing is important, and it shrank so sharply in the first quarter of this year, why is that cause for optimism?  Because what goes down must come up.  Permits for new houses grew solidly in the first quarter.  As one might expect, permits strongly correlate with future growth in housing construction.  So I expect housing to very quickly move from a sector of the economy detracting from economic growth to a sector contributing, and perhaps by late this year contributing strongly.

In short, the seemingly weak 3.2% growth in the first quarter likely presages stronger growth going forward.  Growth strong enough to produce the large number of new jobs that I have previously predicted.  In fact, when the employment report comes out a week from today, it is likely to show that the economy created well more than 200,000 jobs in April.  The Obama Boom has indeed begun!

One final note.  State & local governments are tightening their budgets significantly, causing a drag on economic growth.  This will continue for another year or thereabouts, as tax receipts will recover, but not quickly enough to close the huge budget holes in New York, California, New Jersey, Illinois, and other states.  So this area of the economy will remain a drag for some time.  However, later in this expansion, in 2011 or 2012, when other areas of growth may well slow, this area will again add to economic growth.  That different sectors are in very different places cautions against a super strong recovery, like the one in 1983-84, but augurs well for a long expansion.
Larry Kudlow agrees with me
http://www.realclearpolitics.com/articles/2010/04/10/a_v-shaped_boom_is_coming_105131.html

This means I have to carefully consider if I'm just wrong.  Kudlow is a nearly mindless, knee jerk "conservative" who does hold some consistent and interesting views, but generally ignores any inconvenient history.  This is, I think, one of his better pieces, but then I would say that, since he agrees with me!

Still, read this carefully. It isn't his usual garbage, for a wide variety of reasons. In particular, his focus on corporate profits is one I STRONGLY agree with. The main reason for my hyper optimism beginning late last Summer was my expectation of a BOOM in business investment. That Boom has probably begun. The consumer is even coming back to life, as was shown in this morning's GDP report showing 3.2% annualized growth in consumer spending in the first quarter of 2010.

By the way, Kudlow references that the 4th Quarter of 1992 was better than 1993 and blames the tax hikes of 1993 (which were widely expected from about September of 1992 on. Well ok (this has some truth).  However, Kudlow conveniently leaves out the years of 1994-2000, when, after the Clinton tax hikes of 1993, the economy BOOMED!!  Hey Larry, do tax hikes only hurt in year one and then help in the out years?  To the extent one looked at the data from 1992-2000 and turned their brain off, that is what one would conclude.  In reality, the Clinton tax hikes of 1993 HELPED the economy because they convinced the bond market that we were getting our arms around the budget deficit, and thus interest rates dropped for much of the Clinton presidency, helping spur a great economic boom. 

In any event, someone not kindly disposed to Obama, at all, strongly agrees with my hyper economic optimism.  Take that for what its worth.

Saturday, April 03, 2010

The Great American Job Machine stirs


The Bureau of Labor Statistics just announced that 162,000 jobs were created in March. For the first time since December 2007, the American economy created jobs (that is, more jobs were created than were destroyed). Its about time!

As my loyal readers are aware, I have been predicting, for months, a strong economic recovery, that would generate jobs, with the number rapidly increasing. In short, I have been predicting a much stronger recovery than nearly every economic prognosticator. I stand by that prediction. I am most certainly not claiming any sort of victory after one good report. Instead, we'll see in the coming months if the labor market really has recovered. After strong economic growth the last quarter of last year and the first quarter of this year, medium sized and large businesses are still very nervous about adding headcount. This can't last-- if demand for their products & services increase, new jobs will as well-- the laws of economics and common sense demand it. But businesses are bound and determined to wait as long as they possibly can, to ensure they can get the credit they need (in the case of small businesses) and to ensure that the pickup in demand is lasting (businesses of all sizes, but especially large businesses). Since I predict that investment by business is about to take off hugely, and that consumer spending, depressed since 2008 by job loss and fear of economic armageddon, is about to improve, demand for the goods/services of businesses in America should improve, and steady increases in jobs should follow.

Let's look more closely at today's reports. The report was expected to be skewed by a huge number of workers hired for the 2010 census. Even though those workers count as employed, and bring in a paycheck, their jobs are very temporary, and its appropriate to strip them out if you are trying to figure out the economy's underlying strength. There were 48,000 new census workers, far lower than expected. So there really were over 100,000 new jobs created, mostly temporary workers and in the health care industry. So the labor market is still quite weak, of course. Just a little bit less weak.

In addition, the government each month releases a second report which is used to report the unemployment rate that you hear in the news, currently 9.7%. That report also attempts to count how many jobs are created/lost in a given month, but the number of jobs in that report is considered less reliable than the number of jobs reported in the other survey, which is what the media is referring to when it reported that 162,000 jobs were created in March. Still, the second, less reliable report, concluded that 264,000 jobs were created in March. That marks the third month in a row the second survey has reported job gains, for a total of 1.1 million new jobs in 2010! That would be a strikingly good total if it were in fact true. Unfortunately, even I'm not that optimistic. As I said, the second report is considered less reliable. However, that second report is considered more reliable than the first, report, and in the fullness of time it may be that the labor market turns out to have been less awful in the last several months than we thought.

Anyway, returning to the jobs gained in March. The 162,000 number is a fantastic number compared to the small job losses which have occurred for the last 6 months and the monster job losses that occurred in the year before that. But in the context of 15 million unemployed, and many millions more unemployed, it is, of course, a pittance. America will need years of stronger job growth than we had last month in order to bring the economy anywhere near to the 4.5% or so unemployment rate that is as low as we can realistically get. That's how deep a hole we dug for ourselves in the years leading up to the collapse of Lehman Brothers and the Great Recession of 2008-2010.

But for now, we can all celebrate that the economy has begun creating jobs. It should create many, many, many more in the coming months.