Flying Pink Unicorns

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.