As was expected, the economy grew in the fourth quarter of 2009, with the Gross Domestic Product showing an an increase of 5.7%. Technically speaking, the recession could now be considered over because the economy experienced growth over two successive quarters:
From Associated Press:
The economy grew faster than expected at the end of last year, though the engine of that growth — companies replenishing stockpiles — is likely to weaken as consumers keep a lid on spending.
The 5.7 percent annual growth rate in the fourth quarter was the fastest pace since 2003. The Commerce Department report Friday is the strongest evidence to date that the worst recession since the 1930s ended last year, though an academic panel that dates recessions has yet to declare an end to it.
The two straight quarters of growth followed a record four quarters of decline. Still, the expansion in the fourth quarter was fueled by companies refilling depleted stockpiles, a trend that will eventually fade. Some economists worry that when that happens, the recovery could
Small businesses, this author’s included, helped push the economy along as they refilled stockpiles of inventory in the 4th quarter. Theoretically, this makes sense. In the midst of the recession in late 2008/early 2009, small businesses pulled back on purchasing excess inventory. As those inventories depleted throughout 2009, business owners began re-ordering goods from their distributors and manufacturers. As a personal example, our company re-ordered enough inventory at depressed manufacturing and transportation prices to provide inventory for almost all of 2010. This was double the amount of inventory we normally stock, but price discounts coupled with attractive credit terms from struggling manufacturers gave us an edge at the end of 2009.
So, from this standpoint, it is easy to see how GDP could have grown, though the 5.7% number does seem a bit high. It is important to note that the GDP reported for the 3rd quarter of 2009 was originally 3.6%. After two subsequent revisions by the government, the official number is now 2.2%. This was a downard adjustment of 38% !
A similar revision now would take the GDP growth from 5.7% to 3.5%. Not bad, but not good either, especially if we consider the way GDP is “officially” calculated, resulting in artificially boosted the numbers.
Karl Denninger at Market Ticker opines about the GDP Inventory Bounce and personal income vs. government handouts:
The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE).
The first two are not a big surprise.Â The latter, however, is dangerous to rely on.
As I have repeatedly pointed out we have over the last 18 months added about $500 billion (annually) in transfer payments to the federal budget.Â This counts in the GDP report as PCE, but is not actual output any more than I am richer if I go to the bank and borrow $20,000 on my credit card.
If one was doing GDP as a “balance sheet” you’d have to subtract the addition in liabilities (debt) from the money spent, but of course GDP isn’t computed that way.Â This results in a nutty overstatement of GDP when it is used as a measurement of economic health, which of course is how all the so-called “economists” use it.
The amusing part of the report is found in the personal income and outlays section:
Current-dollar personal income increased $119.2 billion (4.0 percent) in the fourth quarter, compared with an increase of $35.1 billion (1.2 percent) in the third.
Personal current taxes decreased $11.7 billion in the fourth quarter, in contrast to an increase of $3.5 billion in the third.
Got it?Â People aren’t earning the money, the government is handing it out. You don’t pay taxes on government handouts, for the most part.Â There was a potential “improvement” signal in the third quarter related to tax liabilities increasing, but that has now reversed – hard – which throws a big fat rock at the concept of employment turning in any meaningful way.Â Instead the “current dollar income” is being borrowed and given away by the government through unemployment extensions and other forms of handout.
Bottom line: The market liked it (although the net change after thinking about it for a while was pretty much a non-event – we’re up a whole two S&P points a half-hour after release) but most of the improvement was due to inventory build and transfer payments from the government (and the government borrowed the money), not actual earned personal income.
As much as we’d like to believe President Obama that we have avoided a depression and that we are in a recovery, something about the GDP number just doesn’t seem right. Though not available as of this writing, we’re almost positive that John Williams’ Shadowstats will calculate GDP growth at a significantly lower rate than the official government number.
To be perfectly frank, there is not a whole lot of statistical information coming out of government institutions that we can believe anymore. When we look at commercial/residential bank lending declines, job losses, the looming wave two real estate disaster, and excessive easing of the quantitative variety, we remain skeptical of this recovery.