Don’t get too jazzed about this morning’s GDP report. The better-than-expected reading, fueled by slower inventory liquidation rather than consumer spending, likely isn’t sustainable.
The headline 5.7% jump looks good on paper. But there are reasons for concern. For all of 2009 GDP fell 2.4%, marking the biggest drop for an entire year since the 10.9% slide in 1946.
And as Calculated Risk points out, residential investment and personal consumption expenditures, the leading sectors for GDP, both slowed in 4Q. The declines aren’t surprising, especially since the personal savings rate rose and will likely continue increasing in next year or two, blog says. Also don’t expect residential investment to start rising until excess housing inventory is absorbed.
“The transitory boost from inventory changes is frequently a great kick start to the economy at the beginning of a recovery – as long as the leading sectors (PCE and RI) are also picking up,” Calculated Risk says. But this report is concerning as “underlying growth remained weak.”
On the bright side, the 5.7% jump shows there’s “some recovery traction underway in the economy,” James Picerno notes at The Capital Spectator.
But the report’s clout loses some of its luster amid an ailing labor market.
“This much is clear: Without a positive change in nonfarm payrolls in next week’s update, today’s GDP report is far less encouraging than it appears,” he says.
No one will boast about the 5.7% GDP rise if next week’s monthly employment report shows the economy’s still losing jobs. “There’s really only one way to keep the economy expanding on a meaningful level for the year ahead: a rebound in the labor market,” Picerno notes.
Keep in mind also that once inventory contributions are stripped out, GDP increased only 2.2% in 4Q, quite the contrast from the headline figure. Gluskin Sheff chief economist David Rosenberg sums up it perfectly in his latest note to clients:
So, the real question that nobody seems to ask is why it is that underlying demand conditions are still so benign more than two years after the greatest stimulus of all time. The answer is that this epic credit collapse is a pervasive drain on spending and very likely has another five years to play out.