First, the good news. This morning’s release of the government’s initial estimate of fourth-quarter GDP is a blow-out number: +5.7%. That’s the highest annualized quarterly real (inflation-adjusted) rise in GDP since 2003 and it’s also up sharply from Q3’s 2.2% rise. In addition, the Q4 number exceeded what most economists were expecting, and most were predicting a healthy increase.
Nice. We needed that. We need more of it. As we’ve discussed recently, 2010 promises (threatens) to be challenging relative to the rebounding aura that prevailed last year and so at this point a rosy tailwind from GDP is especially welcome.
But (you knew one of these was coming) there’s less in today’s GDP Q4 bounce than it appears. A 5.7% increase is a big number and there’s no doubt that the general upswing in the last three months of 2009 was strong. We’d be looking at a whole different ballgame now if the Q4 change in GDP was only modestly higher, much less negative. In that respect, we dodged a bullet. There’s some recovery traction underway in the economy.
In fact, it’d be surprising if it were otherwise. After more than a year of massive monetary stimulus, supported with the fiscal equivalent as 2009 unfolded, it was virtually assured that the reflationary efforts would bear fruit on the overall GDP ledger. A number of observers of the economic scene have been saying as much in recent weeks. PIMCO’s Paul McCulley, for instance, predicted last month that “the fourth-quarter 2009 gross domestic product (GDP) is likely going to be 4%-plus.”
So what’s not to like? A powerful rise in GDP is just what the doctor ordered. Alas, there’s still reason to worry. Let’s start by recognizing the obvious: Today’s estimate is the first of three, and so the risk that the final tally of GDP may be lower can’t be dismissed. That’s always true, of course, but the risk is especially potent now, given the volatility in the economy generally in recent quarters, which raises the bar in terms of getting a handle on economic activity and estimating the future.
Meanwhile, keep in mind that the primary source of GDP’s Q4 rise came primarily from inventory rebuilding and exports. Indeed, the inventory restocking effect was the strongest in 20 years. That’s hardly a problem today, but there’s some doubt as to how long the restocking effect will continue. As companies return to normal, after turning sharply defensive in late 2008 and early 2009, there’s a limit to the positive rebounding effects on this front.
Exports too may headed for more middling results in the year ahead. The falling dollar’s general decline last year was a shot in the arm for exports. A lower valued greenback in foreign currency terms makes American products cheaper in overseas markets. But if the buck stabilizes this year, as it now appears, the forex-driven export wind may slow. There are many reasons to doubt the dollar as a store of value, but there’s hardly a compelling argument for its two main paper rivals: the euro and the yen. Economics underpinning both of those currencies face their own set of troubles and so its not obvious that the dollar’s headed for sharply lower levels at this point vis-a-vis the euro and yen.
Meantime, 70% of GDP is based on consumer spending. How did Joe Sixpack fare in Q4? Personal consumption expenditures rose 2.0%. Not a bad showing, but that’s down from 2.8% in Q3. In other words, the overall economy grew at a much faster pace in Q4 vs. Q3, but the surge had little to do with consumer spending–the elephant in the room for the dollar value of GDP.
That’s more than a trivial point with a labor market that’s still ailing. It’s hardly a surprise to find that the pace of consumer spending is slowing when the last employment report showed a net loss in nonfarm payrolls. Perhaps next Friday’s monthly payroll update will deliver better news.
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. The jig is up. A week from now, if the net change in payrolls remains negative, no one will be talking up the 5.7% GDP rise. 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.
Today’s GDP is encouraging, but the real news for the economy arrives a week from today. The question is all about future GDP reports. A big piece of the answer will unfold in the trend in nonfarm payrolls.