Main Street

How Good Was Friday’s GDP News?

Friday brought a quarterly estimate of Gross Domestic Product (GDP), and it exceeded expectations, growing at a rate of 5.7%, up from 2.2% the previous quarter. That sounds excellent, and it’s certainly not a bad thing. For a visual, check out the graph at Tapped.

But there are a couple of important caveats before we get too excited.

First, will it last? Meteor Blades writes,

Few, if any, analysts believe the fourth-quarter number can be sustained. But if all four quarters of 2010 average even somewhat less than half that percentage, at least 2.3%, the history of previous recessions indicates a job recovery may soon be under way, with perhaps only one or two months more of net job losses. See New Deal dem’s analysis of this here. If hiring does exceed layoffs starting in February or March, that alone might improve morale for the millions who have been seeking work without success for six months or more.  

What’s uncertain, however, is whether half of today’s percentage can be averaged in 2010. One reason is that GDP was held down in previous quarters because businesses sold goods in their inventories but didn’t order new goods. The pace of fourth-quarter growth was heavily driven by a slowing of this inventory liquidation. Which means that businesses, whether they were dealers in software or motor vehicles, ordered new goods to restock their shelves. Thus, 3.39% of the GDP total for the fourth quarter came from this inventory cycle. In the third quarter, private inventories came in at just 0.69%.

Second, the question of jobs. It doesn’t really help to produce more if people still don’t have jobs.

The economy has been able to grow even without adding workers because employers have found ways to accomplish more with fewer workers. Productivity grew at a robust rate of 8.1 percent in the third quarter of 2009, the most recent data available.

So what’s the outlook there?

Without a much stronger GDP performance than most analysts have been predicting for 2010, we’ll be lucky to see restored a fourth of the 8 million jobs lost in the past 25 months. If something along the lines of the timid jobs bill that passed the House in December gets an OK from the Senate, it may provide modest relief, just as the small business tax incentives and export initiative President Obama outlined Wednesday may do. But these are simply not enough. The beneficial impact on growth from the existing stimulus package is already fading, even though more than half of the $787 billion remains to be spent, as explained here.

So we should be optimistic, in a cautious way. And we shouldn’t let up on the pressure for a strong jobs bill with major investment in infrastructure.

Tags: economy, Jobs, unemployment