The U.S. stock market rose sharply on Thursday on a surprisingly strong GDP report - the first quarterly growth in more than a year. It gave back its gains, though, when investors looked behind the numbers, and saw that much of the strength came from car purchases and housing investment, which had all that potent but finite government help. It’s a start to a recovery, but production, employment and consumption are going to have to be more broadly based for the economy to get back on a decent trajectory.
A 3.5 percent rate of growth sounds pretty good, but you have to understand that the report covers just the months of July, August and September 2009, and the 3.5 percent figure is an annualized rate.
Source: U.S. Department of Commerce
The statistic not incorrect or misleading, but the nature of the calculation is a little hasty: like declaring that the final score of a baseball game is 9-3, based on score of 3-1 for the first three innings. Or that if the price of a stock you own goes up by one percent during the first week of the year, you’ve earned a 52 percent rate of return.
The Commerce Department gives consumers credit for the growth, but that all happened in August, when spending was up 1.4 percent. In September, personal consumption fell again, by $47 billion, after rising $140 billion in August.
And the increase came mostly from motor vehicles, spending on which was up 56% in the third quarter. Spending on non-durables was up two percent, boosted by purchases of food and beverages. Services spending was up just 1.2 percent. That’s not adjusted for inflation.
Consumer spending may have put GDP over the top, but there isn’t much growth in people’s incomes to sustain it. Personal income, which includes wages plus individuals’ rental income and business profits, was flat for September, after increases of just 0.1 percent for August and July, and a 1.1 percent drop in June.
Source: U.S. Department of Commerce
Investment in housing turned positive for the first time since late 2005. The contribution to the annualized 3.5 percent GDP growth was 0.53 percent. Once you de-annualize that, it becomes a small number, but hey, it’s positive.
The last mention-worthy data point is the growth in GDP from inventories, contributing nearly a full percent to the quarter. During the third quarter, businesses continued to let their inventories run down, but at a slower rate than earlier in the year; in the accounting methods for national income that somehow becomes a positive number.
Former Fed governor Bob McTeer was hoping inventories and production would grow, but nonetheless sees the 3Q inventory decrease as quite favorable:
A very positive detail is the contribution of inventory investments. Inventories have been drawn down in recent quarters, and I was expecting a boost from some rebuilding of inventories in the third quarter. Instead, the boost came from a slower liquidation of inventories than in the previous quarter rather than a rebuilding. (A smaller minus has the effect of a plus.) The reason this is so positive, in my opinion, is that the rebuilding of inventories and its boost to GDP is still in our future. It will likely boost the fourth quarter GDP number; if not, the first quarter. It’s an ace in the hole.
Now that’s an optimist. It’s good news today because it is yet to happen?
I quibble with his likening something that might occur in the future to an “ace in the hole.” In poker, an ace in the hole is a card that you have already been dealt: one that is face down, that only you know about it, and you’re keeping it in reserve.
Or maybe Governor McTeer is referring to “Ace in the Hole,” a 1951 Paramount film noir written and directed by Billy Wilder, and starring Kirk Douglas. (The film is also known as “The Big Carnival.”) It tells of a rescue effort - to retrieve a guy stuck in a mine in New Mexico - that gains national attention and turns tragic, through an opportunistic journalist’s manipulation of the story.
