The US stock markets were in a celebratory mode yesterday as the Q3 2009 GDP grew by 3.5% in real terms, better than what the economists were expecting.
First, the details. As per the US Bureau of Economic Analysis (BEA), the GDP grew by 3.5% after contracting for four consecutive quarters. This, in fact, has been the longest and deepest recession in the post-war period. Real final sales rose 2.5%. The contribution of private inventories’ to the GDP growth turned positive at 0.94%. Real personal consumption expenditure (PCE) grew by 3.4% (as against a decrease of 0.9% in the previous quarter) as the "cash for clunkers" programme boosted durable goods consumption (22.3% versus a decline of 5.6% earlier). Fact is, motor vehicles and parts added 1.0% to GDP growth. Not surprisingly, private investment also moved to positive territory (11.5%) as the residential investment rebounded (up 23.4%) although there was a smaller contraction in non-residential investment (-2.5%). Government expenditure slowed to 2.3% due to the decline in state government spending. However, with import (growth of 16.4%) picking, there was a negative contribution of net exports to the GDP growth to the extent of 0.53%.
While the growth rate does look impressive, question is, is it actually so? Not really. Firstly, there is a technical aspect to this growth. The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change. Fact is, private businesses decreased inventories $130.8 billion in the third quarter, following decreases of $160.2 billion in the second quarter and $113.9 billion in the first. While inventories are still being drawn down, the pace of draw down has clearly diminished. Hence the second derivate of inventories (i.e change in the change in inventory) has turned positive. Going forward, inventory built up will slowdown because I fear contraction of consumer spending.
Most of the analysts who has commented on the Q3 GDP release have talked about the positive effect of the ‘cash for clunkers’ scheme(which ended in August) in pushing up the PCE for the quarter. According to some estimates, increased auto sales, directly attributable to the above programme, was to the tune of 700,000. But the bigger issue is, sales plummeted the very next month in September after the programme was withdrawn.
The rebound of residential investment has also a lot to do with the incentive offered by the government to first time home buyers. A credit of USD 8,000 is indeed a big deal. And this programme expires in November. In case the programme is not extended any further, then one can expect residential investments to drop off. In fact, even before the scheme ended, new home sales dropped a tad in September.
End of the day, it is the US consumers and their ability to open up their wallet that will drive and sentiment as well as the economy. And, this does not look good. During the third quarter, there has been a surprising drop in disposable personal income (DPI) to the extent of USD 20 billion. A closer look at the data reveals an interesting aspect. While, given the increasing level of unemployment, the wages and salary component has expectedly declined (and has been declining), what has been holding up the number in the previous quarter was rising transfers (unemployment benefits) and lower tax incidences (tax breaks given by the government). Each of these components faltered in this quarter.
Let’s first take unemployment benefits. In the US, an unemployed person is entitled to unemployment benefit for a period of 26 weeks only. Therafter, they cease to get the benefit. As mentioned earlier, this has been the longest and deepest recession (see chart below) during the post-war period. As a result, people have remained unemployed for much longer period of time.
First, the details. As per the US Bureau of Economic Analysis (BEA), the GDP grew by 3.5% after contracting for four consecutive quarters. This, in fact, has been the longest and deepest recession in the post-war period. Real final sales rose 2.5%. The contribution of private inventories’ to the GDP growth turned positive at 0.94%. Real personal consumption expenditure (PCE) grew by 3.4% (as against a decrease of 0.9% in the previous quarter) as the "cash for clunkers" programme boosted durable goods consumption (22.3% versus a decline of 5.6% earlier). Fact is, motor vehicles and parts added 1.0% to GDP growth. Not surprisingly, private investment also moved to positive territory (11.5%) as the residential investment rebounded (up 23.4%) although there was a smaller contraction in non-residential investment (-2.5%). Government expenditure slowed to 2.3% due to the decline in state government spending. However, with import (growth of 16.4%) picking, there was a negative contribution of net exports to the GDP growth to the extent of 0.53%.
While the growth rate does look impressive, question is, is it actually so? Not really. Firstly, there is a technical aspect to this growth. The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change. Fact is, private businesses decreased inventories $130.8 billion in the third quarter, following decreases of $160.2 billion in the second quarter and $113.9 billion in the first. While inventories are still being drawn down, the pace of draw down has clearly diminished. Hence the second derivate of inventories (i.e change in the change in inventory) has turned positive. Going forward, inventory built up will slowdown because I fear contraction of consumer spending.
Most of the analysts who has commented on the Q3 GDP release have talked about the positive effect of the ‘cash for clunkers’ scheme(which ended in August) in pushing up the PCE for the quarter. According to some estimates, increased auto sales, directly attributable to the above programme, was to the tune of 700,000. But the bigger issue is, sales plummeted the very next month in September after the programme was withdrawn.
The rebound of residential investment has also a lot to do with the incentive offered by the government to first time home buyers. A credit of USD 8,000 is indeed a big deal. And this programme expires in November. In case the programme is not extended any further, then one can expect residential investments to drop off. In fact, even before the scheme ended, new home sales dropped a tad in September.
End of the day, it is the US consumers and their ability to open up their wallet that will drive and sentiment as well as the economy. And, this does not look good. During the third quarter, there has been a surprising drop in disposable personal income (DPI) to the extent of USD 20 billion. A closer look at the data reveals an interesting aspect. While, given the increasing level of unemployment, the wages and salary component has expectedly declined (and has been declining), what has been holding up the number in the previous quarter was rising transfers (unemployment benefits) and lower tax incidences (tax breaks given by the government). Each of these components faltered in this quarter.
Let’s first take unemployment benefits. In the US, an unemployed person is entitled to unemployment benefit for a period of 26 weeks only. Therafter, they cease to get the benefit. As mentioned earlier, this has been the longest and deepest recession (see chart below) during the post-war period. As a result, people have remained unemployed for much longer period of time.
Source: Bureau of Labour Statistics
As can be seen, the average duration of unemployment touched 26.2 weeks in September 2009, highest ever recorded. As a result, a large number of people have been falling off the statistics of those people who are eligible for unemployment benefits. With the decline in Unemployment rate slowing down, the number of people in the 15 to 26 week bracket (i.e those who would be eligible for the unemployment benefit) were down by 510,000 during Q3, while more than a million people became ineligible for the allowance having failed to find a job for more than 26 weeks. Not surprisingly, transfer income received during this quarter was lower by USD 9 billion. Additionally, the tax breaks that the government was giving to the residents in the previous quarters were withdrawn during Q3, resulting in higher incidence of personal tax. During Q3, personal tax paid out rose by about USD 5 bn. Not surprisingly, the PDI was down substantially.
As mentioned earlier, despite the PDI being lower, PCE rose mainly because of the various stimulus package that was available. Going forward, these packages would no longer be available. Additionally, as the unemployment rate slowly inches up and more and more people end up using the 26 week window for claiming the unemployment benefit, what to talk of disallowance of the tax breaks, the PDI is likely to move south. In addition, as we all know, the recovery that would be visible in the near future would be jobless.
Additionally, as I have discussed several times earlier, the US consumers are still highly indebted.
Indebted consumers, increasing job loss and withdrawal of stimulus are a potent combination of disaster waiting to hit the US economy. To me, this is a highly technical recovery which is not going to be sustainable in the near future. In fact, the consumer spending number released today gives an inkling of what’s coming, as it shrank 0.5% in September, the largest drop in nine months.
As mentioned earlier, despite the PDI being lower, PCE rose mainly because of the various stimulus package that was available. Going forward, these packages would no longer be available. Additionally, as the unemployment rate slowly inches up and more and more people end up using the 26 week window for claiming the unemployment benefit, what to talk of disallowance of the tax breaks, the PDI is likely to move south. In addition, as we all know, the recovery that would be visible in the near future would be jobless.
Additionally, as I have discussed several times earlier, the US consumers are still highly indebted.
Indebted consumers, increasing job loss and withdrawal of stimulus are a potent combination of disaster waiting to hit the US economy. To me, this is a highly technical recovery which is not going to be sustainable in the near future. In fact, the consumer spending number released today gives an inkling of what’s coming, as it shrank 0.5% in September, the largest drop in nine months.
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