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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

December 20, 2013 at 10:43 AM

Reasons for caution about the leap in GDP

The final revision for gross domestic product growth in the third quarter is a roaring 4.1 percent. Talk about a hot summer. This is the second-best performance in the measure of all goods and services produced by the economy since the end of the recession. But happy days may not be here again.

For one thing, more than one-third of the growth was because of an increase in business inventories, which may or may not translate to sales down the line. Take that away and GDP grew only 2.5 percent, well below its long-term performance, much less the level needed to be a game changer.

Also, although the revision — up from a first revision of 3.6 percent — showed higher household spending, the number is misleading. About 60 percent of that comes from spending on health care and another 27 percent on gasoline. Spending on housing and clothing actually  fell. So this rising “consumer spending” isn’t about buying lots more stuff.

Bottom line: Demand remains sub par, a problem that has remained as a holdover from the recession and an inadequate government response to addressing demand, not just bailing out the big banks.

Historically, this is the level of GDP growth that would translate into the creation of 300,000 to 400,000 net new jobs per month. That hasn’t happened. In November, 203,000 jobs were created, better than many months since the “recovery” began, but still such a slow pace it would take years to reach the employment levels seen before the Great Recession.

Nearly 11 million people were unemployed under the narrowest definition and the jobless rate was 7 percent, which would have been considered a crisis in any previous post-World War II era.

Using the broader U-6 measure, which includes part-timers who want full-time work and discouraged workers, the unemployment rate was 13.2 percent. Three job-seekers are chasing every opening.

That said, if such GDP growth could be sustained, it would clean up the jobs crisis fairly quickly and address at least some of the extreme inequality that is holding back the economy. But that is by historical standards — say, going back to the 1990s.

Today, larger companies have found they can do more with fewer people and still book record profits, amass record cash and buy back shares so as to keep their stock price — and thus executive compensation — high.

Other forces are holding back job creation, wages and the middle class: Among them: Most new jobs are being created in low-wage sectors, offshoring of jobs continues and advanced robots and automation are taking work once done by human units.

Most “consumers,” who are so important to the economy, are caught in a feedback loop of joblessness or job insecurity, stagnant or falling wages, high debt and lower economic mobility.

Meanwhile, the other Washington has done little to address the problem, such as investments in education, research and infrastructure. Indeed, with a fetish over the deficit and with the sequester, it has done the opposite.

President Obama has overseen a shrinkage in federal spending back to Eisenhower levels (and the private sector has not filled the gap). He and Democrats appear happy to stand aside as House Republicans cut food stamps and unemployment benefits. The damage from austerity will be with us for decades.

Anyway, I have yet to see an economist that says 4-percent or above GDP growth can be sustained. The forecasts are back in the 2.5 percent range; 3 percent among the high optimists.

In the fourth quarter of 2011, GDP grew by 4.9 percent. It didn’t last. Unless something fundamental has changed, especially in the willingness of business to hire and raise wages (in the face of tepid demand), this will be a one-off, too.

Today’s Econ Haiku:

Sea to shining sea

States are out to please Boeing

A new vote here, please


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