The GDP Outlook
Raymond James
By Scott Brown
October 23, 2012
On Friday, the Bureau of Economic Analysis will release the advance estimate of third quarter GDP growth. There’s always a lot of uncertainty in the advance estimate. The BEA will have to make assumptions about inventories, foreign trade, and a few other missing components. However, the report should continue to show the U.S. economy in recovery mode.
As usual, investors should not get too caught up in the headline GDP figure. It will be revised in late November and again in December (and again with the annual benchmark revisions in late July). Focus on the key components. Personal consumption expenditures, roughly 70% of GDP, are likely to have risen at a moderately strong pace. Retail sales were reported stronger than expected in September, while figures for July and August were revised higher. In contrast, business fixed investment should appear relatively weak. The manufacturing data for August led to declines in forecasts of 3Q12 GDP growth. The September retail sales data have done just the opposite, pushing estimates to the top end of the 1.5% to 2.0% range.
The GDP figures arrive in the middle of a minor debate about the nature of the recession and recovery. Much of this debate is political. Republican economists argue that the 2008-09 downturn was no different than the typical recession and the president’s policies are holding things back. Democratic economists argue that the recovery would have been stronger if Congress would have passed President Obama’s jobs bill. In truth, this recession was a lot different than usual, characterized by huge deleveraging in the financial sector and in the household sector (concentrated in mortgage debt). The Fed’s Flow of Funds data suggest that the financial sector deleveraging was still underway in the second quarter. The household sector continued to pay down mortgage debt in 2Q12, but other forms of consumer credit expanded. It’s also interesting to note that total net U.S. borrowing, which includes the large federal budget deficits, has been trending lower in recent years than at any point in the previous decade.
It takes time to work through the kinds of excesses that were built up ahead of the downturn, which is why most economists expected this to be a protracted recovery. The recovery has been even slower than anticipated, but that’s largely because the downturn was much more severe than it initially appeared.
There is a somewhat natural recovery process, which appears to be playing out (albeit more slowly than the typical recovery). Many people ask what will drive the recovery. It’s not any one thing. Rather, many things gradually improve in tandem. For example, better job growth leads to better spending growth, which leads to even better job growth, and so on. We’re on the verge of expanding such positive feedback loops, but in the short term, it’s still a battle of headwinds and tailwinds. The headwinds (Europe, fiscal policy) are likely to restrain the pace of growth for some time still, but the tailwinds, including accommodative monetary policy should eventually take over.
(c) Raymond James
