Is This a Recovery?
This morning the U.S. Commerce Department released the most recent revision of the third quarter 2009 Gross Domestic Product (GDP) statistics. At the end of October, the Commerce Department initially announced that GDP grew at 3.5%. This morning, the GDP statistic was revised down to 2.8%.
Although the financial markets have recovered significantly, the business environment, employment situation and bank lending capacity seem to indicate that we have not yet recovered from the economic downturn. In addition, as we face increasing uncertainty about healthcare, environmental policy and taxation, we look at the current economic environment we have to ask, is this really a recovery?
As the Commerce Department calculates the GDP statistics, specifically the rate of growth in GDP, the calculation is relatively simple. GDP is the simple addition of Consumer Spending + Business Investment + Government Spending + Net Exports.
The initial GDP statistic is an estimate based on limited information and slowly over the subsequent months, the statistics are revised based on new information which makes the statistics more reliable as they incorporate more data and less estimation. If we think about the data as a sum of the parts, the parts probably tell more of the story.
The consumer spending part of the equation has fallen significantly in the last two years. The economic crisis has clearly taken a toll. The result of the unemployment situation and the pending increases in taxes would have us believe that a recovery for the consumer is not yet on the horizon. There is nothing that impacts a consumer’s willingness or ability to spend more than having a job and this is clearly shown in the data. In addition, the foreshadowing of future tax increases by the current administration is a significant deterrent to current consumption. All combined, the environment for the consumer is difficult and shows no signs of getting better any time soon.
Business investment has also seen a significant decline in the last two years. Businesses, in many cases, are unable to gain access to credit because of the financial crisis; this forces businesses to cut back on less profitable parts of their business. In addition, over the next 36 months, a large amount of business debt is coming due, most of it issued during times of low interest rates and better economic times. This debt will have to be repaid without the prospect of being able to re-issue that debt on favorable or even affordable terms. Combined with an increasing tax load and health care obligations being proposed, business investment is on the decline and will probably continue to decline for the next few quarters in most parts of the economy.
Net exports, as a calculation net of imports tend to be a smaller part of the equation; however, as a net importer of goods and services, the United States tends to experience an economic drag as a result of this aspect of the calculation.
Government spending seems to be the only part of the GDP equation that is growing; and, in most parts of the economy it is growing quickly. In fact, it grew so much in the last quarter that it completely overshadowed the declines in consumer spending and business investment to create positive GDP growth. The long-term challenge to government spending programs is that they can only help in the short term. In the long-run, the government doesn’t produce or create anything as effectively or efficiently as the private sector.
In the long run, an economy cannot spend its way to recovery, it must produce its way to recovery. In order to recover, the United States must produce...not spend.
The answer to the question, “Is this a recovery?” is based on the calculation above and yes, moving from negative growth to positive growth is technically a recovery. Unfortunately, this means little to the majority of Americans who are working longer hours for less money, facing increasing tax loads and dealing with significant uncertainty about healthcare, environmental issues, safety and taxation.
The reality is that while this may be a technical economic recovery, it may not feel like a recovery for most Americans for several quarters to come.
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