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The US economy grew at a revised 2.7% in the third quarter, according to the Commerce Department, vs. the 2.0% rate reported previously. Good news? Not really. RDQ Economics:
The upward revision to GDP is less positive than it first seems since it was more than fully driven by a larger-than-previously reported inventory build (at an annualized rate, nonfarm inventories rose by around $89 billion in the third quarter), while underlying growth in terms of real final sales or final sales to domestic purchasers was revised down slightly. A rising inventory build (and nonfarm inventories rose at their fastest pace in two years) is often a harbinger of slower growth and, at this point, we would look for a sub-2% reading on fourth-quarter growth.
Final domestic demand rose just 1.7%, barely stronger than 1.4% in 2Q. Real consumer spending rose 1.4%, softer than expected, though cyclical components of spending like durables were solid. (+8.7%). Of greater concern, investment was revised down to a 2.2% rate of decline from -1.3%. Some unusual boosts to 3Q will not repeat in 4Q. Government outlays rose 3.5% on a 12.9% surge in defense spending, which seems likely to reverse near term. Inventories also boosted real GDP a sharp 0.8 percentage point. Falling farm inventories in particular should drag on 4Q growth. We continue to expect a sub- 1% reading from 4Q real GDP.
IHS Global Insight:
Although GDP growth was revised up to 2.7% from 2.0%, this was not a healthy report. Of the 2.7% growth rate, 0.8 percentage point comes from inventory accumulation, and 0.7 percentage point comes from a spike in federal spending (mainly defense). These won’t be repeated – in fact they’ll probably go into reverse in the fourth quarter. Everything else combined contributed just 1.2 percentage points to growth.
Consumer spending growth was sluggish at 1.4%, business fixed investment declined, and even though exports did better then first thought they were only up 1.1%. The one shining star was residential fixed investment, up 14.2% as the housing recovery kicked into gear.
If we can move towards a credible long-term deficit reduction plan, and at the same time avoid tightening fiscal policy too much, too soon, the combination of a continuing housing recovery with a return of business confidence should see growth accelerate sustainably over the course of 2013. But the immediate growth outlook is soft. The special factors that helped Q3 won’t help Q4, while the fiscal cliff uncertainty will continue to be a drag. And Sandy will hurt too. We expect Q4 growth of only around 1%.
OK, I think we’ve seen enough here. It looks like 2012 will end on a weak note with most economists viewing 2013 as probably more of the same — and that assumes we don’t plunge over the fiscal cliff and suffer another recession. For comparison purposes, let’s first review Obama White House economic forecasts since 2009:
1. In August of 2009, Team Obama predicted GDP would rise 4.3% in 2011, followed by 4.3% growth in 2012 (and 4.3% in 2013, too).
2. In its 2010 forecast, Team Obama predicted GDP would rise 3.5% in 2012, followed by 4.4% growth in 2013, 4.3% in 2014.
3. In its 2011 forecast, Team Obama predicted GDP would rise 3.1% in 2011, 4.0% in 2012, 4.5% in 2013, and 4.2% in 2014.
4. In its most recent forecast, Team Obama predicted GDP would rise 3.0% this year and next, and then 4.0% after that.
Instead, GDP grew 2.4% in 2010, and 1.8% last year. So far this year, quarterly growth has been 2.0%, 1.3%, and 2.7% — with maybe 1.5% in the current quarter. Instead of quarter after quarter of 4% growth, we’ve had just two: The final quarters of 2009 and 2011. Other than those, we’ve haven’t had a single quarter with growth higher than this quarter’s 2.7%. It’s why we still have massive employment and output gaps.
At the very least, I think the folks making the case that the Obama stimulus “worked” need to account for growth that has been less than half of what the Obama White House predicted. It’s not like they didn’t know the historical record of economies after bank and housing busts. All that stuff, one would assume, was factored into these forecasts.
Michael Grabell, a reporter for ProPublica, documented the many failings of the American Recovery and Reinvestment Act in “Money Well Spent? The Truth Behind the Trillion-Dollar Stimulus, the Biggest Economic Recovery Plan in History.”
In reporting on the stimulus over three years, I traveled to 15 states, interviewed hundreds of people and read through tens of thousands of government documents and project reports. What I found is that the stimulus failed to live up to its promise not because it was too small (as those on the left argue) or because Keynesian economics is obsolete (as those on the right argue), but because it was poorly designed. Even advocates for a bigger stimulus need to acknowledge that their argument is really one about design and presentation.
Grabell, shorter: Big Government messed up the Big Spend. Vice President Joe Biden said the stimulus would “literally drop kick us out of the recession.” But Grabell concludes that “the stimulus ultimately failed to do what America expected it to do — bring about a strong, sustainable recovery. The drop kick was shanked.”
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