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Gov’t Revises GDP Estimate Downward Again  

December 23rd, 2009, 12:12 am admin Leave a comment Go to comments

Third-quarter growth was significantly weaker than previously reported, the government announced Tuesday. As measured by gross domestic product, which is seen by many as an increasingly flawed gauge that overstates the health of the economy, the revision showed that growth was still well into positive territory compared with four previous quarters of negative growth.

The initial estimate in October for annualized third-quarter GDP growth was an encouraging 3.5%. Last month, that figure was revised downward to 2.8%. Today, the figure was again revised downward by the Commerce Department’s Bureau of Economic Analysis, this time to 2.2%. This was well below the experts’ consensus of 2.7%, and below the level that even the most pessimistic expert had predicted.

Of that 2.2% increase in GDP, 1.45% came from the administration’s Cash-for-Clunkers program, which provided $3 billion in consumer subsidies for buying new, more fuel-efficient cars. Adjusted for inflation, GDP this year is down 2.8% over 2008.

Goldman Sachs’ Edward F. McKelvey wrote:

This was a much larger than normal revision for the third pass on a given quarter, knocking what once was a fairly robust 3.5% bounce down to a mediocre 2.2% (from 2.8% prior to this revision). All sectors except the trade balance — a focal point of last month’s  downgrade — saw some downward revision. Revisions were particularly deep in business investment — to 5.9% from 4.1%, worth two tenths of the revision —  and in inventories (also worth nearly two tenths).

The latest revision, which is based on more complete data than the previous estimates, was mostly a result of downward calculations of nonresidential fixed investment, private inventory investment, and personal consumption expenditures. Building of new office and retail commercial space dropped more than previously estimated and state and local government spending was worse, falling by 0.6 percent.

Eric Thorne, senior vice president at Bryn Mawr Trust, noted:

“So a lot of the reason the growth was a little bit slow was that inventories have been worked down and that could set the stage for a better economy over the next several quarters,” he said. He added, “for an economy our size, that’s very good news. The fact that inventories have been worked down bodes well for the first half of 2010.”

Mr. Thorne expects 2010 will show improvement in the economy, although he is concerned investors may be disappointed with the pace of the recovery.

“Investors might be looking for the economy to rebound in a couple months,” he said. “We’re satisfied with what’s happening but some investors want a lot in a short period of time.”

The first calculation for the 4th quarter GDP will be released January 29. According to Conor Dougherty at The Wall Street Journal, the consensus of experts surveyed by Macroeconomic Advisers, a consulting group, is now putting that number at about 3.9%, based on better-than-expected growth in October. At least one major forecaster has put the figure at 5%. Given how far off the consensus of experts has been on a wide array of economic statistics this year, it would be wise not to bet your paycheck – if you are fortunate to have one – on that forecast. The Journal reports:

Of course, the economy still has a long way to go before anyone declares it healthy. And some economists warn that restocking of shelves could boost production temporarily, but that oomph could fizzle out later in 2010.

Investment in equipment such as machinery or computers remains wobbly. New orders for non-defense capital goods were down 2.9% in October. “The question is once we get past this point, what does the economy look like?” said Zach Pandl, an economist at Nomura Securities. “It remains the big question for the outlook.” The Macroeconomic Advisers’ consensus sees slower growth — 3.3% — in the first quarter.

And there is still the problem with GDP as a measure in the first place.

As I wrote in October when the GDP was estimated at 3.5%:

While it is not as desperately needed as a fix for the one in five Americans who is unemployed or underemployed, we also need a fresh measurement to replace GDP. Because that gauge does a lousy job. For example, the destruction of natural habitat and of the social structure are counted as pluses if it leads to more production. Pollute a stream while manufacturing some toxic toy, you get a rise in the GDP. Clean up the stream, another rise in the GDP. Pump unreplenishable fossil water out of the Ogallalla Aquifer to irrigate Nebraska wheat fields, another rise in GDP. Running the war on some drugs puts people to work, so another rise in GDP. Build a tank, a rise in GDP. Have it blown up in a war, a rise in GDP to build a new one and to cover the medical treatment the soldiers who were it will need.

Putting aside those “philosophical” failures, many critics, including statisticians who actually collect the data, have recently been calling into question the figures that the public sees. This is especially true for way imports and productivity are measured.

Meanwhile, in another report issued Tuesday morning, sales of existing houses soared 44.1% in November compared with a year ago, driven in part by a deadline on an $8,000 tax credit for first-time home-buyers that has been extended. The year-ago figures were deeply depressed, but the sale of an annualized 6.54 million units still marks a sharp improvement over last year and last month. As with other statistics, it’s the long-term trend that really matters.

“It’s a really good number, but we’re going to see really bad, ugly numbers soon,” said Patrick Newport, an economist at IHS Global Insight, pointing to signs that mortgage applications for December purchases were down. “The housing market is still really weak.”

Impinging on that are the still-unknown consequences from the large numbers of foreclosures that could be in the offing in 2010. As Reuters reported:

Serious delinquencies among U.S. prime mortgages rose nearly 20 percent in the third quarter from the prior quarter, as the percentage of current and performing mortgages fell for the sixth consecutive quarter, banking regulators said on Monday.

The report by the Office of Comptroller of the Currency and the Office of Thrift Supervision, which are part of the Treasury Department, covered about two-thirds of all U.S. mortgages.

It found 3.6 percent of prime mortgages — those made to the most credit-worthy borrowers — were seriously delinquent in the third quarter. That was more than double the year-ago quarter and up nearly 20 percent from the 2009 second quarter.

So far, about 1 million households have begun trial modifications of their mortgages under the Obama administration’s Home Affordable Modification Program. About 3% – 31,382 – of these modifications had been converted to permanent status by the end of November. The U.S. Treasury Department and the Department of Housing and Urban Development say that 375,000 will be permanent by the end of 2009, a figure that many observers view skeptically.


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