“Almost any tax cut or spending increase would succeed in boosting a sluggish economy if the Federal Reserve Board follows an accommodative monetary policy. . . . The key question is, therefore, not whether the proposals provide any short-term stimulus, but whether they are the most effective way to provide stimulus.” -William Gale, Brookings Institution

Yesterday’s GDP number makes it clear that massive stimulus will generate consumer spending, durable goods sales, and even some capex spending. This activity is good for the overall economy.

The issue which I find so fascinating is whether that temporary blip can become a permanent and sustainable growth path. In my opinion, the jury remains out:

A small number of forecasters remain concerned that the economy will slip into a torpor again next year. They say that household spending on long-lasting expensive items, known as durable goods, will weaken as interest rates rise and that companies, still suffering from their binge in the late 90′s, will not continue to invest in new factories and equipment at a healthy pace.

20 years GDP, by President, quarterly

q_gdp_growth.jpg
Source: NYT

The big economic issues going forward:

1) Jobs: Still the largest problem afflicting the economy: “After falling by 2.8 million jobs since early 2001, employment rose during September for the first time in eight months, but the increase was not large enough to keep pace with the growth of the population.” The NYT notes:

“In part, the economies of the United States and other important countries have simply grown too slowly and unevenly for employers to commit themselves to hiring new workers. But companies have also used new technologies and business strategies to become more efficient, able to make more goods with fewer hands.”

2) Consumer Spending: refinancings, tax cuts (including $400 one-time rebate checks to millions of families with children) and hourly wage increases rose faster than inflation. Household purchases of durable goods, like cars, which continue to be heavily discounted, rose at an annual rate of 26.9 percent in the quarter. (The negative was that hours worked fell, while health care costs continue to soar.

3) Business Capex Spending: improved suggesting execs are becoming more confident about economic imoprovement. They are replacing older computers and other machines. Corporate spending on equipment and software increased 15.4 percent this Q, the biggest jump since 2000.

Source:
Economy Records Speediest Growth Since the Mid-80′s
By DAVID LEONHARDT, N.Y. Times, October 31, 2003

http://www.nytimes.com/2003/10/31/business/31ECON.html

Category: Finance

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

One Response to “GDP Follow up”

  1. Jon A says:

    If you look at todays Personal Income report you can see the tax cut stimulus entering in Jul and August. Then in Sept Disposable income drops. That is the stimulus effect. That is all. The next effect to be felt will be the rebuilding of inventories. But I am pessimistic and do not see consumer surging in 2004. I fear that we are setting up for the classic double dip. Companies will rebuild inventories in anticipation of 2d qtr 04 demand. The demand won’t show and another round of pull backs.