Out of Control Policy Blog

Unsustainable Fourth Quarter Recovery

A review of fourth quarter spending reveals that the "recovery" it promises is simply not sustainable. The Fed is signalling it is going to tighten, which will impact the economy "negatively" but that just means it will allow it to find a natural bottom and then have a real recovery. It also means we could be looking at a loopy square-root shaped recovery or a W-shaped recovery.

Q4 GDP Estimate

Here are the Q4 numbers from the current BEA estimate on a 5.7% growth in GDP:

  • Nonfarm inventory rebuilding accounted for the bulk of GDP growth, encompassing 63% of the growth. This is not sustainable. Unless there is a change in the consumer demand for goods (which is hard when we're still in a credit crunch), the inventory stocks will be rebuilt and then only slowly be drained. Some are arguing that inventory rebuilding is just beginning, but even if that is true, eventually it will stop unless the credit markets turn around.
  • Purchases of computer equipment and software were 14.2% of GDP.
  • Household improvements were 13% of GDP while residential investment was just 2.5% of GDP. This is due to the seasonally cycle in the purchases of new homes and times for renovations.
  • Health care (2.8%), financial services (2.1%), and all other spending (1.8%) were limited in contribution.
  • Federal spending netted only 0.4% of the GDP growth since defense spending dipped 0.19 percentage points from the third quarter.

It is interesting to note that spending on motor vehicles retracted by $13.2 billion from the third quarter. It was still $18 billion higher than the second quarter spending, indicating that there is some recovery in spending on motor vehicles. However the big boom motor vehicles spending that contributed almost 37% to Q3 GDP is now shown to be almost entirely because of the Cash for Clunkers program. And shows that government supports for GDP are not sustainable.

Meanwhile, the White House and Congress are moving forward with more stimulus money that is adding to the fiscal instability of nation. That will have a more long-term native impact on the economy. Long enough that it might add to the back-end of a W-shaped recovery after a future recession.

Update 2/25: As a reader kindly pointed out, I neglected to clarify that what I am talking about here is percentage contribution to over all GDP, not just the growth aspect. These are the highest positive contributions to GDP, and thus drove the growth of 5.7%. Just in case there was any confusion. Also, if you want to look at the raw numbers yourself, as I did, check out the BEA's website and look for chart 1.5.2.

Anthony Randazzo is Director of Economic Research


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