Behold: The Recovery Is At Hand

October 31, 2009

by Mario Rizzo  

The Gross Domestic Product (GDP) is growing again at an annual 3.5% rate for the third quarter of 2009. Some people say this means that the recession is over. Apart from the much-touted stubborn unemployment problem, does this make sense? 

The government is spending and will be spending massively. Some of that is moving through the system directly increasing demand for the output of particular agents. Even agents outside of the direct path of the stimulus may spend because they anticipate that some of this government spending is or will be complementary to their own spending.  

There are two pertinent and interrelated questions.  

First, is this a reflection of the pattern of consumer preferences? We should recall that the great economist Jean-Baptiste Say defined production as the “creation of utility.” It really is no-brainer to induce the production of stuff. Whether it is the “right stuff” is another point. The current fashion is macroeconomics is to ignore all issues of resource allocation. But these are important if we are to avoid the error of simply focusing on GDP as it if were the outcome of a welfare-enhancing market process. 

Second, is this sustainable in the long-run without continual stimulus? If the direction of resources is not in accordance with the preferences of the relevant agents it will not last.  

Right now, massive deficits are being run. A trillion a year as far as the eye can see.  Interest rates will be higher later because of this. Taxes will also be higher either to reduce the deficit or to pay the interest ad infinitum. These will have effects in dampening GDP growth. There will be output (of indeterminate value to consumers) now at the expense of lost output in the future.  

A new healthcare bill may be passed loaded with expensive mandates and or fines, perhaps new taxes on the god-awful rich. Anything which affects payroll costs will either lower employment or explicit wages – leading to predictable complaints about jobless recovery and wage stagnation — not to mention worries about the middle class getting shafted and the growth of inequality. I am exhausted already. 

All this is not to mention the artificial re-stimulation of the housing market by government purchases of mortgage-backed securities and the home-buyers’ tax credit that may be extended. Obama has already said yes to an extension and there is a Senate bill. It may also be extended to people who are not first-time house buyers. (This is an example of the lack of concern with correcting previous misdirection of resources so long as there is a political constituency for “stimulus”.) Private residential investment rose 23% in large part due to the rush to get things built before the credit expires. This accounts for about 0.5 percentage points of the GDP increase.  

Treasury bills to fund the deficits are being purchased by banks with almost zero-interest Federal Reserve money. Banks profits are artificially enhanced both by this and the stimulation of the housing-mortgage market. This is partly driving the increase in stock prices. 

The motor vehicles sector has been stimulated by the cash-for-clunkers subsidy. Of course, most of those purchases were simply brought forward in time.  The rebound of the motor vehicles sector accounts for about 1 percentage point of the increase in GDP. However, a day after the GDP figures for the third quarter were released, the Commerce Department reported consumer spending on durables goods (such as cars) declined 7% in September canceling gains from a month earlier. Let’s see what the future holds for this sector. 

Furthermore, capital and other resources are being destroyed every minute of every day as inefficient GM and Chrysler are kept in business. And even their low level of efficiency is being threatened by political intervention. 

Inventories have decumulated at a slower rate. In the second quarter they fell at an annual rate of $162 billion; in the third quarter they fell at an annual rate of $131 billion. This change from the previous quarter adds to GDP. This accounts for about 1 percentage point of the increase in GDP. Now, what is this? It is essentially a forward-looking indicator. If inventories are at a low level then perhaps production will pick up. As of now, this is just a peculiarity of GDP book-keeping. A spike in production to actually restock inventories will come about only if the demand is there – say, next quarter or beyond. 

In sum, at least 2.5 percentage points of the 3.5 percent increase are suspect on their own terms. And then there are the future costs to bear. As long as the stimulus-spending persists the “stuff index” (GDP) will look okay. And as long as the costs are hidden either in the future or in some other way, the politics will look fine for the stimulators.

So is the recovery at hand?

(For the percentage point contributions of the various sectors to GDP growth see the Commerce Department tables.)

4 Responses to “Behold: The Recovery Is At Hand”


  1. I agree. It is an excellent post. Nothing to add.

  2. Bill Woolsey Says:

    Nominal expenditure, as measured by total final sales of domestic product, rose at a 3.4% annual rate. This doesn’t include inventory “expenditures.” It rose at a .6% annual rate in the 2nd quarter. This suggests that the growing imbalance between the quantity of money and the demand for money that resulted in large drops in expenditures in the 4th quarter of 2008 and 1st quarter of 2009 is starting to reverse. It remains below the previous peak and below its previous growth path. I think that for real expenditures to recover to their past growth path, a roughly 9% deflation remains necessary. Of course, there are good reasons to expect that productive capacity is remains depressed.

    I have little doubt that the Obama administrations interventions have been counterproductive. But I find the Keynesian focus that identifies these missallocations with changes in real demand mistaken.


  3. […] structural fall of the interest rate level lowers the marginal productivity of investment (see Mario’s entry) and depresses growth. Thus lifting interest rates becomes difficult, as bad investment would be […]


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