(This is a guest post from Credit Writedowns.)
The US turned in a fairly robust quarter in Q1 2010, with real GDP growth meeting expectations at 3.2% annualized. This comes on the back of a very robust annualized 5.6% growth in the previous quarter. This is the best growth two-quarter growth we have seen since 2003.
However, when one digs deeper, it is obvious this growth is unsustainable because it is predicated on a reduction in savings rates and a releveraging of the household sector. As a result, I expect weak GDP growth in the second half of 2010.
The problem with the BEA reported numbers is the composition of GDP growth. The BEA says in its data release:
Real gross domestic product — the output of goods and services produced by labour and property located in the United States — increased at an annual rate of 3.2 per cent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 5.6 per cent.
The Bureau emphasised that the first-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The “second” estimate for the first quarter, based on more complete data, will be released on May 27, 2010.
The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by decreases in state and local government spending and in residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP in the first quarter primarily reflected decelerations in private inventory investment and in exports, a downturn in residential fixed investment, and a larger decrease in state and local government spending that were partly offset by an acceleration in PCE and a deceleration in imports.
So the gain in GDP was due to consumption, while GDP decelerated from Q4 2009 due to inventory, exports, residential investment, and state and local government spending.
Translation: These numbers are entirely dependent on an increase in consumer spending. Everything else is becoming a drag on growth.
In March, when I wrote “The mindset will not change; a depressionary relapse may be coming,” I noted:
I expect the following to occur:
- Public pressure to withdraw monetary and fiscal stimulus will work and stimulus will be reduced quicker than many anticipate – beginning sometime in early 2010. The Fed has already said it will stop buying mortgages in March and the Obama Administration is now focused on deficit reduction as evidenced by the paltry jobs bill just passed.
- The fiscally weak state and local governments will therefore receive little aid from the federal government. This will result in budget cuts, tax increases, and layoffs by the end of Q2 2010.
- At the same time, the inventory cycle’s impact on GDP growth will attenuate. By the second half of 2010, inventories will not add considerably to GDP.
- Meanwhile, the reduction of Fed support for the mortgage market will reveal weaknesses there. Mortgage rates may increase, decreasing housing demand.
- Employment will be weak in this environment, leading to another spate of defaults and foreclosures.
- The foreclosures and weak housing demand will pressure house prices and weaken lender balance sheets, especially because of second-lien exposure. This will in turn reduce credit growth.
Isn’t this exactly what is happening?
- Monetary and fiscal stimulus is being withdrawn. Do you notice the end of ZIRP? – FT Alphaville
- The state and local governments are already detracting from GDP growth as of the Q1 figures just reported.
- The inventory cycle did add to GDP growth in Q1 but was a major factor in the deceleration in GDP growth.
- The Fed has indeed withdrawn support from the mortgage market. Mortgage rates have been rising, and are near 8-month highs. They fell last week for the first time in five.
- We know that state and local governments are laying off workers in droves. And Jan Hatzius at Goldman is expecting a fairly weak 175,000 increase in non-farm payrolls when the April Data is released. That is not going to get it done. Meanwhile, the only thing keeping foreclosure activity from renewed record highs is government intervention.
- House prices are not rising in the least. The latest Case-Shiller data showed another decline in house prices. That’s five consecutive months of house price declines.
So, the only thing standing between the US and renewed recession is the over-indebted American consumer. And consumer income is not increasing very much. Consumption is increasing much more.
Here’s what the BEA said last month about the data. Note how the growth in personal consumption expenditures is outstripping the growth in personal income. This is clearly unsustainable:
Personal income increased $1.2 billion, or less than 0.1 per cent, and disposable personal income (DPI) increased $1.6 billion, or less than 0.1 per cent, in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $34.7 billion, or 0.3 per cent. In January, personal income increased $30.4 billion, or 0.3 per cent, DPI decreased $26.0 billion, or 0.2 per cent, and PCE increased $38.5 billion, or 0.4 per cent, based on revised estimates.
Real disposable income increased less than 0.1 per cent in February, in contrast to a decrease of 0.4 per cent in January. Real PCE increased 0.3 per cent, compared with an increase of 0.2 per cent.
Bottom line: the government is removing the stimulus prop to GDP growth before the recovery has become self-sustaining. The inventory cycle is already starting to fade. That means weak 1 or 2% growth at best by Q4 2010. Unless job growth picks up tremendously by the second half of the year, this recovery is in trouble.
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