Real GDP Revised Upward in 2009:Q4
The U.S. economy expanded at an upward revised 5.9 percent annual rate in the fourth quarter of 2009, representing the best performance in more than six years. The added improvement to real GDP was largely due to a reduction in the pace of inventory liquidation and a sharp increase in nonresidential fixed investment, which more than offset a wider net export deficit, a downward adjustment in consumer spending, and a greater decline in state and local government spending. Real consumption expenditures were revised downward from 2.0 percent to 1.7 percent, but this was more than offset by a $9.7 billion increase in business equipment and software sales, producing an 18.2 percent gain for this component. On the trade front, although the real net export deficit widened by $6 billion, exports were revised upward by $13.9 billion for a 22.4 percent gain for the quarter. The importance of the foreign consumer as a driver of economic activity was clearly seen by the fact that the export of goods increased $75.8 billion in 2009:Q4, versus just a $22.2 billion rise in domestic consumption of goods in 2009:Q4.
Slow and Low Growth Likely
Despite the strong rebound in real GDP late last year, unfavorable weather conditions for February will likely produce a softer 3 percent or so real growth rate in 2010:Q1, followed by a rebound towards the 4+ percent area in 2010:Q2. The net result of these events should still produce a nine-month average real growth rate of close to 4.5 percent, but in a somewhat more volatile fashion than we had been anticipating. We expect softer 3.5 percent or lower real growth in 2010:H2 and 2011 as economic headwinds have only receded - not disappeared. A continued drag from the construction sector, a 10+ million jobs gap, consumers still repairing their balance sheets, a run-off of stimulus from the Federal government, and significant constraints from record state and local government budget shortfalls should produce a real GDP pace that is well below the 6+ percent average 18-month growth rate registered in 5 of the last 8 recoveries since the mid 1950’s.
Unfavorable Weather Could Cause Havoc
Near term, we may see weather play havoc with several economic readings including the employment, housing, and consumer spending statistics. This, in turn, could cause indigestion for economists and market participants. The early- to mid- February blizzard that assaulted mid Atlantic states, combined with challenging winter weather conditions in the West, Southeast, and Southwest portions of the U.S., could have a negative impact on economic activity. If realized, the weakness might spark misplaced fears about the sustainability of the economic recovery. However, if history is a guide, the softer data should be followed an offsetting rebound in the economic readings when weather returns to normal in the upcoming months.
Bad Weather and Employment May Not Mix
Although the national weather service has not yet released its weather index for February 2010, anecdotal evidence suggests that the weather problems last month were significant, particularly the blizzard in the mid-Atlantic corridor. Past precedent shows that bad weather could produce weakness in the upcoming employment report for February. The events three weeks ago reminded us of the three massive mid-Atlantic/Northeast snowstorms that were reported over the last 20 years—the March 12-14, 1993 weekend storm, the “blizzard of the century” that hit January 6-8, 1996, and the February 15-18, 2003 snowstorm. On average, these three storms produced a temporary reduction of almost 300,000 jobs from what had been the prevailing three-month trend for employment. The net result was an initial payroll print that averaged more than 200,000 below the market consensus estimate. Although the Bureau of Labor Statistics has improved its seasonal factor adjustment process, we still could see some impact of bad weather unfold through weaker employment readings and/or a hit to the workweek. However, what hurts the economy now may help it later this spring. In January 1996, a 201,000 initial decline in payroll employment was followed by a more than 700,000 gain in net new jobs the next month.
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