October 29, 2009

3Q09 GDP Report Thread: The Recession Ends, The POR Economy Continues (Update: An Annualized +3.5%)

Filed under: Economy,Taxes & Government — Tom @ 8:23 am

Related New Post, Oct. 30 — “A Reality-Based Look at 3Q09’s GDP (Plus IBD Update)”


So we’re finally here.

The government will shortly announce that the third quarter went positive, bringing an end to the recession as normal people define it.

As of Wednesday afternoon, Goldman Sachs was predicting that gross domestic product (GDP) growth for the third quarter would come in at an annualized 2.7%, ending a string of four straight quarters of contraction. The consensus of others, according to CNNMoney.com, was a positive 3.2%.

Whether it brings an end to the recession as determined by the National Bureau of Economic Research (NBER) is an open question. My guess is that it will. Based on the justifications NBER used to date its beginning of the recession in December 2007, it probably shouldn’t. After all, 768,000 seasonally adjusted jobs were lost during the quarter at a very consistent clip.

The report will be here at 8:30 (longer-term link here).

UPDATE: The number is an annualized +3.5%. In actual non-annualized terms, The POR (Pelosi-Obama-Reid) Economy’s 3.8% four-quarter dive has been partially offset by roughly 0.9%. That leaves us roughly 2.9% in the hole since the POR Economy began in June of last year. It’s a start; given the horrid employment situation and the size of the hill left to climb, hold the champagne, and even hold the beer.

UPDATE 2: It is encouraging that the GDP growth components are all positive, but sustainability is questionable. The personal consumption component (+2.36%) is the largest. I believe it was likely driven by increases in transfer payments such as food stamps, unemployment benefits, and Social Security. It certainly wasn’t stoked by increases in income for people still working, because that, as measured by average weekly earnings, is down 1.9% since December.

The private domestic investment component (+1.22%) went positive after three unprecedentedly awful quarters where it went down a non-annualized 4%. That it came back a non-annualized 0.3% after falling for so long (5.3% non-annualized over the past seven quarters) is more of a relief than a cause for joy. At some point, companies have to replace dying equipment, cars, computers, etc., whether they like it or not.

A related Pajamas Media column will go up either later today or sometime tomorrow. Update: It’s here; the BizzyBlog tease is here.

UPDATE 3: A sober-up — I realize that data collection wasn’t up to today’s levels, but a look at the 1930s tells us that positive GDP growth doesn’t end a recession (or in that case, depression) as people feel it. You’ll see that growth during the mid-1930s was great (assuming FDR wasn’t cooking the books), but persistently high unemployment lingered until World War II. In the 1930s, FDR created a high-wage, high-unemployment economy that grew. The POR Economy as seen right now in its formative “recovery” stage is shaping up to be a flat-wage (or worse), high-unemployment economy that somehow grows. We’re supposed to be impressed?

One thing such an economy does is play into the statist agenda, as you’ll see in the PJM column when it appears.

UPDATE 4: GDP-related quote of the day, from the BBC

“It’s good to have the economy growing again,” said Brian Bethune, economist at IHS Global Insight.

“But we don’t think that rate of growth is sustainable because it is distorted by all the government stimulus.

“The challenge here is to get organic growth – growth that isn’t helped by fiscal steroids.”

It will be a surprise if this appears in a U.S. establishment media publication.

Mr. Bethune makes an excellent point that is reinforced when you look at the history previous recoveries.

In the six quarters that began in 1Q1983, the private investment component of GDP growth was huge (top set is total GDP growth, and the bottom is the private investment component):

5.1 9.3 8.1 8.5 8.0 7.1 3.9
2.20 5.87 4.30 6.84 7.15 2.44

You see the same thing but to a lesser degree from 3Q2003 to 4Q2004, which of course is because the Bush tax cuts were not as robust:

6.9 3.6 2.8 2.9 3.0 3.5
2.28 2.32 0.35 2.79 0.88 1.40

In this context, 3Q08′s private investment component of +1.22% in the first quarter of an alleged recovery is middling at best, and needs to come in much higher in future quarters if sustainable growth is to occur.



  1. Wait till Krugman cheers this!! But, not so fast my friend!! In his book, “Peddling Prosperity”, Krugman bemoaned the GDP growth during the ealry Reagan years, because Reagan came from such a low point, Reagan had nowhere to go but up!!!

    Comment by Rybiep — October 29, 2009 @ 8:48 am

  2. #1, great point. As noted, it’s 3.8% down, 2.9% to go. If growth in future quarters flattens out (and that seems to be the consensus at the moment), it will take a long time to get the rest of the decline back. With population growing about 1% per year, it will take much longer to get to where per-capita real GDP is where it was after 2Q08.

    Comment by TBlumer — October 29, 2009 @ 9:24 am

  3. It’s called smoke and mirrors accounting, counting government borrowing by not subtracting out the $24k per car and $43k per house tax credit.

    You’re not dreaming: Edmunds calculated the so called $4000 car credit as actually being $24,000 per car and the Brookings Institution (liberal think tank) calculated the $8,000 home buyers credit to cost $43,000 per house to the government. They robbed Peter to pay Paul by advancing all the sales to one quarter in the deceitful attempt to proclaim the stimulus ended the recession.


    The average rebate was $4,000. But the overwhelming majority of sales would have taken place anyway at some time in the last half of 2009, according to Edmunds.com. That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales.


    According to estimates by Ted Gayer at the Brookings Institution, each additional home sale generated by the $8,000 first-time homebuyers’ tax credit actually costs the government $43,000.

    How’s that possible? Gayer figures that of the 1.9 million homebuyers that will get the $8,000 tax credit, 85% would have bought a house anyway. The price tag of $15 billion — about twice what Congress had intended — he reckons will result in approximately 350,000 additional home sales, at a price tag of $43,000 for each additional sale.

    The upshot of both these program as described by both liberal and conservative sources as to the front loading of sales at the expense of the future, the 4th QTR will be down…significantly.

    Comment by dscott — October 29, 2009 @ 9:29 am

  4. #3, good points. I’m really irritated that the Realtors group wants an extension of the credit. If we don’t watch out, they’re going to want to make it permanent, which will permanently distort the real estate market.

    The credit is a thinly-disguised targeted transfer payment, as was C4C. Money for nothin’, as Dire Straits would say.

    Comment by TBlumer — October 29, 2009 @ 9:34 am

  5. Actually Tom, the amount of increase in GDP is as phony as the unemployment rate due to the lame math used by those who wish to put on a nice pageant to distract the public from what’s really going on. Which is the reason why comment #2 isn’t really that accurate either since on a dollar for dollar basis it takes a greater percentage of increase to overcome a decrease. A dramatized example to demonstrate this point: If the economy drops 50%, it would have to increase 100% to get back to the same dollar value (assuming no inflation or deflation).

    Comment by dscott — October 29, 2009 @ 10:28 am

  6. #5, 3.8% down only requires 3.95% up as an offset. But within individual components the difference in the upward offset might be more pronounced.

    Comment by TBlumer — October 29, 2009 @ 10:34 am

  7. Look at the GDP increase less motor vehicle output (page 13 of 14 in the full report.)

    It was only 1.9% after such a precipitous decline in the past 3 quarters. I’d like to know how much was due to the expected expiration of the home-buyers credit, and how much of it is due to 65% of COBRA benefits being paid. Furthermore, the report shows a decline in GDI (I think a better measure of the conditions for PEOPLE.) So unless the government can continue to increase food-stamps, unemployment, and other welfare spending, I think PCE is headed downward and thus we are on our way to either a downward-sloping W or a L with a slight uptick on the way down.

    Comment by Scott — October 29, 2009 @ 10:48 am

  8. #1, What Krugman fails to realize is that Nixon, Ford and Carter both all came from a low point too, but the economy didn’t go “nowhere but up” and than sustain a high level because those guys didn’t adapt the sound policies Reagan did. When the economy went up under the previous three, it went back down up or simply stayed static. Under Reagan the economy went up and consistently expanded well into the 1990′s. The Clinton admin even admitted that much of the growth and productivity that occurred during their years were crested from the incentives enacted under Reagan.

    Reagan also caused unemployment to drop sharply and GDP and growth in general was based on increased productivity and actual growth of private sector entrepreneurship (for instance many of the Internet age conveniences and freedoms we take for granted today and fueled the US being a economic powerhouse during the 90′s were spurred under Reagan during the 80′s). Which is the exact opposite of the phony baloney, held together with duct tap and spit, high unemployment, and activity instead of real achievement ‘growth’ we are being treated to today under Obama.

    Comment by zf — October 29, 2009 @ 11:05 am

  9. #7, good point. That had nowhere to go but up, given that Chrysler totally shut down during most or all of the second quarter, and GM shut down some or all of its plants during a portion of it.

    One other item on the same page is the slowdown in computer sales, which I think was caused by the wait for Windows 7 (if it was caused by something else, that’s a problem). If I’m right, that “should” go the other way this quarter, and in effect gives the economy a +0.4% or so (a swing from -.2 to +.2) head start.

    Comment by TBlumer — October 29, 2009 @ 11:31 am

  10. #8, I was really just trying to slam Krugman, waiting for him to cheer on his great leader. I agree with you completely, Reagan and Thatcher both realized that problem with socialism, that whole “other people’s money” thing!!

    Comment by rybiep — October 29, 2009 @ 12:30 pm

  11. I’ve mentioned this before, but it’s important now. There are many econ/fin websites and blogs that understand the issues here. Although some may argue, I’ve been convinced that the only way to understand where we are now is to first review Austrian School economics. They saw this coming and have a pretty clear idea that it will be a long, hard slog through the debt rubble to get out.

    Denninger at The Market Ticker, as he always is, is first at breaking down the published reports. First, without USG stimulus, C4C boosting auto results, and the $8,000 of free money to buy homes, the GDP would have declined by 1.5 percent. Second, here is the key section of the report: “Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.” (Bureau of Economic Analysis)

    His last sentence in his post is the following: “You cannot have an economic recovery when on a q/o/q basis real disposable income is contracting at a 7.4% annual rate and worse, the spread between nominal and real income is widening, indicating that mandatory purchases such a food, energy and health care – are increasing.”

    Anyone investing now on the notion that it’s all sunshine and roses from here needs their head examined.

    Comment by boqueronman — October 29, 2009 @ 6:13 pm

  12. #11, basically putting the government stimulus in personal terms, this is like a unemployed person using a credit card to artificially keep the spending up but there is no job coming in the future to pay the bills that are coming due. Which is why I am predicting the 4th quarter is going to be negative.

    Comment by dscott — October 29, 2009 @ 6:44 pm

  13. [...] Anyone still operating under the illusion that Thursday’s +3.5% GDP report is anything to get excited about, or represents anything remotely sustainable, needs to read and digest Karl Denninger’s take (or I should say takedown) at the Market Ticker (HT to previous post commenter baqueronman). [...]

    Pingback by Economy Gasps for Air; A Roundup of Data and Analysis | Chicago Daily Observer — October 30, 2009 @ 10:13 am

  14. Some points that have been raised: a $13.5tillion economy that grows 3.5% is different from a $15.5trillion economy that grows the same rate. This growth is less than where we were.

    As also noted, the gov borrowed for CFC, consumers incomes went down but spending increased over 3%, which means they borrowed. Most, if not all of the growth came at hands of borrowed money – which will have to be repaid. Apparently, the Left is right, we can borrow ourselves into a booming economy. Oh wait….isn’t that what got us here in the first place, and wasn’t it a lock up of credit that pushed into the recession? If credit is opening up again, there is 1.6 trillion in cash reserves JUST WAITING for an opportunity to flow into the economy. With CDOs back in favor….can credit leverging of 1.6t be far behind. I wonder what the bubble will be….commodities?

    With Citibanks moves over the last month, I can’t for the life of me see anything sustainable about this. But, unfortunately, I know what Nov and Dec will bring – people borrowing all they can to have one good, last Christmas.

    Expect 2million bankruptcies next year and another record foreclosure. and 11.1 unemployment by April. (U6 @20+)

    Comment by Tracy Coyle — October 30, 2009 @ 11:29 am

  15. #14, hope you’re wrong about that unemployment number. But I’m afraid you’re right.

    Comment by TBlumer — October 30, 2009 @ 11:45 am

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