It all depends on how you wish to spin the numbers.
Q4 2009 GDP increased 5.7% of which 3.4% was inventory reduction. Overall for 2009 GDP went down 2.4%. My guess is that the 5.7% number will be readjusted downward when the revised numbers come out in late March (26th).
What does this mean? Inventory reduction is a business cycle phenomenon. When consumer demand shrinks, retailers draw down their inventory of goods before they re-order. They’ve been doing this for six quarters, the longest streak since 1948. Now businesses find their inventories too low and re-order goods. This has happened for the last 2 quarters. It reflects the fact that businesses have become lean and more efficient which is not a bad thing.
But … as David Rosenberg points out, it is usually accompanied by increases in consumer spending which is driven by wage and job growth:
Strip out inventories and the foreign trade sector, we see that domestic demand growth in the fourth quarter actually slowed to a paltry 1.7% annual rate from 2.3% in the third quarter. Some recovery. …
In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labour input has never before, scanning over 50 years of data, coincided with a GDP headline this good. Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed’s National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker — a few grains won’t do.
David Wessel in the WSJ:
Wage and benefit costs, both before and after adjusting for inflation, grew more slowly in 2009 than in any year since the U.S. government began tracking data in 1982, as double-digit unemployment weakened workers’ ability to command higher pay. …
Adjusted for inflation, wages and benefits fell 1.3%, after rising 2.8% in 2008, the first year of the recession. The inflation-adjusted cost of wages and benefits at the end of 2009 stood just 1.1% higher than at the end of the previous recession in 2001, the Labor Department said.
Which gets us to tepid consumer spending:
Consumer spending grew at a 2% annual rate, the Commerce Department said. That was down from the third-quarter, when spending grew at a 2.8% rate, boosted by auto sales related to the government’s cash-for-clunkers program. …
And, ” [h]ousehold purchases dropped 0.6 percent last year, the biggest decrease since 1974.”
This is all consistent with the increase in the personal savings rate, as consumers tighten their belts, pay down debt, and save for retirement. “The personal saving rate — saving as a percentage of disposable personal income — was 4.6 percent in the fourth quarter, compared with 4.5 percent in the third.”
I wish to remind you that not all is doomsday. As I’ve discussed before, economies heal themselves without government intervention. The above example of inventory re-supply is an example. What is harming the recovery are the government’s attempts to thwart the liquidation of debt held by banks and other financial institutions. But things are not “robust” as they say and you should not put much hope in Q4 results. We have a long way to go.
You can see the Department of Commerce release here.
