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Growth spurt expected to slow this year
Question of the Day
After the best quarterly growth in six years at the end of 2009, the economy is expected to settle down in 2010 to a more subdued state that reflects underlying difficulties with jobs and credit still weighing on consumers.
Investors were pleasantly surprised on Friday by a report showing sizzling growth at a 5.7 percent annual rate in the final quarter of 2009 — more than doubling the 2.2 percent growth rate in the summer, when the economy emerged from recession. But the growth spurt was almost entirely fed by one-time events — in particular, a slowdown in a massive liquidation of overstocked goods by businesses that held back the economy throughout 2009.
A one-time surge in auto and home sales spawned by government incentive programs also ended during the quarter and won’t provide the same kind of boost to the economy this year, analysts said.
“It’s far too early to break out the champagne and declare ‘recovery accomplished,’” said Josh Bivens, an analyst with the Economic Policy Institute think tank. “This growth will not be sustained. It was driven largely by a restocking of business inventories that will not be repeated in coming quarters.”
The Commerce Department estimated that nearly two-thirds of the quarterly growth was a result of businesses paring back less on inventories. The usual drivers of growth — consumer and business spending — expanded at a modest 2 percent pace during the quarter. Economists expect growth to stay in that range this year.
“Growth is likely to be subdued by historical standards, in the 2.5 percent to 3 percent region for 2010,” said Nigel Gault, chief U.S. economist at IHS Global Insight. “An inventory swing of this size can only occur once.” The Obama administration portrayed Friday’s strong growth figure as a good start on economic recovery, but acknowledged that it still has a long way to go and said Congress needed to do more to spur job growth. Although growth in output has resumed since the summer, businesses continue to lay off workers, providing little sense of recovery to job seekers.
White House spokesman Robert Gibbs appeared on Sunday’s political talk shows to advocate a jobs bill that was smaller than the $150 billion package approved by the House in December, apparently keeping an eye on burgeoning deficits.
He said the proposal should add up to “somewhere in the $100 billion range” and include business-hiring tax credits, infrastructure spending, and subsidies for small-business loans taken from the government’s bank bailout fund.
Mr. Gault said a job market recovery may be approaching. He noted that the most promising sign during the fourth quarter was a surge of 13.3 percent in business spending on computers, software and equipment.
“If firms are feeling confident enough to raise their equipment spending, they’re probably confident enough to start hiring again,” he said. “That will support consumer spending” this year.
Consumers reported an increase in confidence last month but by and large remain depressed by the dearth of jobs and dwindling incomes. Much of the jump in consumer spending at the end of last year was a response to government assistance to buy cars and homes.
“The government stimulus can’t be sustained,” with the U.S. Treasury now facing record debt burdens as a result of an unprecedented splurge in spending in the past year to soften the effects of the economic crisis, said Sung Won Sohn, an economics professor at California State University at Channel Islands.
“The employment market is the main problem facing consumers and the economy,” he said. Consumers normally generate more than two-thirds of economic activity. They are trying to “do their part,” Mr. Sohn said, but will need help from a recovery in the job market.
Mr. Sohn said the labor market is “in the process of stabilizing” and the unemployment rate should peak and start to decline in the first half of the year. The unemployment rate currently stands at 10 percent.
“The economy is recovering, but the pace remained subpar” at the start of 2010, reflecting the struggles of the consumer, said John Silvia, chief economist at Wells Fargo Securities. “Households appear to have set a course of moderate spending that is consistent with lower expectations for income and the need to rebalance their spending and saving decisions.”
The savings rate ticked up to 4.6 percent last year from 2.7 percent in 2008 as fears about joblessness forced consumers to stow away more cash for hard times, and banks and consumers cut back on credit-fueled spending. Credit card debt, home equity loans and other kinds of credit that spawned robust growth in consumer spending in the past shrank during 2009 and will continue to decline this year, economists said.
As overstretched consumers continue to pay off debt and build savings this year, Mr. Silvia said, spending will simmer down to an average 1.4 percent growth rate — anemic by historical standards.
He sees a darker side to the business spending surge on equipment and software last quarter. Rather than foreshadow a return of hiring, he said, businesses during the recession used such technology investments to help cut labor costs, since in some instances workers’ output can be replaced by using more sophisticated equipment. Labor costs, including wages, health care and pensions, remain the single biggest expense for the vast majority of businesses.
Many U.S. companies stayed afloat and even managed to be profitable last year because of this aggressive cost-cutting, accompanied by drastic layoffs. Adding to this underlying trend, Mr. Silvia said, was the congressional threat of new mandates for health care coverage that would add to labor costs — making businesses even more reluctant to hire.
But Congress’ actions early last year to provide $862 billion in stimulus spending on health care, education, infrastructure and jobless benefits did provide some help to the economy, which peaked with an 8.1 percent surge in federal nondefense spending in the fourth quarter, Mr. Silvia said.
“The longer-term challenge for the economy” lies in the aftermath of the stimulus, he said. Congress is considered likely to extend jobless and health care aid in coming weeks, but much of the rest of the stimulus is scheduled to expire this year.
About the Author
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