Burnt Orange Report

GDP Up, Employment Down, Confusion Reigns Supreme

By Jim Dallas

DailyKOS is on this one, but I think misses part of the story.

WASHINGTON (Reuters) - The U.S. economy rocketed ahead at its fastest pace in more than 19 years in the third quarter of 2003 as consumers, their wallets fattened by tax cuts, went on a buying spree, an unexpectedly strong government report showed on Thursday.

U.S. gross domestic product surged at a 7.2 percent annual rate in the July-September period, the Commerce Department (news - web sites) said. It was the steepest climb since the first quarter of 1984 and more than double the second quarter's 3.3 percent rate.

That's all fine and good, but is it sustainable? Looking at the details, one needn't be an economist (and I am not) to worry.

First, consumption of durable goods has been high for the last two quarters, and it stands to reason that this is in large part a function of tax-cutting (purchases of durable goods also bounced up in Q4 of 2001 and Q3 of last year). Obviously, people don't go out and buy durable goods (cars, refrigerators, TV sets) just everyday. And personally I'd suspect that consumers may be blowing their wad all at one time, making future growth in this area unlikely.

Similarly, residential investment went up 20 percent last quarter. That's pretty aberrant. People and businesses don't go out and fix their homes/offices/etc. up everyday, either.

And it's clear where the money for all these improvements is coming from; scroll down to "disposable income." Real disposable income was also up 7.2% last quarter. However, the decrease in tax collections (largely from advance payments on child tax credits - another one hit wonder) outpaced increases in income. In short, the federal budget deficit has been this quarter's sugar-daddy (and we know how that's going to end up).

On the other hand, Brad DeLong, who is an economist, sees a silver lining: a big boost in equipment investment.

That coupled with some signs (noted in Reuters) that the labor market is starting to turn around suggest that we've finally hit rock-bottom in the quest to clear out inventories, and that demand is (finally) catching up with supply. Of course, as KOS and Brad DeLong both note, unemployment isn't going anywhere fast. Which is a crying shame, because it clearly indicates a gap between potential growth and actual growth.

If I had to make a completely amateur guess as to what is going on, it is this -- that low interest rates and tax cuts are fueling a short-term boost in consumption of goods that people wouldn't otherwise buy. This is not bad, but it probably isn't the foundation for job growth and economic expansion that the country really needs right now.

UPDATE: Paul Krugman's NYT column this morning mostly agrees with my hypothesis, arguing that:

First, while there was a significant pickup in business investment, the bulk of last quarter's growth came from a huge surge in consumer spending, with a further boost from housing. These components of spending stayed strong even when the economy was weak, so there shouldn't have been any pent-up demand. Yet housing grew at a 20 percent rate, while spending on consumer durables (that's stuff like cars and TV sets) — which last year grew three times as fast as the economy — rose at an incredible 27 percent rate last quarter.

This can't go on — in the long run, consumer spending can't outpace the growth in consumer income. Stephen Roach of Morgan Stanley has suggested, plausibly, that much of last quarter's consumer splurge was "borrowed" from the future: consumers took advantage of low-interest financing, cash from home refinancing and tax rebate checks to accelerate purchases they would otherwise have made later. If he's right, we'll see below-normal purchases and slower growth in the months ahead.

Speaking of all-things Krugman, we should find out in the next 72 hours whether Krugman stalker (and we mean that in the opinionated, figurative sense) Donald Luskin will follow through with his threat to subpoena blogspot in order to obtain Atrios's secret superhero identity.