Fourth quarter GDP growth looking better than expected

Another number that points to stronger than expected U.S. economic growth.

U.S. exports rose 3.2% in October to $159 billion, according to data released on Friday, December 10. That’s the highest level since the middle of 2008.

With a dip in imports, down 0.5% in October, to $197 billion, the U.S. trade deficit shrank for the month to $39 billion. That’s a drop of 13% for the month and brings the deficit to its lowest level since January.

The lower level of imports suggests higher GDP growth for the fourth quarter. In the third quarter surging imports lopped 1.8 percentage points off the 2.5% GDP growth figure for the quarter. (Roughly, higher imports mean that a given level of economic activity doesn’t produce as much in the way of domestic economic growth,)

Economists estimate that the higher level of exports, and lower level of imports, and improved domestic economic activity in such areas of the economy as the retail sector could lead to GDP growth of 3% or better in the fourth quarter. Read more

The Federal Reserve may not be having much luck using its $600 billion quantitative easing program to reduce interest rates in order to stimulate the economy—the yields on 10-year Treasuries are climbing–but it looks like the wealth effect might be ready to ride to the rescue.

Household wealth in the United States rose by $1.2 trillion in the third quarter, the Federal Reserve reported on December 9 thanks to rallying stock prices. Household net worth grew by a 9.1% annual rate in the quarter after dropping at a 9.9% annual rate in the second quarter of 2010. The increase would have been even greater except that home prices continued to fall in the quarter, taking a bite out of family wealth.

The value of family holdings of stock rose by $978 billion in the quarter while the value of real estate holdings fell by $748 billion. That was the biggest drop in the value of household real estate since the first quarter of 2009.

The wealth effect is tough to measure and not all economists agree that family net worth has a significant impact on consumer spending. I think those skeptical arguments are well taken in normal times, especially because stock ownership in the U.S. is concentrated at the upper end of the income scale. Most families, even in the age of IRAs and 401(k)s don’t have much invested in stocks. The family home remains the biggest asset for most U.S. families by far.

But these aren’t normal times. Read more

The world has a fair deal of experience in dealing with small countries that can’t pay their bills. And the world is gaining more experience by the minute. Greece can’t pay its bills? Put together a funding package that comes at the price of domestic austerity and higher taxes. Ireland can’t pay its bills? (Or actually its banks’ bills?) Put together a funding package at the price of domestic austerity and higher taxes. And when the small countries can’t pay their bills again in a couple of years, go through the process over and then over again until creditors finally agree to take a haircut on their loans.

But what about a huge country, one that is at the center of the world’s economic and financial system, one that can be described as the world’s greatest power, one that controls the world’s supply of the global currency of exchange? What do you do with such a country that can pay its bills but shows no inclination to do so? And instead brazenly asks for more credit?

The world doesn’t have a lot of experience working its way through problems like that. But I think that’s the kind of problem that now confronts the world. The deal between the Obama White House and Congressional Republicans to extend the Bush administration’s tax cuts for another two years at the cost of adding another $1 trillion to U.S. debt says to the world that we have no intention of paying our bills. And pugnaciously adds, So what ya gonna do about it?

I’ve actually been able to find just one example in Western history that sheds any light on situation that the United States and the world finds itself facing. Read more

Yesterday the stock and bond markets weighed in on the proposed deal between the Obama administration and Congressional Republicans to extend the Bush administration tax cuts. Nothing unexpected there: bonds went down on the certainty that the proposal would add to the U.S. budget deficit and stocks went up on the hope that it would add to growth in the U.S. economy.

Today Wall Street economists are weighing in to put some numbers on both that deficit certainty and that growth hope.

On the debt side, estimates now are that the proposal—which this morning is drawing strong criticism both from liberals and Tea-Party conservatives such as Senator Jim DeMint (South Carolina)—would add $1 trillion to the U.S. debt over the next two years. The assumption is that none of the proposed tax cuts would be paid for by spending cuts. I think that’s a very reasonable assumption. That would put the federal budget deficit at 9% to 10% of GDP. (To benchmark that number, Spain’s budget deficit as a percentage of GDP came in at 11.1% in 2009. Spain, you might note, is at the center of the euro debt crisis.)

If this proposal passes, the United States will be the only country in the developed world that has decided not to tighten fiscal policy in 2011.

So how much extra economic growth would the United States get from piling on another $1 trillion in debt?

Economists estimate that the package, as now constructed, would add something like 0.3 to 0.5 percentage points to real U.S. economic growth in 2011.  (“Real” means discounting inflation’s contribution to growth.) And another 0.2 percentage points to growth in 2012.  JPMorgan Chase, for example, has raised its projections for U.S. economic growth to 3.5% from 3% for 2011. With the current dollar U.S. GDP at $14.8 trillion that extra half a percentage point means that the U.S. economy would add $518 billion in growth in 2011 instead of $444 billion.

Why so little from such a big addition to the deficit?

Because economists don’t project much of a boost to growth from the biggest part of the package. Extending the Bush tax cuts at a cost of $800 billion over two years, they estimate, would add about 0.2 percentage points to GDP growth in 2011.

The biggest additions to growth come from relatively modest parts of the proposal—the extension of unemployment benefits for all of 2011 and a 2% reduction in payroll taxes. Economists estimate that the modest amounts targeted at these areas, $60 billion for unemployment benefits and $120 billion for the payroll tax cuts, would have such a large influence on growth because the money goes largely to consumers who would spend all the money they receive rather than saving or investing a portion of it as top income consumers historically do with their tax cuts.

The proposal isn’t a done deal yet, given the level of opposition from left and right. But this is how Wall Street economists are scoring it now.

The government employment numbers were a slap in the face on Friday. But the market seemed unrattled.

After way better than expected retail sales and pending home sales numbers, and an optimistic employment survey from ADP, the Bureau of Labor Statistics announced on Friday that the economy added only 39,000 nonfarm jobs in November.

That was a huge drop from the 172,000 increase in October and way short of the 130,000 expected by economists, according to Briefing.com.

State and local governments continued to cut jobs, as they struggled with budget deficits, but that doesn’t explain the shortfall. The private sector added just 50,00 jobs in November. The consensus among economists was looking for an add of 130,000 private sector jobs. October had seen 160,000 new private sector jobs.

As you might expect income growth, a key factor in a modest revival of the consumer economy in the United States, stalled. Hourly wages didn’t move up at all and the average workweek remained stuck at 34.3 hours.

Optimism that the economy might be improving—or well-founded fears that Congress would let unemployment benefits run out for many long-term unemployed workers—led to an increase of 103,000 in the workforce. Combined with the anemic growth in jobs that took the unemployment rate up to 9.8% from 9.6% in October.

So why didn’t stocks go through the floor on Friday?

Same reason that the reaction to Fed chairman Bernanke’s worry on TV on Sunday night that the economy might need something bigger than a $600 billion boost from the Fed has been so muted today:

Investors aren’t anticipating great times for the U.S. economy. The expectation is just that the economy will be a little bit better than expected in August and modestly better than last year.

The jobs numbers fit that bill. If you think, as many economists do after looking at the jobs numbers, that statistical adjustments will take the October number down and the November number up, you’re left with an average of around 100,000 new jobs added in each month. That’s not enough to make a big dent in unemployment—but then nobody seems to be expecting that to happen anytime soon. But 100,000 a month isn’t that far from the definition of a very slow and jobless recovery that describes the consensus view among economists right now.