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The Siege Is Over


Real GDP boomed in Q4 and suggests continued strong growth in 2010. If this is a “weak recovery” or “the new normal,” please give us more. The primary reason for the V-shaped recovery is that monetary policy has been extremely loose the past couple of years and, with the normal lag time, is now having a huge impact on the economy. The “siege” is over, but some pessimistic analysts seem to have caught a case of “economic Stockholm Syndrome,” afraid to admit improvement.

Although inventories accounted for a large share of growth in Q4, this was due to fewer inventory reductions, not an actual increase in goods on the shelf. As a result, inventories will continue to add substantially to growth in 2010. Meanwhile, final sales (GDP excluding inventories) have increased three quarters in a row and the increases have accelerated each quarter.

Notice what has not accounted for recovery: government spending. Government was a drag on the economy in Q4 and only added 0.3 points to the real GDP growth rate in 2009, no different than the long-term average. On the inflation front, GDP prices increased at only a 0.6 percent annual rate in Q4. However, prices for the things we buy (gross domestic purchases) increased at a 2.1 percent rate. Nominal GDP (real GDP growth plus inflation) is now up 0.8 percent versus last year and will be going up quickly over the next few quarters. This means zero-percent interest rates are too low and, therefore, inflationary.

In other news this morning, the Chicago PMI, a measure of manufacturing in the Midwest, increased to 61.5 in January versus 58.7 in December, bucking a consensus-expected decline. In particular, the employment index increased to 59.8, the first positive number since 2007 and the highest level since 2005. This supports the forecast that payrolls increased in January.   

 — Bob Stein is senior economist with First Trust Advisers.


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