Big jump in GDP may veil weakness in economy

By Steven Mufson
Washington Post Staff Writer
Friday, January 29, 2010; A14

A year ago, the Union Pacific railroad was scouring the country for places to park its idle freight cars -- about 60,000 of them. With auto, coal and chemical shipments plunging, Union Pacific's chief executive, James R. Young, was also scouring the landscape for a bright spot.

"We're so low right now and inventories are so low, if we do see a spark, things could pick up pretty quick," he said last February.

On Friday, the federal government is scheduled to release numbers that many analysts expect will show a 4.6 percent jump in inflation-adjusted gross domestic product, but Young is wondering just how much spark the economy really has.

Union Pacific still has 44,000 idle freight cars and 1,700 idle locomotives. And its freight car loadings are still running nearly 20 percent below the peak levels of a couple of years ago. Young worries that what's really behind the pickup in GDP numbers is that companies have stopped running down inventories and their actual sales to customers haven't changed much.

"I'd say things are stable and maybe there are some signs of strength, but we've got a long ways to go," Young said Thursday.

The example of Nucor

Many economists agree and warn against reading too much into a jump in GDP figures for the last three months of 2009. Ed Yardeni, president of Yardeni Research, said that even if there were no change in final sales of goods, the GDP figures would show a 4 percent increase simply because businesses that were emptying their warehouses a year ago are now buying enough goods to keep stockpiles steady.

"A lot of it is the arithmetic of inventories," said Yardeni, who is expecting a 6.5 percent jump in the GDP number. "Even if there is a very strong number for the fourth quarter, if it's [all because of] inventories, it will raise real questions about the strength of the economy in 2010."

Nucor is a good example. Reeling from the downturn last year, the Charlotte-based steelmaker practically stopped buying pig iron, which it uses as raw material. Instead it used up much of the pig iron it had stockpiled for normal times and suddenly didn't need. For the last quarter of 2008 and the first three quarters of 2009, Nucor bought infrequently.

Now, said the company's chief executive, Daniel R. DiMicco, "we've worked them down to the absolute minimums necessary to meet the demand of market." So the company has gone back to buying more regularly. But steel demand remains weak, and Nucor's mills are running at a little over 60 percent of capacity.

"We're keeping things lean like all our customers," said DiMicco.

DiMicco said that "nothing's really changed in our opinion from the standpoint that the economy is going to be very slow in growing out of this serious recession that we've had."

One of the key indicators that executives say they are watching are employment figures, which remain weak.

On Thursday, the Labor Department said first-time claims dropped 8,000 last week to a seasonally adjusted 470,000. Analysts had expected a steeper drop to 450,000, according to Thomson Reuters. The four-week average, which smooths out fluctuations, rose for the second straight week, to 456,250. The average had fallen for 19 straight weeks before starting to rise.

"One of the key measures I look at from a macro perspective is hiring," Young said. "And I use my own business. We had a peak of 52,000 employees and now we're running at about 42,000 right now. For all practical purposes, our hiring has been shut off for about a year."

He added: "Right now I'm not in a hiring mode for at least the next three or four months. Until we see some positive movement on jobs being added, it's going to be tough to move the economy forward."

Separately, the Commerce Department on Thursday reported that factory orders for manufactured goods rose 0.3 percent in December, far less than the 2 percent advance economists had expected. For all of 2009, durable goods orders plunged 20.2 percent, the largest drop since 1992.

Mixed picture

But Union Pacific's Young said performance varies widely from sector to sector. The railroad's shipments of automobiles in January are up 80 percent from a year ago, but still lag far below levels of two years ago. Shipments of chemicals are up 12 percent so far in January, after being down 2 percent in the fourth quarter. But shipments of industrial products, such as lumber, cement and steel used in infrastructure or construction, are down slightly from the previous January and far below levels of two years ago.

Some companies have taken a more sanguine view. "GE's environment has improved and we saw some encouraging signs at year-end," GE chief executive Jeffrey Immelt said last Friday on a conference call about the company's earnings. He said fourth-quarter infrastructure orders increased $3.7 billion from the third quarter to $22.1 billion. GE's service orders grew 14 percent, and consumer delinquencies were "stabilizing," Immelt said.

But economists and executives remain cautious. Yardeni, more optimistic than the consensus about the fourth quarter, cautioned that "a lot of people lost their jobs in industries likely to remain depressed, particularly housing and automobile-related industries. . . . Many of those people will have to change careers because their jobs aren't going to come back."

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