Washington Post Staff Writer
Friday, January 29, 2010; 12:00 PM
The U.S. economy grew at an annual rate of 5.7 percent in the final months of 2009, the fastest rate of growth in six years and well above the 4.6 percent rate forecasters had expected.
Washington Post economics reporter Neil Irwin will be online Friday, Jan. 29, at 12:00 p.m. ET to discuss what the GDP numbers mean for the economy and whether they indicate an end to the recession.
A transcript follows.
Neil Irwin: Welcome, everyone. This is Neil Irwin, economics reporter at the Post. This morning, the government reported that the nation's economy roared ahead, at least as measured by gross domestic product, in the final three months of 2009. The 5.7 percent pace of GDP growth was the strongest reading since 2003, and is pretty definitive evidence (combined with the third quarter number) that the recession technically ended over the summer. We have some good questions already about the report, and we can discuss all things economic here, so fire away with those questions or comments.
Jobs: Unemployment is universally described as a lagging indicator -- when can we expect to see it start substantially falling?
Neil Irwin: This is the trillion dollar question, and the reason in my intro that I described the recession as likely being "technically over." Economic expansion, as measured by GDP, is an important step in a recovery, but is not the same as conditions on the ground feeling better for most workers. This will not be a true recovery in any meaningful sense until people are getting back to work, and that hasn't happened yet; in December, employers cut another 85,000 jobs.
The key question now is how soon companies find that demand for their products is so strong that they have to hire people, not merely stretch existing workers further. Private forecasters generally expect job growth to return sometime this spring, perhaps even as early as February or March.
But even if they're right, it will take longer than that for the unemployment rate to come down. Two big reasons: First, the nation needs substantial job growth, around 130,000 jobs a month, to keep up with growth in the working-age population (so just adding 50,000 jobs a month just won't cut it). And also, it appears quite a lot of Americans have dropped out of the labor force, given up even looking for a job out of frustration. Once employment picks up, some of those people will likely re-enter the labor force and start looking for work, keeping upward pressure on the jobless rate.
A long answer to a short, but important question.
Metro DC: Can we just say that the recovery is just beginning rather than the recession is over? Most americans are worried about the recovery (making sure job growth is healthy and unemployment is reduced) and are not happy to hear the pundits and politician say the recession is over (even though most economists say it is) and unemployment is at +10%.
Neil Irwin: I like your turn of phrase. I grapple with the language of this when I write in print and speak on television, because you're right, it sounds almost callous to talk about the recession being over when the unemployment rate is so high. It is an example of the economists' way of viewing the world is different from that of ordinary Americans.
The president's speechwriters, by the way, are having a hard time with this same challenge, which is why you see some interesting linguistic gymnastics in his own statements about the economy, such as his comment on today's number.
St. Paul: Hi Neil -- Definitely great news, but as the spouse of someone who has been unemployed for the last 12 months, I'm wondering how these numbers will translate into more jobs. Or will we continue with a jobless recovery (which in my view is really no recovery at all)?
Neil Irwin: I wish I had a more definitive answer to this question. Most forecasters, as I said earlier, are expecting a return to job growth in the first half of 2010, though they almost universally think that it will be slow and soft.
The nation is in a big economic hole, both in terms of employment and other measures, and we need some real gangbuster growth to crawl out of it. But there's not much evidence that that will happen, given that the American economy is still in a massive cycle of deleveraging, households and financial firms alike trying to readjust depend less on borrowed money.
Inventory?: How much of the growth is due to inventory shifts? Is it just imaginary? Or does it really mean things are getting better? When will it translate into jobs?
Neil Irwin: Of the 5.7 percent rise in GDP, 3.4 percent was due to businesses not cutting back on their inventories as rapidly as they had been.
In one sense, that's imaginary, as you say. It is a one-time thing, for one thing, and is unlikely to be repeated in the quarters ahead. I heard one prominent economist say the other day that he wishes the inventory bounce was spread more evenly, to create a steadier expansion.
But in another sense, it's not imaginary. Businesses were slashing their inventories dramatically through the recession and immediate aftermath, which is one reason they cut so many jobs: If a company just sells the goods already on its warehouse shelves, without ordering new ones, it doesn't need to employ workers to make any new stuff. Now that companies are about done liquidiating their inventories (they sure can't get much leaner), they'll have no choice but to hire people to meet deamnd for their products. And that's just assuming they leave inventory levels where they are now; even better for the job market would be if companies feel that the economy is strong enought that they should build their inventories back up a bit.
Kingstowne, VA: Isn't it said that you can't determine a recession till after it's over? If that is true, then saying we were in a recession means we are no longer in it. Yay, it's over!
Kidding aside, what exactly are the determining factors that indicate we are in a recession? Unemployment rate, housing starts, interest rates, stock market, etc. all seem to be factors, but exactly what indicators will determine when we are definitely out of this recession?
Neil Irwin: Right. The recession is very likely over, even if growth remains weak (and the job market remains horrendous). And it is possible (not that I'm expecting it) to have a second recession soon after the first ends, commonly known as a double dip. For example, there was one recession in January to July of 1980, followed by a second beginning July of 1981.
So what is a recession? The National Bureau of Economic Research, a nonprofit group of economists, has a "Business Cycle Dating Committee," which makes the quasi-official judgments. The NBER's official definition of a recession is "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough."
The committee didn't officially declare that this was a recession until December 2008, a year after it began, and will likely take a good bit longer to declare it over.
You can read more about their procedures here:
New Hampshire: While obviously the GDP is a national number, is there any where to go to find out how particular states performed in the last quarter?
Neil Irwin: GDP data by state comes out with a very long lag. The most recent data now published is from 2008. The best place to go for more current readings on the economies of individual states and metro areas is the employment data published by the Bureau of Labor Statistics. It comes out with about a six week lag.
Yglesias: Matt Yglesias wrote "Real personal consumption grew at a modest 2 percent and given how much debt everyone's got you're unlikely to see that reach a much higher figure. Government expenditures aren't going to give us a boost in the future, thanks to the phase-out of ARRA and the "spending freeze," unless we manage to start a war with Iran.
"So we're basically left hoping for growth to come from the export sector. Q4 saw imports grow and saw exports grow even faster, which is pretty much what we should be hoping for from trade."
Do you agree?
Neil Irwin: Yeah, that's about right. Higher exports clearly need to be a key part of any sustained recovery. One thing Matt leaves out, though (in this excerpt, at least, haven't seen his original post) is business investment. Equipment and software spending rose at a 13.3 percent rate in the fourth quarter, which for me is the best news in today's report. So if businesses start to feel more confident in the future and continue ramping up their capital expenditures, that could join exports as a driver of growth.
Los Angeles, CA: Did the Federal Deficit contribute to the current financial crisis and the recent recession? Since CA's Proposition 13 in 1978, likely more Republicans than Democrats have taken advantage of voters' preference for lower taxes by campaigning vigorously as tax cutters. Of course voters don't want their favorite program(s) cut -- the definition of the proverbial free ride. Without equivalent spending cuts, new revenue sources or say foreswearing earmarks, tax cutting promises by politicians are disingenuous, cynical and crass politics used to mollify voters and lambaste opponents. Would serious movement towards balancing the Federal Budget help avoid another recession and financial crisis?
Neil Irwin: The answer is a little complicated. The budget deficit was not a first-order cause of this financial crisis and recession. Deficits in the mid-2000s were part of the excessive consumption that fueled the crisis, but were a second-order cause. Truth is, the deficits of the mid-2000s were pretty manageable.
BUT, budget deficits may well be the cause of the next financial crisis. The problem is not this year or next, when running big deficits is a pretty normal (and inevitable) part of dealing with a crisis. But absent some action to curtail spending, raise revenue, or both, we could have some serious problems by the end of this decade or maybe sooner. The question is whether Congress acts before the bond market forces them to.
washingtonpost.com: Here's Matt Yglesias's original post: GDP Grew at 5.7% Annualized Rate in 2009 Q4
Fairfax, Va.: Good Afternoon Mr. Irwin, The Obama Administration just announced $8 billion in grants to States to fund high speed rail projects, including European/Japanese caliber systems in California and Florida. One grant to my native Wisconsin will fund a long planned high speed rail link between the capital of Madison and Milwaukee, creating 13,500 good paying jobs. That's Huge in a small State. A Spanish company may locate a rail vehicle assembly plant in Janesville where a GM plant closed in 2009.
Isn't this proof the Recovery Act is creating good jobs and sustainable economic growth for the Nation?
Neil Irwin: Hey, everybody, looks like have Larry Summers on the chat.
You really can't prove the case for a massive effort like the stimulus program by focusing on the micro level. The final assessment of how effective (or not) the stimulus has been will come down some really smart macroeconomists doing some really fancy math to try to figure out how much aggregate demand the effort created (and in turn how many jobs that aggregate demand created).
Dunn Loring, VA: Regarding yesterday's version of your article on the Bernake confirmation vote, can you explain how you knew that the dissenting senators were just voting as a sop to disgruntled voters back home, and did not vote no because they had principled reasons to be opposed to Bernake? Given the lack of confidence in Bernake, how much power/influence will he still carry at the Fed?
Neil Irwin: I certainly do not dispute that many senators have principled reasons for opposing Bernanke, and if that's what came through in the article, I didn't mean for it to. Bernie Sanders, Jim Bunning, Jim Demint, Richard Shelby, and others have laid out clear, consistent reasons they found him objectionable over many months and years. But following the Massachusetts election, when there was some populist fervor in the air, a number of senators who had either never expressed an opinion on him or said moderately positive things suddenly either decided they were against him or said they were undecided. That seems like a pretty straightforward cause and effect relationship to me. My understanding is that at the Senate Democratic caucus meeting after the Mass. election, a number of senators said something to the effect of, "Hey, we need to be going after the banks, how can you ask us to vote to confirm Bernanke?"
Within the Fed, Bernanke is highly respected and will be as influential as ever. Outside of the Fed, the whole episode has damaged his credibility and political clout significantly.
Washington DC: Why is the unemployment rate so narrowly defined? I know lots of people who cannot find work, have no work, and are not receiving "unemployment". Is it because the govt. does not want to know the TRUE unemployment rate?
Also, do these inventory statistics include manufactured items coming from abroad? Seems like inventory would be a pretty poor indicator of the economy if the goods are being made abroad. Thanks.
washingtonpost.com: Frank Ahrens writes about the 'true' unemployment rate regularly on Economy Watch.
Neil Irwin: Right, as Frank has written, there is in the monthly jobs report a set of broader measures of unemployment. The broadest is called U-6, and includes, people who have given up looking for work out of frustration ("discouraged worker" in wonkspeak) and people workign part time who want full time jobs. The data is here:
Inventories does include goods from abroad, but in terms of overall GDP, imports subtract, so the numbers adjust for the fact that things made elsewhere do not count as economic output in the United States.
Silver Spring, MD: "The 5.7 percent pace of GDP growth was the strongest reading since 2003..."
GDP = private consumption + gross (private/government) investment + government spending + (exports − imports)
Thus, if private consumption; private investment and imports/exports remain the same (or go down slightly), but Government spending and Government investment goes way up, then assuredly the GDP will rise.
However, if the Government's spending/investing is financed through borrowing or simply printing more money, then this rise in GDP actually seems to be bad.
Neil Irwin: You're right on the basic math of GDP. Government spending increases it, plain and simple.
The question of whether the government should borrow money to spend or invest in a recession is an ideological one, but surely one key question is what is happening in the economy more broadly: Namely, when private borrowing and investment is not occurring, should the government take advantage of very low interest rates to make up some of that hole in aggregate demand?
One little aside: Interestingly, government spending was a small drain on fourth quarter GDP. There was an 8.1 percent rate of increase in non-defense federal spending, but that was outweighed by a decline in defense spending and a decline in state and local government spending.
Atlanta: Aren't these false numbers, though? I mean...not that they were calculated improperly, but with all the 'stimulus' being pumped into the economy over the last two years...well, it's 'worked,' I suppose. But it is not able to be sustained ($15 trillion debt, anyone?) - and we are seriously screwed now with our debt and the drop in the dollar (oil wouldn't be so high if the dollar was valued better).
As in...this is COMPLETELY unsustainable unless and until congress starts getting serious and STOPS SPENDING. And not the phony commission they can't even put together...but REALLY stop spending.
Neil Irwin: There are real questions around the sustainability of the recovery. As stimulus wears off, and potentially the Fed starts to raise interest rates (unclear when that will happen), the question is whether the private sector will begin expanding fast enough to create solid growth in the second half of 2010 and 2011. We shall see.
The government debt problem, though, comes about not so much because of the stimulus (which, while enormous, is a one-time expense), or the financial bailouts (which will end up costing little), but because of a long-term mismatch between our tax structure and our spending, particularly on Medicare. The long term fiscal deficit from Medicare dwarfs absolutely everything else.
That seems like a pretty straightforward cause and effect relationship to me: Given the ability to pick and choose your desired cause and effect, isn't it a stretch to reach your conclusion because some senators finally took a firm position once the confirmation vote was set? For example, does the fact that the market dropped five percent in the days following Obama's declaration that he will contiue to fight for health care reform constitute a "straightforward cause and effect relationship"?
Neil Irwin: I spent the last week and a half speaking to Senate staffers and others closely attuned to the views and mindset of members of the U.S. Senate. I'm telling you, after Massachusetts, those guys were scared and angry, and more than a few viewed a no vote against Bernanke as a way to express that.
Raleigh, NC: So a 5.7 increase in GDP. Subtract 3.39 for inventory adjustment That leaves and increase of 2.3% Now subtract out the appx. 10 percent of GDP that is being propped up by stimulus and we're still not in recovery. Face it if the government can't trick consumers into thinking we're in recovery in the next couple months, while the stimulus sets in, then we're headed for an even bigger ride down. Thank you GREED.
Neil Irwin: Your math is off a little bit. Government spending was actually not a contributor to fourth quarter GDP (it actually subtracted a bit).
The 5.7 breaks down as follows:
1.4 percent--personal consumption expenditure growth
0.4 percent--Fixed investment (houses, commercial buildings, equipment and software)
3.4 percent--change in inventories (as you say, unlikely to recur).
0.5 percent--Net exports
0.02--government consumption and investment.
Bethesda: Do you think interest rates will climb up because of this?
Neil Irwin: In the short run, it appears not to have had an effect; the bond market has been little changed today (10 year Treasury yield is at 3.63 percent, essentially same as yesterday).
I doubt that's what you're really asking. This rise in GDP was expected, but in general, if there are signs that the rapid growth continues the economy is poised to really take off, then interest rates will rise in anticipation of the Fed raising its target for short-term rates. Similarly, if global investors lose faith in the ability of the U.S. government to repay its debts or manage itself in a sound manner, or come to expect higher inflation, rates will rise.
Conversely, if the economy gets weaker and seems to head for a double-dip recession, and/or Congress seems to get its act together on fiscal sustainability, rates would likely stay low.
How's that for an on-the-one-hand/on-the-other-hand answer?
The Fed and Full Employment: Using the NBER definition of recession should really spread the focus over the whole list of economic indicators and remove some of the emphasis put on GDP. Business reporters should ALSO focus on the unemployment changes relative to a 'normal' recession. In these particular circumstances a 10 percent unemployment number should be compared to full employment and prior recessions. (And maybe some focus should be given to the U-6 statistics and not just the "standard" U-3 unemployment numbers. The current U-6 stands at 17.3 pct in Dec 2009).
Full employment is defined as 5 percent. A doubling of that number really ought to be given extra weight by NBER when considering recec
Bernanke has two mandates: stable money and full employment.
Neil Irwin: Interesting thoughts, thanks.
Princeton, NJ: In case you doubt my facts:
From Paul Krugman:
"Here's the raw fact, from the National Health Expenditure data: since 1970 Medicare costs per beneficiary have risen at an annual rate of 8.8% - but insurance premiums have risen at an annual rate of 9.9%. The rise in Medicare costs is just part of the overall rise in health care spending. And in fact Medicare spending has lagged private spending: if insurance premiums had risen "only" as much as Medicare spending, they'd be 1/3 lower than they are."
Also I am curious as to what you think of Uwe's computation that we can well afford Medicare in the future:
"If "economic sustainability," then exactly what do people have in mind with that phrase? During the past 4 decades or so, the long-run, smoothed average annual growth rate in real (inflation-adjusted) GDP per capita has been about 2%. Suppose that fell to only 1.5% for the next four decades. The current average real GDP per capita of about $40,000 would then grow to about $72,500 by 2050 in constant-dollar terms. Medicare now absorbs about 3% of GDP, leaving a non-Medicare real per capita GDP of $38,800. It was estimated by the CBO about a year ago that Medicare will absorb about 9% of GDP by 2050. Let's make that 10%. At these numbers, the non-Medicare real GDP per capita available to today's little critters who will run America in 2050 will still be close to 70% larger than is our current non-Medicare GDP per capita."
Neil Irwin: I know so vastly less about Medicare financing than Uwe Reinhardt that I'm just going to throw this out there as something to read and think about for another day.
Neil Irwin: I'm sorry to have left some terrific questions on the table; we should do it again sometime. Thanks, everyone.
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