The recovery is back! Or maybe not.
On Thursday morning, the U.S. Commerce Department said the nation’s gross domestic product rose 2.5% in the third quarter, nearly double the 1.3% rate it had risen in the quarter before. And the growth was far better than many economists thought it would be just a few months ago. In the doldrums of the mid-summer many people were predicting that the economy would soon slide back into recession. That doesn’t seem to be happening, at least for now.
Even more encouraging was where the growth came from – corporate America. There was a huge surge in business spending, up more than 17%. Consumer spending was up as well, but not nearly as much. Of note, though, is that consumer spending rose faster than incomes. That’s not a great thing on an individual level. Savings was down. But for the economy in the short-term it’s a good sign. Consumers appear to be regaining some measure of optimism. And in a consumer driven economy we need confidence.
Still, for a number of economists today’s news wasn’t enough wipe away their general pessimism about the economy. Paul Ashworth, chief U.S. economist at Capital Economics, said the growth was temporary and would soon fade. Nigal Gault at IHS Global Insight said the most likely outlook for the U.S. is continued weak growth. Josh Bivens of the think tank the Economic Policy Institute said that “the strongest growth in a year was still not strong enough.” NBER economist Justin Wolfers said the recovery has been delayed another quarter.
What are all these economists so worried about?
Again, it comes back to corporate spending. A number said the surge in business spending was not sustainable. Corporations, though, are sitting on hoards of cash. It was often cited as the reason the economy would pull out of recession. In fact, a common question during the recession has been why aren’t companies spending more. Now that businesses are finally spending I don’t get why people believe it will stop so quickly. The deep recession caused companies to put off many projects and business investment in general. They made do with lean staffs for a longer period than many remember. All that has probably created a good deal of pent-up demand.
Yes, there are still somethings to be worried about. And many economists were right to point out that at 2.5% it would be a long time before the unemployment rate gets back to pre-recession levels. And I mean a long, long time. A recent analysis from the Atlanta Fed shows that at 2.5% growth, we still wouldn’t be close to full employment a decade from now. But here’s my problem with analysis like that. Economies don’t tend to stay in one place. If the recovery is back, growth will probably accelerate. If it’s not, growth will slow, and Washington will eventually have to do something.
My point is you have to start somewhere. Josh Feinman, global chief economist of DB Advisors, said that he didn’t think corporate spending could continue to rise if consumer spending doesn’t pick up more. Without customers, companies will eventually stop hiring and investing in their business. And I agree. But once companies start spending again, and begin the rehiring process, consumer spending will follow. We should have long dispelled the myth that there will be a V-shaped economic jump back. The economy is not going to come roaring back all at once. “Eventually we will have a positive feedback loop,” says Feinman. “But I’m not sure the third quarter is the beginning of that.”
My guess is that the recovery will happen by surprise. It will probably be in full force long before anyone realizes it. That’s what usually happens, and could be happening already.