Third Quarter Growth Will Be Better

Popular Economics Weekly

We now know the reasons for this summer’s growth pause, but growth is picking up for the rest of the year. The Japanese earthquake and Tsunami disrupted a fragile recovery at the same time as Europeans found out they had a fragile banking system. And several stimulus programs had expired—such as the housing tax credits while much of the ARRA $800 billion had been spent. Top that off with congressional gridlock, the U.S. credit downgrade, with consumers and businesses still paying down their debt, and we can see why many pundits were calling for a second recession.

But that ain’t happening, folks, as I’ve said. In part, because of so much cash being held by corporations with record profits, and banks in excess reserves. Economic growth for the second quarter ended up stronger than previously estimated but remained anemic, as I’ve said.

And we will see better third quarter economic growth—in the 2 to 3 percent range—as the steady increase in consumer spending (read retail sales) means more businesses will be hiring, while manufacturing is holding up. One reason is industrial production. Manufacturing data point to a stronger third quarter—and no recession. Manufacturing—especially autos—continues to lead industrial production.

Manufacturing has even outpaced growth for the overall economy over the past year. On a seasonally adjusted year-on-year basis, overall industrial production was up 3.2 percent in September, compared to 3.3 percent in August.  Through the second quarter, real GDP growth was 1.6 percent on a year-ago basis.  Basically, manufacturing is leading the recovery and at the national level is running stronger than implied by manufacturing surveys.

Obama’s new push on allowing more homeowners to refinance—up to 1 million by some estimates—can also breathe new life into the housing market.  Expansion of his Home Affordable Refinance Program (HARP) will streamline the refinance process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as homeowners are current on their mortgage payments, said President Obama at his Las Vegas unveiling. Fannie and Freddie have also agreed to waive some fees that made refinancing less attractive for some.

Pricing details won't be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1, according to Calculated Risk. Loans that exceed the current limit of 125 percent of the property's value won't be able to participate until early next year. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.

It seems that businesses have chosen to get the most out of their current workforce rather than hire new workers. It shows in the flagging productivity numbers and rising unit labor costs (ULC) seen in Econoday’s graph, which means their existing employees cannot produce much more per worker.

This means businesses aren’t hiring more workers because they don’t yet see increasing demand for their products. But the recent pickup in exports, capital goods orders and retail sales are telling us that the Third Quarter will look better. We are still in a deflationary cycle, as Krugman, et. al., have been saying ad nauseum. It is called a liquidity trap when businesses and consumers hold onto their savings rather than spend or invest out of the fear that conditions can worsen again. What will loosen their wallets is some confidence in the future.

Harlan Green © 2011