Thursday, December 27, 2007


Two revisions last week decreased the chances of a recession in 2008. Both indicators showed a huge increase in economic growth through the third quarter. Firstly, the revision of Q3 GDP growth, the amount of all goods and services produced domestically, was raised to 4.9 from 3.9 percent, the fastest growth in 4 years.

Second was the revision of third quarter labor productivity from 4.9 to 6.3 percent, also the strongest gains in 4 years. Both signal that not only is the economy continuing to grow, but labor costs which make up two-thirds of production costs are actually declining—down 2 percent in Q3 after declining 1.1 percent in Q2, according to the Labor Dept.

So the efficiency of our economy is actually increasing at a time of trouble in the real estate and financial sectors, higher energy costs, and greater geopolitical risks. If this economy can perform in the worst of times, what will it do when conditions improve?

Top this off with 94,000 payroll jobs added in November’s employment report and we see almost no possibility of a recession next year. In fact, calculating a recession is left to the National Bureau of Economic Research, who always announces it after the fact. It is considered to be 2 quarters of negative GDP growth, negative jobs growth, as well as shrinking retail sales and personal incomes. Current economic growth would therefore have to do more than slow down. It would have to literally reverse course and that is not very likely in the near term, given a business-friendly administration and Federal Reserve willing to print enough money to support their banks’ credit problems.

The huge upward revision in GDP growth was because exports and inventories were actually higher than initially estimated. Exports surged because the rest of the world is now growing faster than the U.S. The International Monetary Fund estimates 2007 worldwide economic growth at 5.1 percent and 2008 growth at 4.8 percent. These countries can therefore afford to buy more U.S. goods.

Higher business investment is spurring the increased productivity. Investment is rising 9.4 percent in Q3 after an 11 percent rise in Q2. Productivity is measured in output per hour of work. Output of all goods and services surged 5.7 percent while hours worked dropped 0.6 percent, hence the fantastic 6.3 percent productivity rate in Q3.

This is while consumer spending actually increased from Q2, as did disposable incomes. In fact, November retail chain-store sales—a crucial indicator of consumer behavior—exceeded expectations by rising a robust 4 percent, according to Thomson Financial. Department stores led with a 9.2 percent surge.

That leaves us with the housing question. October existing and new-home sales were basically unchanged, while new-home sales rose slightly. The problem is with so-called “sticky” prices that homeowners are notoriously reluctant to drop when sales slow, which in turn cause inventories to pile up. But with this kind of economic growth, does anyone doubt that sales will pick up in 2008? I don’t.

Copyright © 2007

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