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Analysis Last Updated: Nov 24th, 2009 - 00:22:19

Third quarter GDP to be revised downward; unemployment to rise and stock rally to continue
By Peter Morici
Online Journal Contributing Writer

Nov 24, 2009, 00:13

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Today, the Commerce Department will report revised data for third quarter GDP.

Third quarter growth likely will be revised down to 2.8 percent from the 3.5 percent reported on October 29. The economy contracted 0.7 percent in the second quarter.

The downward revision for the third quarter is expected to reflect a smaller contribution from inventory investments and a larger trade deficit.

Inventory investment contributed nine-tenths of a percentage point to the 3.5 percent preliminary third quarter growth estimate. This did not reflect inventory buildup but rather a slower pace of inventory liquidation -- firms downsizing for leaner consumer demand going forward. In the arcane world of GDP accounting, a slower liquidation of inventories counts as growth.

Other notable contributors to the 3.5 percent preliminary estimate were a one percentage point contribution from cash for clunkers and a one half percentage point attributable to the first time new home buyers� tax credit

The increase in the trade deficit subtracted about one-half of a percentage point from growth.

The consensus forecast for fourth quarter growth is 2.9 percent, and this may be optimistic.

Inventory investment may contribute less to growth, and the trade deficit will continue to swell, taxing demand for U.S.-made products and GDP growth. Cash for clunkers will not assist auto sales, and non-auto retail sales are recovering only modestly from the recession. Although the new home buyers� tax credit has been extended and expanded, preliminary data do not indicate another sharp increase in residential construction activity.

Stimulus spending should contribute more to growth in the fourth quarter of 2009 and 2010. However, once the stimulus money is spent, a second dip in GDP is likely if exports don�t take off or something is not done to significantly curb imports of oil and consumer goods from China.

Overall, economists expect GDP growth in the range of 2.9 percent in 2010, and that is hardly anything to cheer about. Coming out of a deep recession, a much larger jump in GDP should be expected.

Growth less than three percent is not enough to keep unemployment from rising further. My estimates indicate the jobless could reach 11 percent in 2010.

Health care reform will likely raise private sector costs another $140 billion per year or one percent of GDP -- this is in addition to the taxes levied to pay for federal subsidies to low-income individuals purchasing health coverage.

Cap and Trade to curb C02 emissions would further the raise the cost of doing business in the United States.

In 2010, pending changes in health care mandates and pending Cap and Trade legislation will weigh on business expansion decisions, reduce private investment and send more jobs to China and other Asian locations.

Once the effects of the $789 billion stimulus package have passed, the U.S. private sector will likely have many fewer jobs than in 1999. 2010 may be a decent year, but the fundamentals are building for a disappointing 2011.

Without public policies more supportive of private sector jobs creation and exchange rate reform, the U.S. economy is headed for a period of growth less than three percent and chronic double-digit unemployment.

Paradoxically, stocks should continue to rally through the New Year and into 2010. Modest growth at home and robust opportunities in Asia are enough to boost profits for large U.S. multinationals, and those profits plus low interest rates and abundance of cash in the hands of institutional investors will power stocks upward in the New Year.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

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