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
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
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.
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