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Analysis Last Updated: Apr 29th, 2010 - 00:30:29

Friday�s GDP report: An anti-middle class recovery
By Peter Morici
Online Journal Contributing Writer

Apr 29, 2010, 00:18

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Friday, the Commerce Department will report estimated first quarter GDP growth. The consensus forecast is for a 3.5 percent increase, further confirming the end of the recession and that the recovery is moderate and disappointing.

Unemployment will hang above 8 or 9 percent well into 2011, and most workers will continue to face a tough job market and declining living standards.

This recovery is decidedly anti-middle class. Wages will not keep up with rising prices, health care premiums and taxes. A good deal of the gains, so far, are going to Wall Street and the medical and intellectual property industries.

At 5.6 percent, fourth quarter GDP growth was pumped up by a slower place of inventory draw down -- in the arcane world of GDP accounting, a slower pace of depletion adds to growth. Although the inventory rebuild has begun, the pace is slow reflecting tepid sustainable demand for U.S. goods and services.

Adjustments to inventories accounted for 3.8 percentage points of growth. Demand for U.S.-made goods and services -- the key to sustainable growth -- added only 1.8 percent to growth. Domestic demand -- less a bump in net exports that is not likely to be sustained -- added only 1.5 percent.

Backing out the inventory adjustments, real GDP increased about $150 billion the second half of 2009 after bottoming in the second quarter -- just about the amount paid out on Wall Street for 2009 bonuses.

New health care laws shift costs for services to the poor and low income workers to state and local governments through broader federal mandates, and onto insurance and drug companies. Resulting tax and premium increases fall heaviest on the middle class.

Hollywood and cable companies are boosting ticket prices and subscription fees, abusing ordinary Americans. Political contributions insulate their market power.

Looking ahead, data are not encouraging. After such a long and damaging recession, we should expect several quarters of 5 percent growth but poor and mistargeted economic policies will force Americans to settle for less.

A bullwhip effect on inventories will add to first quarter growth -- restocking a different selection of goods and services for a scaled back consumer, home buyers and auto buyers. However, retail sales indicate sustainable domestic demand is growing slowly, perhaps at an inflation adjusted rate of 2.8 to 3.2 percent.

Auto demand has recovered, pushing up production, but further increases are unlikely.

Appliances sales were pushed up by federal rebate programs but that program is winding down and has ended in several states.

New home sales and starts were boosted by the $8,000 first time home buyers tax credit but that is ending this month, and commercial construction remains very weak.

Weekly new jobless claims remain above 450K, when below 350K is considered healthy.

Manufacturing is showing some ginger, thanks to stronger car production and leaner methods in technology-intensive industries. However, new car sales are not strong enough to drive further expansion of production, and factories appear able to make do with existing workers or even fewer workers in other industries. These days it takes a lot of new demand to cause anyone to hire.

Productivity may be expected to increase at least at a 2 percent annual pace, and the labor force grows about 1 percent a year. Hence, GDP growth greater than 3 percent is needed to significantly bring down unemployment.

Businesses need customers and capital to create jobs. The trade deficit is a major drag on the former and weakness at the 8,000 regional banks won�t be addressed by the president�s bank reform proposals.

The trade deficit is nearly entirely oil and trade with China. The president�s programs to increase domestic conservation and drilling are halfway measures and won�t yield large results for many years. Talk on trade issues has failed with China -- it will not meaningfully move on its currency, as the small revaluations being suggested won�t dent the subsidy to Chinese products at Walmart provided by a 40 to 50 percent undervalued currency.

So far, President Obama�s policies have not solved the problem of middle class decline because they fail to deal with systemic issues in the banks, trade, health care and competition in intellectual property industries.

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

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