Track the Stimulus

The recession started officially in the fourth quarter of 2007; GDP turned negative for the first time in the first quarter of 2008.  While the bursting of the real-estate bubble was the primary cause of the recession, the crisis moved rapidly to the manufacturing sector which has been contracting since early in 2008; the services sector joined the contraction in the second half of 2008.  The crisis in the industrial sector became significantly more pronounced after the financial sector came close to implosion in September 2008, and as the consumer placed a brake on spending.  Unlike the previous recession, industry with the exception of banking/finance, real-estate and the automobile sector was generally in good health: a strong capital base, low inventories due to better supply chain management and relatively lean payrolls.  Given those factors and the rapid disposal of inventory in 4Q08 and the first half of 2009, once consumers spending stabilized and thanks in good part to the government's liquidity infusion through both fiscal and monetary stimulus, the economy emerged from the recession in the third quarter of 2009.  The fourth quarter of 2009 saw very strong GDP growth of 5.9%; unfortunately, the strength in the number was primarily due to a replenishment of inventories - while "normal" after a steep recession, replenishments of inventories by themselves do not result in sustainable growth, only a return of business and consumer demand can cause that.  The latter looks to be severely compromised by a steep increase in the unemployment rate, now sitting around 10%, and by a process of consumer de-leveraging - after the severe loss of wealth resulting from the collapse of the real-estate market and the strong drop in the stock market, consumers, which were highly indebted to begin with have started a process of saving more and reducing their liabilities.

GDP Growth

While for the entire 2008 the US did manage to generate growth (a paltry 0.4%), 2009 was a different story.  The US economy suffered a steep contraction of 2.4%, a yearly level not seen since the 10.9% contraction of 1946. 

 

The very weak economy coming into 2008 became dreadful after the collapse of Lehman Brothers, and the near dead experience of the global financial system.  Quarterly GDP readings of -2.7%, -5.4% and -6.4% in 3Q08, 4Q08 and 1Q09 underscored the depth of the malaise and the impact of the financial crises on businesses, but specially on individuals which curtailed spending at a global level.  To support the global economy, governments around the globe enacted strong fiscal and monetary policies.  In the US, the "stimulus act" provided close to $800 billion in fiscal stimulus, and the Federal Reserve maintained interest rates at close to 0% levels and devised innovative programs to provide liquidity to the mortgage and the securitization markets.

 

This efforts have paid off at the macro level.  The US economy grew strongly in the second half of 2009, and the most dire predicaments were adverted.  Unfortunately, while businesses (especially large, well capitalized ones) have seen an improvement in their fortunes, the consumer has taken the brunt of the financial storm.  With unemployment at 10% and a steep loss of wealth, consumption has suffered, and consumers are less willing to part with their cash.  

Close to 3.9% of the 5.9% GDP growth in 4Q09 was the result of inventory rebalancing.  Inventories had contracted so rapidly during the first two quarter that businesses needed to re-stock to be back in business.  Consumer spending increased 1.7% in the fourth quarter, which accounted for only 1.2% of the growth in GDP.  Once inventories are back to normal levels, if the consumer does not support the economy, the US will be back to a very slow groth scenario.  Unfortunately, an over-levered consumer is expected to continue the trend seen in 2009 of saving more and spending less.  Good for the economy in the long term, but not a good harbinger for the short term. 

The growing fiscal deficit also limits the potential of the economy, as the government's ability to provide fiscal stimulus in the future is severely curtailed, and further monetary stimulus risks awakening the inflation spirits.  The private sector will thus have to be left to its own devices in the not too distant future.

On the positive side, the weakness in the dollar (in spite of recent outperformance versus the Euro), makes US exports more affordable.  US exports grew 22.4% in the fourth quarter, easily outpacing imports - over the next few years we are likely to see a push towards greatly increasing US exports in particular to emerging economies, which have recovered much more rapidly than develop economies in this crisis.  Furthermore, US productivity is at record highs, and salaries and hours worked are also increasing.  In the mid-term this implies that companies will need to start hiring again - as the unemployment rate falls, and individuals are less fearful about their own circumstances, spending should make a more forceful comeback and the private sector should return to its normal rate of growth.