January 2010

Roubini Calls U.S. Growth ‘Dismal and Poor,’ Predicts Slowing

Written By: Simon Kennedy and Erik Schatzker

New York University Professor Nouriel Roubini, who anticipated the financial crisis, called the fourth quarter surge in U.S. economic growth “very dismal and poor” because it relied on temporary factors.

Roubini said more than half of the 5.7 percent expansion reported yesterday by the government was related to a replenishing of inventories and that consumption depended on monetary and fiscal stimulus. As these forces ebb, growth will slow to just 1.5 percent in the second half of 2010, he said.

“The headline number will look large and big, but actually when you dissect it, it’s very dismal and poor,” Roubini told Bloomberg Television in an interview at the World Economic Forum’s annual meeting in Davos, Switzerland. “I think we are in trouble.”

Roubini said while the world’s largest economy won’t relapse into recession, unemployment will rise from the current 10 percent, posing social and political challenges.

“It’s going to feel like a recession even if technically we’re not going to be in a recession,” he said.

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The Meaningless GDP Growth Numbers

Written By: William L. Anderson

The latest GDP numbers were released Friday and, no, despite what the Associated Press tells us, the economy in the last three months of 2009 did not boom. Yes, 5.7% is a gaudy number, but even Paul Krugman says that it is a “blip.” (Yes, when I agree with Krugman, I put that one on, too. Broken clocks can be correct twice a day.)

The current situation, as Krugman explains, is based upon what is called an “inventory bounce.” He writes:

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

It is interesting that Krugman brings up “long-term investment,” because at the current time, we don’t see businesses investing for the long haul, especially in this country. This is not due to myopia on part of business owners, but rather because we have a situation of what Robert Higgs in this excellent paper calls “regime uncertainty.”

During the 1930s, the Roosevelt administration was openly hostile to business owners, forcing up taxes to confiscatory levels (FDR even tried to have a 100 % tax on all income above $25,000 a year), and making open threats to seize companies or force them to shut down. Now, this made him popular with lots of voters, as “populism” does seize upon the resentments of people.

If you notice, Obama is doing the same thing. Now that many of his initiatives are being beaten into the ground with the loss of the 60th Democrat in the U.S. Senate, he is resorting to Huey Long-style threats against private enterprise. No doubt, this will please the Paul Krugmans of the world, but it also means the end of long-term investment here.

And the end of long-term investment here means that businesses will try to keep current operations going but also are going to have an exit strategy, just as they had during the 1930s. However, during that decade, they did not have the option of investing in places like China, which has shown itself to be much more friendly to capital investment than the United States.

To a Keynesian like Krugman, I might as well be speaking gibberish. Keynesians believe that all that is necessary is for the government to print lots of money, make sure that people receive it, and then watch them spend. The more people spend, the more the economy magically grows, since in the Keynesian mind, all assets are homogeneous and spending is the yeast that makes the economic bread rise.

Remember, Krugman holds that investment is useful only because it is another mechanism for spending. The concept that capital investment means more production in the future, and creates the means for people to obtain a higher standard of living simply does not exist in the Keynesian thinking. It is always spending all the time.

Fixing America: Job Growth

Written By: Elizabeth MacDonald

GDP rose 5.7% unadjusted in the fourth quarter of 2009, the second straight quarter of growth, the Commerce Department said today. But the economy shrunk by 2.4% for the year, the biggest drop since the 10.9% contraction in 1946, as more than seven million people are out of work–more than 15 million counting those who have given up.

President Barack Obama is talking about spending more money on a big jobs push, as the Democratic-controlled Senate approved raising the government borrowing limit by $1.9 trillion.

The debt ceiling was just raised last November beyond $12 trillion—government spending is now about the size of the U.S. economy. The U.S. collects $2.4 trillion annually in total tax receipts. Which is why the massive borrowing. Foreign central banks in China, Japan, the UK and Saudi Arabia now own more of the U.S. debt than ever before.

Meanwhile unemployment continues to stay stickily, stubbornly high, at around 10%, with weekly jobless insurance claims stuck around 478,000. Economists say hitting 440,000 on the four-week moving average is typically when you’ll see a solid economic turnaround.

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TARP Cop: Some Bailout Goals Still Unmet

By Peter Barnes, Senior Washington Correspondent

The government’s top bailout cop said Sunday that more than a year after the financial crisis hit, many of the goals of Washington’s $700 billion bank rescue program remain unmet and that policymakers still have not addressed fundamental problems that triggered the crisis, leaving the financial system vulnerable to another collapse.

In a 224-page quarterly report to Congress, Neil Barofsky, the Special Inspector General of the Troubled Asset Relief Program (TARP: undefined, undefined, undefined%), acknowledged that TARP had stabilized the financial system. But he said that it has so far failed to restore consumer and business lending and to significantly prevent home foreclosure.

And in a slap at Congress and the Obama Administration, Barofsky said that “it is hard to see how any of the fundamental problems in the system have been addressed to date.”

He said the bailout “will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.”

You can read Barofsky’s new report here

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Economy soars 5.7 percent in Q4, fastest in 6 years

(Reporting by Lucia Mutikani; Editing by Neil Stempleman):

The economy grew at a faster-than-expected 5.7 percent pace in the fourth quarter, the quickest pace in more than six years, as businesses reduced inventories less aggressively, the Commerce Department said on Friday.

The first estimate put fourth-quarter gross domestic product growth at its fastest pace since the third quarter of 2003. The economy expanded at a 2.2 percent annual rate in the third quarter.

Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 4.6 percent rate in October-December period.

Growth was boosted a sharp slowdown in the pace of inventory liquidation, a factor that could mask the strength of the economic recovery from the longest and deepest downturn since the Great Depression.

But even stripping out inventories, the economy expanded at an annual rate of 2.2 percent, accelerating from the 1.5 percent increase in the third quarter, reflecting relatively strong performance from other segments of the economy.

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