GDP report to show anti-middle-class recovery
Friday's GDP report will show the recession is over, but that the recovery is moderate and disappointing.
By Peter Morici, TheStreet
On Friday, the Commerce Department will report its first-quarter gross domestic product estimate. Economists are forecasting a 3.5% increase, further confirming the end of the recession and that the recovery is moderate and disappointing.
Unemployment will hang above 8% or 9% 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 won’t 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%, fourth-quarter GDP growth was pumped up by a slower pace of inventory declines. 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 demand for US goods and services.
Adjustments to inventories accounted for 3.8 percentage points of growth. Demand for US-made goods and services -- the key to sustainable growth -- added only 1.8% to growth. Domestic demand -- excluding an increase in net exports that’s unlikely to continue -- added only 1.5%.
Backing out the inventory adjustments, real GDP increased about $150 billion in 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 for poor and low-income workers to state and local governments through broader federal mandates, and to insurance and drug companies. Resulting tax and premium increases will 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, the data are not encouraging. After such a long and damaging recession, we should expect several quarters of 5% growth, but poor and ill-targeted 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 scaled-back consumers, 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%.
Car 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 homebuyer tax credit, but that’s ending this month, and commercial construction remains very weak.
Weekly new jobless claims remain above 450,000, when below 350,000 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 be making do with existing workers or even few 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 2% annually, and the labor force grows about 1% a year. GDP growth of more than 3% 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 the Wal-Mart (WMT) provided by a 40% to 50% 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 contributor to TheStreet. He's also a professor at the Robert H. Smith School of Business at the University of Maryland. He previously served as the director of the Office of Economics at the U.S. International Trade Commission.
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