U.S. macro outlook: Q3 turnaround confirmed

Economy-watchers have marked their calendars for Friday, January 29. That's when the U.S. Bureau of Economic Analysis (BEA) releases Q4 figures for Gross Domestic Product (GDP), along with the first estimate for GDP growth for the year 2009. The updated W. P. Carey macro forecast expects that inflation-adjusted GDP grew by 4.0 percent in the fourth quarter and declined for the year by 2.5 percent. If the forecast is realized, the Q4 real growth will be the strongest recorded since Q1 of 2006, when the economy expanded by 5.4 percent (quarterly change at an annualized rate).

Economy-watchers have marked their calendars for Friday, January 29. That's when the U.S. Bureau of Economic Analysis (BEA) releases Q4 figures for Gross Domestic Product (GDP), along with the first estimate for GDP growth for the year 2009. The updated W. P. Carey macro forecast expects that inflation-adjusted GDP grew by 4.0 percent in the fourth quarter and declined for the year by 2.5 percent.

If the forecast is realized, the Q4 real growth will be the strongest recorded since Q1 of 2006, when the economy expanded by 5.4 percent (quarterly change at an annualized rate). Why are analysts focused on growth rates for a period that is already over in real time? The reason is that an understanding of the trajectory set in the second half of 2009 helps project where the economy is going as we move forward into 2010.

Q3 Upturn

The available evidence (as revised December 22 by the BEA) shows that the economy definitely turned around in Q3, setting the stage for even better numbers in Q4 and beyond. Granted, there remains a disconnect between the pronouncements from Washington D.C. that "the recession is over" and what consumers see in the headlines about unemployment and weak labor markets.

But as the economy continues to rebound, firms will soon have to begin hiring to supplement their current workers, whose productivity gains are nearly maxed out. The turnaround in GDP growth is summarized in the table below.

Real GDP grew by 2.2 percent in Q3, after contracting for four consecutive quarters. That measure is the basis for the claims that "the recession is over." The single largest component of GDP, consumer spending, increased in Q3 after declines in four out of the previous six quarters.

The most significant reversal in Q3 was the residential component of GDP, which increased by 18.9 percent, after declining for 14 consecutive quarters. Overall gross private investment grew by 5 percent in Q3, reversing seven consecutive quarters of decline. A sub-component of gross investment, equipment and software spending, increased in Q3 after falling for six consecutive quarters.

As the global economy began to improve (and the dollar weakened), U.S. exports increased in Q3, after registering declines in four out of the previous five quarters. The strengthening of the economy in Q3 also led to growth in spending on imports.

While increases in imports are associated with a growing economy, because of the way GDP is computed an increase in spending on foreign goods and services actually has a negative impact on GDP. Import spending increased in Q3 by 21.3 percent, after declines in seven previous quarters. This surge in imports put negative pressure on GDP amounting to a decrease of more than 2.5 percentage points.

A second major drag on GDP revealed in the Q3 revisions was commercial building, which fell by 18.4 percent, marking the fourth consecutive quarter of declines. The effect was to reduce overall GDP growth by more than one-half of a percentage point. Although several key components of GDP have reversed direction and are now growing after a period of decline, the outlook still calls for a sub-par period of expansion in 2010.

The expected 2.5 percent growth is real GDP is similar to the pace of expansion recorded in 2003 during the "jobless recovery" period after the recession of 2001. The 2010 consumer spending forecast is 2.0 percent. As a touch-point for comparison, the average annual inflation-adjusted growth in consumption for the U.S. since 1960 is 3.5 percent.