Thursday, August 5, 2010

Our Wad Is Shot

Is it or isn't it?
The Great Recession of 2008, I mean. According to the chart above, it's been over for the past year. The chart shows four consecutive quarters of sequential growth in Gross Domestic Product. Happy days are here again, right?

Not exactly. Despite stimulus spending by the federal government and quantitative easing by the Federal Reserve, the rebound in GDP has amounted to little more than a dead-cat bounce, falling 1% short of the pre-recession peak recorded in the fourth quarter of 2007. In other words, we have yet to gain back all that we had lost. This explains why Maine's general-fund revenues for FY 2010 (which ended on June 30) were down 2% from the year before. The two biggest drivers of GF revenues, the sales tax and the individual income tax, were down 2.6% and 4.9% respectively. Some recovery.

A "normal" recovery in the post-WW2 era, as David Rosenberg of Gluskin Sheff points out, should be far more robust. Ten quarters after the onset of a recession, GDP usually breaks out to a new high that is on average 8% above the prior peak, not 1% below. This year's Q2 number of +2.4%, released last Friday, is particularly disappointing not only because the pace of growth is slowing (already), but also because almost half the growth was due to a build in unsold inventories. Real final sales (GDP ex inventories) have grown just 1.2% in the past year--in Rosenberg's words, "the weakest revival in recorded history."

Leading indicators suggest that GDP growth will be flat-to-negative by Q4, which means that Maine faces more belt-tightening in FY 2011.

No comments: