Diane Swonk, Chief Economist
Sep. 30, 2009 – 7:45 a.m. CT
Economy Trying to Gain Its Footing
Real GDP fell 0.7% in the second quarter, slightly less than initially reported and better than expected. Better-than-expected stimulus spending helped to boost the figure.
The real news, however, will be how much of a rebound in growth we get during the second half of the year. A turnaround in home and vehicle sales (aided by the Cash for Clunkers stimulus), coupled with a slight pickup in production (most notably autos) virtually ensures positive growth in the range of 3% in the second half. That is welcome news, but still a far cry from what we really need to regain the ground lost during the recession. If this were a more "normal" recovery, we would have to see six-to-eight CONSECUTIVE quarters of 6-7% growth to justify what pundits call a "v-shaped recovery."
Separately, preliminary data on employment for September suggest that employment losses continued to abate from the first half, but not as much as many had hoped. We are still awaiting the much-needed turnaround in employment, which is still several months away. Indeed, recent reports on small business employment, which focused on surveying large firms, suggest that the employment situation is actually worse than is currently being reported.
The key problem that remains is credit. Small and large firms alike are finding that they must hoard more cash and build up a larger cash cushion in a world without cheap and EASY short-term credit to fund their monthly payrolls.
Consumer credit conditions – the primary source of credit for small businesses – are expected to tighten in the months ahead, as lenders deal with the cyclical write-offs associated with 10% unemployment AND the restrictions created by the new consumer protection laws.
Be careful what you wish for – the new credit consumer protection programs, in particular, are expected to limit the distribution of credit and boost the costs of credit to the most credit-worthy borrowers. Indeed, mortgage applications fell in recent weeks as home buyers hit hurdles in getting appraisals through.
Moral of the Story: It's tough to get much of a rebound in growth when we lack a system to leverage the recovery.
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